BACK TO THE 70s?
In 1970, throughout a rising inflation disaster, President Richard Nixon appointed economist Arthur Burns as chairman of the Federal Reserve. Like Trump, Nixon demanded that Burns scale back rates of interest and take heed to the president’s recommendation in crafting financial coverage.
At Burns’ swearing in, Nixon mentioned he would meet with Burns recurrently, including: “You see, Dr Burns, that may be a standing vote of appreciation upfront for decrease rates of interest and more cash (…) I respect his independence. Nevertheless, I hope that independently he’ll conclude that my views are those that must be adopted.”
Below strain from the president, who threatened to move laws diluting Fed independence if Burns didn’t comply, Burns repeatedly lower rates of interest. Nevertheless, prematurely low rates of interest and the notion that the president was influencing financial coverage solely deepened the financial disaster going through the US within the Nineteen Seventies.
The end result was stagflation, the dismal financial scenario during which each inflation and unemployment enhance concurrently. Below Burns’ watch, annual inflation peaked at 11 per cent and unemployment at 8.5 per cent.
The “Nice Inflation” of the Nineteen Seventies was finally ended by one other Fed chief, Paul Volcker. Recognising that Burns had created a spiral of inflationary expectations, in 1980 Volcker drastically elevated rates of interest to 19 per cent. Volcker then saved rates of interest in double digits till inflation completely fell.
The so-called “Volcker shock” did finally tame inflation, however at the price of cripplingly excessive rates of interest and surging unemployment.
The Nice Inflation of the Nineteen Seventies, and the value paid to finish it, stands as a robust warning in opposition to the short-term sugar hit of lowering rates of interest in response to political strain.
