1970s Redux…Who Gets Ripped off This Time?

One company’s stock soared the other day. Kawamoto, Japanese maker of facemasks, was up some 24%.

The rest of the market looked a little droopy. Stocks had caught the Wuhan bug, said commentators. The Dow ended the day down 454 points.

And what next? Will stocks go up from here? Or keel over?

We don’t know. Markets are unpredictable. But the Federal Reserve is not. If stocks go down, we know what the Fed will do…it will intervene to push them back up. That is, it will inflate, with ultra-low rates, repo madness, quantitative easing (QE), and ‘not QE’ programs.

That has been Fed policy since former chief Alan Greenspan first did the trick in 1987. In the years ahead, as it becomes more desperate to keep inflation going, it will probably try some new tricks, too, such as buying stocks directly, and ‘curve control,’ where it attempts to set interest rates all along the yield curve.

We know, too, that the Fed can’t sit still. Without more inflation, asset markets will deflate… and the economy will go into recession…forcing the Fed to inflate even more.

It is what it is. Inflation is here to stay. And inflation is always and everywhere a political phenomenon. It is intentional, like a street mugging, designed to separate people from their money.

So, today’s question: Who gets ripped off?

EXPOSED: The truth behind Australia’s ‘miracle’ economy.

Repo madness

We need to put on our thinking caps. Because the Fed’s repo madness program brings us into a bigger, bolder phase of larceny.

Until last September, the Fed had at least been pretending to follow traditional central bank principles. Its 2009–15 excesses, it said, were just emergency measures. It would ‘normalise,’ it promised, as soon as conditions permitted.

But then, without a cloud in the sky, the Fed began printing money — beaucoup money. FX Empire describes the new program:

To simplify, there is too little cash and too many government bonds. Well, traders can thank President Trump who has increased significantly the fiscal deficit. As the Congressional Budget Office estimated last week, the federal deficit rose 12 percent in the first quarter of fiscal year 2020 compared to the same period last year. Larger deficit means more Treasuries coming into the market, putting an upward pressure on interest rates.

In short, the Fed began acting like the central bank of a ‘sh*thole’ country…printing the money to pay the nation’s bills.

Who will be left holding the bag?

Best bet

In the crash of ’87, the Dow fell 22% to under 1,800. The best bet then was simply to buy the dip, hold, and let the Fed’s money-printing push up prices. The Dow rose 17 times from 1987–2020.

In that phase, the Fed’s inflation short-changed the 90% of the population that didn’t have substantial financial assets.

The rich got richer. Relatively, everyone else got poorer…with the bottom half losing about 30% of the wealth they had in 1999, according to the Feds’ own measures of inflation.

And today?

Whip inflation now!

Last week, visions of ‘Whip Inflation Now’ and gas lines haunted our sleep…with a soundtrack of ‘Stayin’ Alive’ and ‘You Light Up My Life’ playing in the background.

We wondered whether the coming decade might resemble the ’70s, when the Fake-Money Express first left the station. Let’s look at the two periods. And let’s see who got ripped off then…and who’ll get ripped off this time…

Then: The ’70s followed a 20-year period of low interest rates.

Now: Interest rates have generally been on a downtrend for 40 years.

Then: The stock market had been rising since the end of the Second World War. The Dow hit an all-time high in 1968, over 950.

Now: Stocks have been rising since 1980, with two major interruptions. In 2000, the dotcom bubble burst. In 2007, the real estate bubble burst. Each time, the Fed came to the market with more money (inflation).

Then: Unemployment was low in 1970.

Now: Ditto.

Then: GDP growth had been strong since the war.

Now: We are still in the longest business expansion in US history.

Then: The federal government had overspent in the 1960s…on its Great Society and War in Vietnam flimflams.

Now: It has overspent on entitlements at home and the War on Terror abroad.

Then: By the early ’70s, officials felt they could no longer continue with normal financial policies. They had made a mess of US finances and couldn’t trust markets to sort it out. Normally, the US government would honour its commitments to overseas governments, who held billions of US dollars. They had enjoyed the right to exchange them for gold, at a fixed rate, since 1792, with only occasional interruptions during times of war.

Instead, the feds pulled a switcheroo, introducing a new money that was not backed by gold. That act was viewed as a ‘technical’ adjustment, not something ordinary citizens should worry about.

Now: In August 2019, under pressure from Donald Trump, the Fed ceased normalizing interest rates. And on 17 September 2019, overnight interest rates spiked to 10% — a clear sign of too much borrowing and too little savings. The normal thing would have been to let buyers and sellers work it out. That’s what markets are for.

Instead, the Fed stepped up its inflation, feeding new money into the short-term lending markets at the rate of about $60 billion a month.

Then: Consumers got ripped off in the ’70s. On average, prices doubled. And overseas dollar-holders lost out, too, when they could no longer redeem their dollars at the old rate.

But investors fared even worse. In nominal, new-money terms, stockholders ended the decade about where they started it. But if they tallied it in old, gold-backed, pre-1971 dollars, they lost 92% of their wealth.

Bond investors didn’t fare much better. In gold-backed dollar terms, investors who bought 10-Year US treasury bonds lost 87% of their wealth.

In short, bondholders, stockholders, and dollar holders all ended up as bag holders.

Now: Our guess is that the 2020s won’t turn out much different.


Bill Bonner,
For The Rum Rebellion

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

The Rum Rebellion