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“Consumers have emerged from the winter blues. If they spend anywhere as great as they feel right now, then this economy is going to roar over the next few months,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.
So what transpired during the early years of floating was a massive worldwide expansion of money and credit fueled by the Fed. This, in turn, generated the greatest bout of commodity price inflation that the world had seen since the postwar fly-up in 1919.Crude oil led the way. Having been priced on the world market at $1.40 per barrel when Nixon’s free marketers gathered at Camp David in August 1971, it rose to an interim peak of $13 per barrel four years later. And that was a way station to its eventual top of $40 per barrel by 1980.The dramatic post-1971 escalation of worldwide oil prices was blamed by officialdom on political rather than economic forces—and in particular the alleged market rigging of the OPEC cartel. In fact, except for a brief period around the October 1973 Mideast war, there was no systematic withholding of oil from the market.The problem was not a shortage of oil but a flood of money and inflated demand. During 1972–1974, the global economy reached a red-hot pace of expansion, which in some part was due to the locomotive pull of the Nixon boom. For example, non-oil imports to the United States rose by 15 percent in the first year after Camp David, and then accelerated to 22 percent growth the next year and 28 percent during the twelve months ending in August 1974. These giant gains in imported goods were literally off the charts.So as blistering US demand ignited production booms around the world, factory operating rates rose and supply chain backlogs surged everywhere on the planet. Moreover, there was another entirely new, even more potent force at work. In response to the Fed’s flood of money and credit, other central banks around the world reciprocated with their own fulsome monetary expansion.They bought dollars and sold their own currencies in foreign exchange markets in order to forestall the upward pressure on exchange rates that was inherent in the brave new world of floating currencies. In other words, the heretofore circumspect central bankers of the world became furious money printers in self-defense as they faced the flood tide of dollars beingissued by Arthur F. Burns.In fact, with exchange rates no longer fixed and visible, a more subtle process of competitive devaluation became the daily modus operandi of the system. In this manner, the Fed propagated its inflationary monetary policies outward to the balance of the world economy.So it was a storm of money and credit expansion which generated the first commodity bubble after 1971, not the OPEC cartel alone or even primarily. For if the problem had been just the putative rigging of prices by the oil cartel, there is no way to explain the dozens of parallel commodity booms during the same two- to three-year time frame.Quite obviously, there was no evidence of cartel arrangements in the markets for rice, copper, pork bellies, or industrial tallow, for example. Yet between 1971 and 1974, rice rose from $10 to $30 per hundredweight, while pork bellies climbed from $0.30 per pound to $1.Likewise, the cost of a ton of scrap steel soared from $40 to $140; tin jumped from $2 to $5 per pound; and the price of coffee rocketed up nearly eightfold, from 42 cents to $3.20 per pound. Even industrial tallow caught a tailwind, rising from $0.06 to $.0.20 per pound, and pretty much the same pattern was reflected in the price of corn, copper, cotton, lead, lumber, and soybeans.Needless to say, the first inflationary cycle of floating money came as a shock to policy officials, especially the Federal Reserve and its chairman. While Chairman Burns was a pusillanimous accommodator when it came to the game of hardball politics in Washington, as a matter of belief he had remained an anti-inflation hawk.So when Nixon went into his terminal Watergate descent, Burns got his nerve back and threw on the monetary brakes. Accordingly, double-digit bank credit expansion came to a screeching halt, rising by only 1.2 percent in 1975.