May 7, 2011
In 1973 the president was Nixon and OPEC had only been around about 13 years. Now the demand for oil in the US was increasing steady with the demand for cars increasing and central heating and air conditioning becoming more popular. In October the Middle East became uproar and wars began to break out. Soon after OPEC announced a change in the oil prices that sent everyone in panic mode; Gas went from thirty cents a gallon to a dollar twenty a gallon very quickly. In February of 1973 the US dollar experienced a changed in worth in the wrong direction. With the dollar worth less, unrest in the Middle East and rising unemployment the stage was set for nasty sixteen month recession that economist had never seen before nor has it happened again, Stagflation.
We have norms for every standard of measurement we use on our economy. There is a little bit of room where we can play with these norms and live confortable if we are too high or too low. In in the oil crises of 1973, we experienced many things at the same time, there was high unemployment rising from 4.8% to 8.6%, there was massive amount of inflation, and last but not least the oil embargo that left Americans struggling. First looking at the unemployment, when we look at the unemployment numbers for Nov. of 1973 we see that we are starting out at an above full employment equilibrium. Now it looks like the economy is trying to get back to a natural rate of unemployment which is 5%. Now the first five months of 1974 it seems to level out about 5.1%, about normal. After that there is a steady increasing trend of just rising unemployment. Now if we look at GDP for this same time period we start to understand why unemployment is just steady increasing. Most of the production that was happening at this time wasn’t happing. Our economy was experiencing negative growth. Said best by Fritz, if we are not making advances in our technology then fewer people are needed to create the same old items. The fewer people needed, the higher the unemployment goes, the deeper we fall into negative GDP growth, and with the oil crises, higher inflation. Just between the high unemployment and negative GDP we have a nasty recession, but we still have to put in play the Inflation. Now that was kind of kicked off by the deflation of the dollar in the first quarter of 73’ but when oil prices sky rockets, much like they have the past month or so in present time, the inflation went through the roof with the annual inflation reading for 1975 being 11.8% when the norm is ideally around 2%. Now a few things were realized when this all happened, Americans demand for oil was steady increasing and relied heavily on other countries to provide the oil, one little hick up in the Middle East and the oil market stopped and in turn stopped everyone. Inflation is very much a self-fulfilling idea, it depends on several factors but the major one is consumer confidence. Now if a consumer expects higher prices and demands higher wages to keep up, and the company gives in, they just pass that cost directly to consumer. So the employees get their pay raise to deal with higher cost living but really in turn they are the ones making the inflation increase. This coupled with the oil embargo created major inflation and with unemployment rising, GDP falling; it put our economy in a state called Stagflation. With all the data combined here is about where we stood before the recession started and what all these factors created.
If we look at the data we see that the FOMC was more concerned with the double digit inflation than the rising unemployment at first. We all know that the Federal funds rate is just a symbol of whatever they are trying to accomplish either it be stimulus or restraint. The federal funds rate started at 5.75% and by June of 74’ it had rising to 13%. With...