Wednesday, April 1, 2015

Interest Rates, Inflation, And Debt Matter

Back in September of 2012, I wrote an article reflecting on how the economy of today had been greatly shaped by the actions that took place starting around 1979. Interest rates, inflation, and debt do matter and are more significant than most people realize. Rewarding savers and placing a value on the allocation of financial assets is important. It should be noted that many Americans living today were not even born or too young to appreciate the historical importance and ramifications of the events that took place back then. The impact of higher interest rates had a massive positive impact on corralling the growth of both credit and debt acting as a crucial reset to the economy for decades to come. Below is a copy of the article. 

                       A Time For Action, 1980?

In his book "A Time For Action" written in 1980 William Simon, a former Secretary of the Treasury tells how he was "frightened and angry".  In short, he sounded the trumpet about how he saw the country was heading down the wrong path. William Simon (1927 – 2000) was a businessman and a philanthropist. He became the Secretary of the Treasury on May 8, 1974, during the Nixon administration and was reappointed by President Ford and served until 1977.

I recently picked up a copy of the book that I had read decades ago and while re-reading it I reflected on and tried to evaluate the events that brought us to today. As often the future is unpredictable, looking back, it is hard to imagine how we have made it this long without finding long-term solutions and addressing the concerns that Simon wrote about so many years ago. Back then it was about billions of dollars of debt, today it is about trillions of dollars. It appears that something has gone very wrong.

Do Not Underestimate The Importance Of The Reset By Paul Volcker In 1980
By the end of the 70s inflation started to soar. Only by taking interest rates to nosebleed levels was then Fed Chairman Paul Volcker able to bring inflation back under control. Paul Volcker, a Democrat was appointed as Federal Reserve chairman by President Carter and reappointed by President Reagan. Volcker is widely credited with ending the stagflation crisis where inflation peaked at 13.5% in 1981. He did this by raising the fed fund rate which averaged 11.2% in 1979 to 20% in June of 1981.  This caused the prime rate to hit 21.5% and slammed the economy into a brick wall. This also affected and shaped the level of interest rates for decades

Rates Today Are Ready To Fall Off The Chart!
This action and the increased interest rates in following years is credited by many to have caused  Congress and the President to eventually balance the budget and bring back some sense of fiscal integrity and price stability to America.  As the debt from the Vietnam war and soaring oil prices became institutionalized we moved on. Interest rates slowly dropped and the budget came under control. In recent years spending has again started to grow and at the same time taxes have been cut. This has slowly occurred over years and been ingrained in the system.

The path has again become unsustainable and many people will be shocked when the reality hits, this is not the way it has always been. Today many Americans feel just as frightened and angry as Simon did so many years ago. America has kicked the can down the road, failing time and time again to face the tough decisions, and failing as well to take action. Part of the problem is the amount of debt has grown so large that we can no longer imagine or put a face on it. The day of reckoning may soon be upon us, how it arrives is the question. Many of us see it coming, but the one thing we can bank on is that after it arrives many will be caught totally off guard.


Footnote; This post dovetails with many of my recent writings, for more I might suggest reading the article below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged.
                      http://brucewilds.blogspot.com/2013/03/the-young-will-be-burdened.html
  

5 comments:

  1. Blogger’s brilliant Efforts are really appreciable. Anyone can easily understand the thoughts. Also I like the conclusions made on this topic which is really very informative.Stock Cash Tips

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  2. Indeed we can bank on that. Well said.

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    1. Actually, could have been "said" better with real sentences. Bruce needs an editor.

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  3. "Cuddoes", for this very good article. Indeed it is the impossibility to save money -his savings are eaten away by inflation -, for the average man , that will destroy all trust in the financial system. I live in Europe and it is the same here. Mario Draghi is from Goldman Sachs, the New World Order Empire's bankers.. So the American policy is copied over here.

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  4. Two books, "CURRENCY WARS" and "BLOOD IN THE STREETS" (1989) speak to the eventuality of debt implosion, and the form(s) it is likely to take.

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