Tuesday, October 3, 2017

Decades Of Economic Perspective Hold Great Value

 brucewilds.blogspot.hk / By: Bruce Wilds

Only Over Many Years Do We Gain True Perspective
As a person who cares about and is concerned about the economy, I find it very disturbing that so many people have forgotten or never taken the time to learn recent financial history. By recent, I'm referring to the last fifty to one hundred years. As we go back further it could be argued that the relevance and lessons we have learned weaken from changing times and because we now live in a considerably different world. This brings me around to a topic I often raise about how those without a long-term view or outlook of the economy wander about with what might be called "blind spots" where they totally miss possible scenarios as to how the world might react to unfolding events. I always marvel when I hear some young expert telling people how to invest by cranking out the wisdom they picked up in school only last year.

Over time as interest rates have fallen over the decades how we view the economy has changed. It seems only the people who were directly affected by the sky-high interest rates of the early 1980s remember and internalize their impact. It is often only from a historical point of view that we can gain a real appreciation and be truly aware of how damaging high-interest rates can be. They increase the carrying charge on many items, commodities, and items that sit idle or underutilized. High rates caused by inflation bring about a rapid revaluation of assets. Soaring valuations, stretched and distorted markets untethered to financial reality are not all that uncommon, however, history shows that sooner or later gravity overcomes their momentum and they come crashing to the ground with a thud. 

An example I have used before has to do with 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. Years ago I wrote a piece titled, "A Time For Action, 1980?" where I detailed some of the thoughts expressed way back then in the book "A Time For Action" written in 1980 William Simon after his time as Secretary of the Treasury. At the time he was "frightened and angry" and the book was his way of sounding the trumpet about how America was heading down a dangerous path.

Picking up a copy of the book that I had read decades ago caused me to reflect on and 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. This causes me to think that something has gone very wrong.

Do Not Underestimate The Importance Of The 1980 Reset
By the end of the 1970s, 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 funds 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, surprisingly it bounced back rather well. It must be noted this also had a profound on how we felt about money and debt while effecting and shaping the level of interest rates for decades

Interest 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.  I'm sorry to say the path that Fed Chairman Paul Volcker set right decades ago has again become unsustainable and many people will be shocked when this reality hits.

At some point, it might be wise to take a moment and ask, where will this end, and just as importantly, how? We should remember trees don't grow to the sky and that black swans do not announce their arrival. In the end what bothers me most is that the numbers simply no longer work. It is time we consider the Fed and our government as one and Washington's failure to respond to the needs of the average American has been a big part of what created a pathway for Donald Trump's rise to power and his being elected as President as well as some of what is fueling the backlash against globalism. Ironically, the national debt has not been a big issue to many voters who I chose to accept the idea it will not yield huge negative economic ramifications.

As of late the ways and metrics used for years to determine value have been chucked out the window and been replaced by momentum and technical systems and if they don't work "don't fight the Fed", has become the rallying call driving us forward. Another watershed event is the general acceptance by many economists of what many people call Modern Monetary Theory or MMT. Also known as neo-chartalism, MMT is an economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money. Newly acquired tools like derivatives and currency swaps are supposed to allow us to print and control growth going forward thus manipulating our problems away.

Do not underestimate the value of insight gained from decades of economic perspective. It tells us the economy of today is far different from the way things have always been. Today many Americans feel just as frightened and angry as former Secretary of the Treasury Simon did back in 1980. Since then 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. To those of us who envision the day of reckoning may soon be upon us, how it arrives is the question. One thing we can bank on is that when it arrives the majority of people will be caught totally off guard. Mark my words, cause, and effect remain a reality of life whether we are prepared or not!


  1. "credited by many to have caused Congress and the President to eventually balance the budge"

    Reagan tripled the national debt so I'm not sure where the above statement comes from.

    1. Clinton was president when the budget was balanced, America even ran a surplus for four years.
      Please note, no where did I give credit to Reagan.for this.

  2. One thing is for sure, I don't think trading in and out in the upcoming environment will cut it. Imo best bet is to buy stock in companies that can outperform in a high inflation environment and hold on for dear life. Adding to positions on the sure to be sharp moves downward.

  3. Reagan tripled the debt. He did as they had to make room for the recycling of petrodollars that was taking hold globally. You can't issue debt notes if you don't have a need :). Analyze the Reagan administration, find Ned Regan and learn where he came from and what he did. Neddy knew the 'money system' plan.