LIKE 1946 NOT LIKE 1970…


In July of this year the Council of Economic Advisers, a White House think tank, published an article titled, “Historical Parallels to Today’s Inflationary Episode.” At the time inflation was a backburner issue, received less airtime since the data didn’t support it. We saw it differently and were terrified by the consequences. Today, the data, especially the consumer price index, supports a false inflationary surge. Now for the rest of the story and what we conclude will happen … Six inflationary events since World War II were reviewed which declared that current events didn’t have the flavor of the 1970s. At the time the U.S. suffered a period of high inflation to cause painful consequences for most Americans. Turbulent inflation started at 5.9% and more than doubled to 12.8% by 1974. At the time President Nixon executed various economic policies known as the “Nixon Shock,” which included the untying of the US dollar from gold and stopping the exchange of dollars for gold by foreign central banks. The result was an unfettered federal printing press to create newly minted dollars that were unanchored and allowed world currencies to do the same. From our G-101 algorithm computations, the finding suggests that the money supply of the U.S. is 350% greater than what the Federal Reserve published data shows. The result does not show on the world stage since all countries, except Switzerland, followed the same course of action and caused universal and perpetual inflation. Nixon didn’t stop there: His Republican Administration introduced wage and price controls from 1971 to 1974. The unintended consequences were 1. food and energy shortages. i.e. ranchers stopped shipping cattle to markets, consumers emptied shelves of supermarkets, etc., 2. The oil crisis pushed inflation to record levels. In October 1973, Arab members of the Organization of the Petroleum Exporting Countries placed an embargo on the U.S. using the excuse that the U.S. supported Israel in the Yom Kippur War, but, it was the overvalued US dollar. Oil prices reached as high as $73 a barrel from $7.25 in today’s dollars. A second oil shock in 1979 led to a decrease in Iranian oil output with the catalyst being the Iranian Revolution. The result was the butterfly effect: To the average American, it meant panic at the pump --- the fear of no gas, heat homes or run factories. That’s what inflation looked like to them. 3. To combat inflation. The Federal Reserve raised interest rates in 1977, causing the economy to tip into recession in the 1980s. But inflation continued to rise, prompting Fed Chairman Paul Volcker to continue to raise rates. The U.S. entered a recession that lasted from July 1981 to November 1982 with unemployment peaking at 10.9%. All because of printing unaccountable $100 bills that cost the federal government sixty-one cents to print each one and selling at $100 each or whatever it can get. We are still plagued by Nixon’s folly. From our perspective, no need to panic. Our current inflation has 1947 characteristics as a singular event. The backdrop was the end of World War II that accompanied a period of inflation compared to the inflationary episodes that occurred during the Civil War and World War I. Prices also surged after World War II ended. In 1947, inflation jumped to over 20 percent, caused by the elimination of price controls, supply shortages, and pent-up demand. G-101 algorithm classified the 1946-1948 inflation spike as a “singular event” of WW II, which parallels the singular event caused by the COVID-19 pandemic, not the start of a protracted wage-price spiral. We are not in an overheated economy with too much money is chasing too few goods. Demand is outstripping supply as consumers are buying fewer services but more goods than before, placing a strain on ports, trucking, warehousing, etc. If the federal government treats it like the Nixon panic of 1970, the U.S. economy will hit a brick wall and end with a major economic collapse. Policymakers in Washington should “go with the flow” and revisit the 1946-1948 period as the model to maneuver the economy into firmer ground and not be trapped by reckless monetary and fiscal policies.

The big mistake made in the 1946-1948 period was to respond to a false inflation surge by failing to comprehend the singular nature that caused the price increases in the first place, and for the Federal Reserve to act prematurely created the recession of the early 1950s.