The Safer Haven

We've talked about how bad the stagflation was during the late '70's and early '80's, but don't take it from me. Here's what Federal Reserve history has to say: [bold added]

The economy was already in weak shape coming into the downturn, as a recession in 1980 had left unemployment at about 7.5 percent. Both the 1980 and 1981-82 recessions were triggered by tight monetary policy in an effort to fight mounting inflation. During the 1960s and 1970s, economists and policymakers believed that they could lower unemployment through higher inflation, a tradeoff known as the Phillips Curve. In the 1970s, the Fed pursued what economists would call "stop-go" monetary policy, which alternated between fighting high unemployment and high inflation. During the "go" periods, the Fed lowered interest rates to loosen the money supply and target lower unemployment. During the "stop" periods, when inflation mounted, the Fed would raise interest rates to reduce inflationary pressure. However, the Phillips Curve tradeoff proved unstable in the long-run, as inflation and unemployment increased together in the mid-1970s. While unemployment trended down slightly by the end of the decade, inflation continued to rise, reaching 11 percent in June 1979 (Federal Reserve Bank of St. Louis).

(WSJ graph)

In 1971 Richard Nixon canceled the convertibility of dollars to gold under the Bretton Woods system, which had been in place since 1944. The delinking of the dollar from gold and the combination of inflation and unemployment unprecedented since the Great Depression made it a period of maximum economic uncertainty. The gold price spiked from the $35/oz. under Bretton Woods to a high of $850 by the end of the decade.

The gold market is spiking again. In fact it Hasn’t Rallied This Much Since 1979. [bold added]

A modern-day gold rush is stretching from Costco store aisles to underground vaults in London to the flickering screens of Wall Street. Old jewelry now glimmers with potential dollar signs.

Gold’s value has ballooned by 40% this year, putting it on track for a greater annual price jump than during the depths of the Covid-19 pandemic or 2007-09 recession, according to Dow Jones Market Data. Futures for the precious metal haven’t surged so much in a year since 1979, when a global energy crisis fueled an inflationary shock that thrashed the world’s economy.

Costco 1 oz. buffalo gold piece

These days, it isn’t a financial meltdown that is drawing people to one of the original market refuges. The recent run-up to record prices—reaching $3,682.20 a troy ounce on Monday—instead stems in part from the White House, with investors big and small rushing to shield themselves from an uncertain outlook for the U.S. economy and its role in the world.

A lot has changed in the past 50 years. What hasn't changed over the centuries is that people flee to gold in troubled times.

Henry Kissinger (1923-2023)

Henry Kissinger dated glamorous
celebrities like Jill St. John (NY Post)

When there were only three channels on TV, when every city had two newspapers, when print magazines (Time, Newsweek, U.S. News, Life, Look, etc.) each had millions of subscribers, Henry Kissinger headlined all of them. He was the rock star of the Nixon Administration long before "rock star" became a term of approbation in fields other than music.

Henry Kissinger's Harvard professorship lent an aura of intellectual respectability to Nixon's foreign policy, defusing some of the critics' attacks. His "shuttle diplomacy" brokered the U.S. withdrawal from Vietnam, peace between Israel and Egypt during the Yom Kippur war, and the historic opening of ties with Mao Tse-Tung's China.

It only added to his stature when he dated some of the most glamorous women in the world.

Henry Kissinger has his detractors from the left (bombing of Cambodia) and the right (detente with the Soviet Union). Nevertheless, it is clear that much of today's geopolitical landscape is the result of actions he took 50 years ago. R.I.P.

That '70's Show

My grandfather was a dad in his thirties during the Great Depression. Like many who lived through that period, he was extremely conservative in his finances and refused to take on debt (he did a home mortgage on his one-and-only house during the 1920's, before the Depression).

We baby boomers had a similar chastening experience during the "stagflation" of the 1970's. Many economists of the time argued that the U.S. could not pay for both the Vietnam War and the Great Society ("guns versus butter") without a massive increase in taxes. At the time the Federal Reserve couldn't "print money" willy-nilly, that is, buy unlimited amounts of Treasury debt, because the quantity of dollars was constrained by the amount of gold held at Fort Knox.

Richard Nixon caved to the intense pressure to de-link the dollar from gold ("go off the gold standard") in 1971. The money supply could now increase more freely, and all the bad things we hear about the 1970's---runaway inflation, a stagnant economy, fixed-income retirees losing ground (by the way, California property taxes at the time increased by double-digit percentages along with home prices, giving rise to 1978's Proposition 13 that capped property tax increases at 3%/year), gas shortages, wage and price controls, "windfall profits" taxes on oil companies--are an indelible memory for those of us who lived through that period.

Ronald Reagan and Paul Volcker (London Times)

Inflation was finally whipped, albeit painfully, by Fed Chair Paul Volcker during the early 1980's by limiting the growth in the money supply, almost as if we were back on the gold standard again. Treasury rates rose to 15% or higher, and consumer and mortgage interest rates followed, before getting back to normal a couple of years later.

As a boomer now living off of savings, I have no desire to experience another round of 1970's-like inflation, and I certainly don't want to live through another "cure."

To be fair, there have been several instances after the Volcker era when the money supply rose dramatically, usually in response to a financial crisis, and inflation did not occur. Many economists have convinced themselves that the world has changed, and that we can "control" inflation.

Perhaps because I entered the workforce and paid bills during the 1970's I give more weight to 40-year-old negative experiences than latter-day economists, but I believe big inflation is coming.

The economy is warm if not hot, the Administration is proposing $trillions in additional spending, and the Federal Reserve is promising to keep rates low. [bold added]

The Fed has kept interest rates near zero for the past year and signaled rates won’t change for at least two more years. It is buying hundreds of billions of dollars of bonds. As a result, the 10-year Treasury bond yield is well below inflation—that is, real yields are deeply negative —for only the second time in 40 years.

If we are going to reprise the 1970's, shift some investments into real estate, gold, art, or more stable foreign currencies that can keep up with dollar inflation. (I would recommend cryptocurrencies, but I don't understand them well enough.) Get out of bonds and low-growth dividend paying stocks. If you have variable-rate loans, convert them to long-term fixed-rate debt.

It is possible that the economy will not experience inflation if high government spending on the wrong things (unemployment insurance extensions that keep workers home), high taxes, and high regulation results in stagnation. But an economic boom and low inflation? No way...and I hope my pessimism is wrong.

Picture and Words

National Review editor and writer Reihan Salam likens Donald Trump to Richard Nixon (though probably not in the way that first comes to your mind, dear reader):

Nixon would make peace with the New Deal and with activist government, having concluded that Goldwaterism was a dead end....Nixon believed that America had been betrayed by feckless, out-of-touch elites who had allowed the country to descend into chaos, and he effectively exploited both racial desegregation and crime as wedge issues. He promised to use the power of government on behalf of decent, law-abiding people—but not to dismantle the power of government.

(Reuters / WSJ graphic)

Reihan Salam evaluates major Republican figures over the last half-century across two dimensions: pro/anti-government and pro/anti-elite. Donald Trump and Richard Nixon are the only inhabitants of the pro-government, anti-elite quadrant.

2x2 matrices are both revealing and over-simplifications of reality. For example, Dwight Eisenhower was clearly pro-government in his sponsorship of "a vast network of highways and world-class research universities." However, Ike's most famous speech, his 1961 farewell address, cautioned against the dangers of big government (the military-industrial complex.)

Donald Trump has promoted border security and energy independence, both of which will indeed entail increases in spending.

In the Republican debate from last March Mr. Trump also said that he will reduce government, potentially by a lot:

As president, I will repeal every word of Obamacare. I will pull back the regulators that are killing small businesses.

And we will pass a simple flat tax and abolish the IRS. [snip]

[I will cut] Department of Education. We're cutting Common Core. We're getting rid of Common Core. We're bringing education locally. Department of Environmental Protection. We are going to get rid are of it in almost every form. We're going to have little tidbits left but we're going to take a tremendous amount out.

Richard Nixon not only increased government spending but government's mission by creating the EPA and OSHA. If Donald Trump is to be believed, he will seek to remove some major functions. Let's see if Mr. Salam puts his picture in the same place in four years.

The Lonely Guy

Vanity Fair writer Todd Purdum on Barack Obama:

He may be the biggest presidential paradox since Thomas Jefferson, the slaveholder who wrote the Declaration of Independence: a community organizer who works alone.

The biggest Presidential failure in our lifetime was Richard Nixon, another lonely guy. According to political reporter Richard Reeves, Nixon wrote memos to himself throughout his Presidency:

Nixon waited until late at night to pen these memos to himself. He did so when he was alone in his office, alone in the Lincoln bedroom, alone at Camp David, or alone across the street in his monastic hideaway in the Old Executive Office building--always alone, almost always in the dark, and sometimes, even in August, with a fire blazing.

Like Richard Nixon, Barack Obama seems to prefer his own counsel. They are the rarest of political animals--two individuals who rose to the highest office without liking to be with other people. A penchant for solitude may not only cause failure but prevent solutions, especially if they involve compromise, from being devised.

We'll see. It's going to be a long three years. © 2013 Stephen Yuen

The Sensibility of House Republicans

No, really, House Republicans may be acting sensibly:

House Republicans say they will not overreach on probing the Obama administration, having learned lessons from investigating the Monica Lewinsky scandal during the Clinton administration. [snip]

Impeachment is not something that has been bandied about around the House GOP leadership table, according to GOP leadership aides and a House Republican member who spoke on background.

Unless there is solid proof of high crimes and misdemeanors (using the people's definition, not lawyers' understanding) by the President, House Republicans should quash all mention of the I-word. Mr. Obama is still popular and could become an object of sympathy if there were a rush to start impeachment proceedings.

It's difficult to imagine that he would ever be as unpopular as his predecessor, but Mr. Obama may well descend to that level after three and a half more years of scandal and ineffectiveness, not to mention being the butt of late-night humor.

Thursday's Jay Leno:

This week will mark the 37th time House Republicans have tried to repeal Obamacare. If Republicans really want to do away with Obamacare they should endorse it as a "conservative non-profit" and let the IRS take it down!

A lot of critics are now comparing President Obama to President Nixon. The good news for Obama: at least he's no longer being compared to President Carter!