According to the mainstream narratives, a state of inflation alert was the catalyst to the US stock market mini-crash of February 2 and February 5, 2018. This explanation echoes the run-up to the October 1987 stock market crash. On other occasions in history, inflation alerts have not had such an immediate effect, with the pull-back of asset price inflation (which typically leads reported goods and services inflation) waiting for a substantial tightening of monetary policy.

Now everyone and his dog realizes that an inflation “break-out” (from inertia under the 2 percent standard) would mean a bigger take for Uncle Sam and an eventual crash and recession. Some investors who have been riding the “hunt for yield” train decide it is time to get off, but on approaching the exit they encounter a stampede of like-minded people. Asset prices have gapped down or, worse, the market has seized up. Aggravating the stampede is the arrival of fellow-investors who have suddenly discovered the state-of-the-art products and services they — during the hunt for yield — have blown up.

Many decide to postpone their exit hoping for a quieter time in the future. The history of the stampede and the realization that many of its one-time participants still “want out” weigh on markets and the economy going forward.

In autumn 1987, the trigger to the inflation alert had been the new Fed Chief (Alan Greenspan) hinting that he would no longer steer monetary policy towards bolstering the dollar in line with the Louvre Accord of early that year. Paul Volcker (the previous Fed Chief) had had late remorse for having pursued a policy of monetary inflation since the Plaza Accord of summer 1985 (where he had signed up for Treasury Secretary Baker’s dollar devaluation policy). In the first half of 1987, Volcker had been tightening policy, annoying the Treasury Secretary and thereby failing to gain a nomination for a further term. The Bundesbank quickly indicated that Germany (unlike Japan at the time) would not follow the US on this further journey into monetary inflation. The US-German policy divergence (underlined by Secretary Baker criticizing a Bundesbank rate hike) and the related dollar setback, triggered a US inflation alarm in the stock markets. 

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