Right at this very moment in Simi Valley, California, friends and admirers of former President Ronald Reagan are filing past his coffin, beginning five days of official remembrance.
Dignitaries and statesmen are memorializing his cold war victories, eulogizing his moral fiber, and reminiscing about his warm humor. Millions mourn his passing.
But too few are talking about one of the greatest conquests of his lifetime – over the great inflation monster of the late 1970s and early ’80s.
Have they forgotten? Do they feel it is not important? I wonder.
Indeed, long before the first jar of jelly beans found its way to his first meeting at the Oval Office, President Reagan had made up his mind to fight inflation like no other president in modern history.
He teamed up with Fed Chairman Paul Volcker. They met in the White House and huddled at Camp David. And then …
* They kept interest rates significantly HIGHER than the inflation rate.
* They made sure that the REAL cost of borrowing (even after adjusting for inflation) was EXPENSIVE.
* And by maintaining that policy very patiently and consistently, inflation finally receded.
You do remember how tough that was, don’t you? How many years it took … how many false starts and stumbles we had to endure. Is all that now about to be undone?
I shudder at the answer. Based on the first four months of the year, consumer price inflation is now running at the annual compound rate of 4.4%. But official interest rates are still at only 1%.
Even after the Fed raises its target to 1.25% (expected this month), that still leaves a NEGATIVE gap of more than THREE full percentage points between short-term interest rates and current inflation.
That’s precisely the OPPOSITE of the policy Ronald Reagan and Paul Volcker pursued. It’s making money too cheap, and it’s pumping UP too much inflation. As a result, it’s time for you to …
GET READY FOR THE NEXT ROUND!
Everything tells me the inflation monster is reawakening – not next month or next year – but right now.
You can see the inflation for yourself. You can see it in the $2-plus prices of gas at the pump … the price of paper, copper, or steel … surging tuition costs … soaring health care costs … and out-of-control service costs. All are jumping or about to jump. All are now obvious, even to the untrained eye.
Next …
– Expect higher airline tickets, more airline bankruptcies or some combination of both.
– Don’t be surprised if you soon hear demands for higher wages – from labor unions, independents, even foreign workers – the beneficiaries outsourcing to India, China and elsewhere.
– Plus, you can count on one more rising cost: The cost of money itself – interest rates.
So get ready, and don’t let anyone deceive you.
BENIGN OR MALIGNANT?
At first, Washington spin masters and Wall Street cheerleaders will tell you the inflation is “small” or “benign.”
They’ll welcome it as “Corporate America’s improved pricing power.”
They’ll call it “the price of prosperity.”
And with few exceptions, they’ll sit back complacently, expecting you to do the same.
Don’t fall for it. Inevitably, the inflation will grow larger, spreading through the economic body like a cancer … corroding your savings … gutting the value of your bonds … and sapping the last ounce of strength from the already-beleaguered dollar.
I’m 57, and I’ve personally witnessed this before – in Brazil where inflation surged to triple digits … and here in the United States, where it hit double digits. I remember how prices leapfrogged each other, how inflation fed on itself.
I also remember this one undeniable fact:
ONCE THE INFLATION MONSTER IS LET LOOSE, IT IS EXTREMELY DIFFICULT TO STOP.
To recapture economic stability, it took collective national pain and widespread personal sacrifice: Unemployment and under-employment. Debt defaults and bankruptcies. Sometimes many months of financial chaos.
Strangely, though, policymakers today don’t seem to remember – or they don’t WANT to remember.
My father used to put it this way: “There’s nothing wrong with their memory. Their problem is they have a very convenient ‘forgetory.'” They selectively forget all those annoying, not-so-trivial tidbits that could upset their current agenda.
The current agenda is growth at all costs, just as it was before the last round of inflation. And this time, like the last, the ultimate cost may be very high.
We’ve already seen the greatest U.S. budget deficit in history, even during some of the best of times. We’ve already seen the largest U.S. trade deficit of all time, even when the U.S. economy was still strong. If that’s what we face in supposedly good times, what will happen in bad times?
To answer these questions, we cannot peer over the horizon and see our future. We can only look back to the past and gather some clues.
USA, 1970s
Richard Nixon was president. He thought he had solved inflation by slapping on wage-and-price controls in 1971. But he was wrong.
The inflation problem burst onto the main arena of American life with gale force. Interest rates soared. Bond markets were thrown into chaos. Franklin National and the West German Herstadt Bank went under. New York City teetered on the brink of collapse.
At first, Washington and Wall Street were in denial. But finally, the previously silent voices could be heard:
Some argued inflation was a conspiracy by the rich to bleed the poor. Others said it was a plot by labor to bleed the rich. Most, however, recognized that it was really a ploy by politicians to effectively default on debts, soothe the public, and collect votes from both the rich and the poor.
A SEARCH FOR CAUSES
They also recognized that inflation was “the most vexing and most intractable of all economic problems,” “immovable,” “hard to cure.” But, still, few could explain its causes.
Some economists went no further than to say inflation is “too much money chasing too few goods,” which is only a description, not an explanation.
Still others avoided the subject entirely by citing different kinds of inflation: They talked about “creeping inflation,” “rampant inflation,” “runaway inflation,” “galloping inflation,” “hyperinflation,” “cost push inflation,” “demand pull inflation,” “structural inflation,” “inflation fed inflation.”
Despite the plethora of terms, however, inflation defied solution, and repeated attempts by the government to find a cure never got off the ground.
In early 1970, the President’s Council of Economic Advisors (CEA) undertook a massive study to find inflation’s “real causes.” Herbert Stein, its Chairman, passed the responsibility to Ezra Solomon. Several months later he, in turn, passed the buck to an economist newly arrived at the CEA, Nicholas Perna.
When Stein appeared before the Joint Economic Committee in October 1972, Senator William Proxmire asked about the status of the study. “We are not prepared to make the conclusions of that study public,” Stein said. “We will have more to say about it in our report.” But the report, when it finally appeared, made no mention of the study.
The hard truth: The government economists knew all along that they were pumping too much money into the economy and feeding the fires of inflation. Their real concerns were preventing a recession and covering up the fact that inflation, along with the decline of the dollar, was the probable consequence of their policy.
Inflation went through the roof. The economy seemed to be growing, but it was mostly on a treadmill.
BRAZIL 1950s-90s
My family and I moved temporarily to Brazil when I was six. Dad, a romanticist at heart, wanted a second home in the tropics, where he could take off a few months each year to write peacefully without the daily distractions of Wall Street.
We settled on a homestead in the central highlands, where my siblings and I went to a Brazilian school, just outside of Anápolis in the state of Goais.
Dad commuted on Pan Am’s twin-engine airliners with connections to Varig’s regional flights – 28 hours one way, 28 hours the other. But my mind was strictly focused on local travel, especially trips to the North on a narrow dirt road that wound its way up to the rolling hills, steep cliffs and waterfalls of Chapada de Viadeiros.
One day, we went to visit Viadeiros by jeep, and on the way, we stopped to picnic on a broad, grassy plateau. Standing at the center of the plateau was a sign, hastily written in misspelled Portuguese – “Futuro citio de BrasÃlia,” future site of Brasilia. Other than the tatu (armadillos), cupim (termite mounds), and abundant birds, that was the only immediate sign of life.
Sure enough, a couple of years later, the new president, Jucelino Kubicheck, broke ground and began the most massive construction project in Brazil’s history – to build the new capital city. But the government didn’t have the money. So he printed it, literally by the truckload. And he set off a wave of inflation that continued for most of the rest of the century.
By 1967, the Brazilian currency – the cruzeiro, was so devalued it had to be replaced by the new cruzeiro, worth 1000 of the old money.
Only three years later, in 1970, the inflation had accelerated to triple digits so quickly that the Brazilian government had to do it again, replacing the new cruzeiro with an even newer one.
In 1986, the government announced still another currency – the cruzado … only to be followed by the new cruzado in 1989 … another cruzeiro in 1990 … the cruzeiro real in 1993 and, finally, ten years ago, the real.
All told, in my lifetime, Brazil has endured eight currencies. Translated into English – the cross … the new cross … the cross (again) … the crusade … the new crusade … the cross (still another time) … the royal cross … and the royal.
With each currency change, Brazil’s government promised the inflation had been solved … only to watch helplessly as the economy lurched forward into another inflationary spiral and plunged into another stagflation or recession. And with each currency change, the government officially recognized still another 1000-to-1 devaluation.
Growing up in Brazil, I marveled at the ingenuity and patience of Brazil’s people – plus the corruption of many of its leaders – in coping with such rampant, ingrained, inflation.
When I was in grammar school, the price of rubber balls kept soaring beyond belief, and my friends could not afford to buy them. So we got together and collected a bunch of dirty, old socks. Then, we bundled and darned them together. During recess, instead of playing soccer, we kicked around sock balls.
One day, Dad brought two brand new soccer balls from the States – plus gymnastic equipment from his old days as an amateur gymnast in Harlem. Two hundred kids, myself included, were ecstatic.
The next year, the price of rice and beans practically doubled overnight. But the father of a good friend, an immigrant from Syria who owned a local wholesale and retail warehouse, helped offset the shock, while still pocketing a nice profit.
He showed me how he did it – a simple mathematical formula which told him how much to stockpile when prices were relatively low and how much to sell when prices were surging, while still satisfying local demand.
Meanwhile, politicians coped by converting the art of bribery into science.
One finance minister, Delfim Netto, a favorite of U.S. bankers, became known as “Mr. 10%.” No matter what the project, vendors had to pay him his tithing.
Over a decade later, Fernando Collor de Mello, Brazil’s most infamous president of that era, put Netto to shame. He built one of the biggest influence peddling rings in the history of the world.
Today, Brazil’s currency is more stable and corruption is the new president’s enemy number two (after hunger). But the price paid to get it there has been enormous.
SOME LESSONS …
First, inflation is never cured. It only goes into remission.
Second, once a country suffers a relapse, the pain can be very severe.
Third, to tame inflation again can take years of hard work.
Fourth, inflation can thoroughly transform a nation – changing or corrupting people’s habits, attitudes, business strategies, day-to-day decision making, and planning.
Fifth, the United States is not Brazil. But it is also not immune to an inflation that can erode – or even destroy – the fabric of the economy and society.
Sixth, stay vigilant. Continue to keep most of your money safe and liquid. But also continue to allocate some portion to inflation hedges, such as those I’ve been recommending in my Safe Money Report.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
martinonmonday@weissinc.com
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