By Charles Stampul
It takes about a decade for inflation to reach its apex. In August of 1971 President Nixon closed the gold window, putting an end to Bretton Woods agreement. CPI and interest rates peaked ten years later.
The current inflation seems to echo the 1970s. But look back 100 years and the similarities are more alarming.
An international gold standard was first upset with the creation of fractional reserve banking under the US Federal Reserve in 1913. In 1914 Germany suspended convertibility of paper money into gold. Ensuing trade imbalances came to head with World War I.
The Treaty of Versailles forced Germany to was pay the costs for the war in gold over a 42 year period. German debt rose from 38.6 billion in January, 1919, to 176.6 billion in May, 1921. As the government borrowed to make reparations, the value of the Mark eroded. By 1922 Germany could no longer make any payments. Their debt grew from 52 billion in January 1922 to 150 billion just three months later, and 1000 billion by the end of the year.
Monetary policy is always downstream from fiscal policy. It was the Great Society spending programs of 1965 that led to the crisis facing Nixon in 1971. The current crisis was pushed forth by the federal government, starting with it’s bailout of large American banks in 2008.
But the monetary response to the financial crisis of 2008 pales in comparison to what we have seen since March 2020. This year, the Federal Reserve has announced that it will decrease it’s rate of debt monetization and many economists and market watchers expect that interest rate hikes will follow. Higher inflation, they believe, will force the Fed to tighten policy.
To do this, however, Congress would have to commit to austerity. They would have to accept whatever social unrest comes with reigning in spending. As long as Congress is spending, the Federal Reserve must accommodate. It’s more likely that a brief period of tapering will lead to even greater monetization (a.k.a., quantitative easing) immediately after.
But since most market participants believe the unlikely, maybe more out of hope than analysis, the dollar has been strengthening, just as the German Mark strengthened just before it’s collapse in 1923.