“History Doesn’t Repeat Itself, But It Often Rhymes.” —Mark Twain
Tragic economic poetry with unprincipled presidents rhymes all too often. Trump and Nixon challenged the Constitution and made pacts with devils paid with fiat money to win elections. Nixon left communists shamefully ruling Vietnam, while Trump abandons Europe to Putin and lets Iran block international trade. Is ’70s stagflation our fate? With financial planning in focus, will our nation regenerate in 2028 as it did after Watergate?
Currency Instability
Johnson and Nixon somehow believed they could win simultaneously unwinnable wars on poverty and communism; they dropped more bombs than B-17s but with hesitation sufficient to lose Vietnamese peace. They also paid billions in AFDC/FAP to create sufficient unintended dependency in policies later abandoned. Nixon cut taxes in 1969 and unfairly endorsed Keynesianism while increasing stimulus amidst full employment.
Deficits and trade imbalances led Nixon to abandon a gold standard, which had insulated Anglo-American currencies from politics for centuries and Monetarists wept as devaluation and inflation mounted. Nixon, like Trump, had not warned allies before “Nixon Shocks” devalued the dollar 8% to temporarily stimulate exports.
Nixon pushed Arthur Burns, his Fed Chair, to ease money supply. Burns dropped federal funds rates to 3.31% in January 1972 then raised them to 10.79% by post-election 1973. Nixon’s 1975 10% tax rebates resemble Trump’s Covid paychecks—feel-good experimental policies without principle. Money supply (M2) started in 1970 at around 7.38%, hit 13.3% just in time to help Nixon’s 1972 reelection, then fell. Post election, CPI increased annually to 8.8% by 1973 and 12.2% by 1974. Trump dreams his Fed were so compliant.
Energy Shortages
America rescued Israel from the Arab onslaught of 1973 only to suffer a retaliatory Arab oil embargo that had more effect on affordability—not to mention long gas lines—than closure of the Straights because Trump’s larger reserves and better fracking make us marginally energy independent.
Price Controls and Tariffs
Nixon and Trump both engaged the world with destabilizing tariffs that artificially raised consumer prices. Nixon denounced price controls as “a scheme to socialize America” before implementing wage and price controls that created shortages far more serious than those we face. Nixon lifted controls in November 1972, then inflation jumped to 8.3% by November 1973.
Labor productivity with resulting unemployment and affordability challenges. Unemployment was around 5% in the early 1970s but peaked at 7.6% in 1975 before falling to 6% under Carter. Inflation peaked at 12.3% in 1974 and 13.9% in 1980. Only politics explains why Nixon and Trump undermined the dollar and Free Trade when employment has risen.
Unaffordable Mortgages
High inflation increased borrowing costs including mortgages. Average 30-year rates were 7.5% in 1971 rising to 11.2% by 1979. But people bought more modest homes on smaller lots and delayed architectural improvements on homes that might cost $30,000. The median home was about four times salaries. Secondary mortgage markets and adjustable rate mortgages (ARM’s) developed when people dated high rates while marrying cheap houses.
Harmony Restored?
To fight stagflation in 1977, Congress directed the Fed to moderate money growth “…to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Iran’s war with Iraq rapidly drove up oil prices. But Carter broke the political business cycle Nixon and Trump celebrate:
“Carter courageously appointed Paul Volcker to head the Federal Reserve in full knowledge that this determined public servant would deploy the blunt instrument of tight money and high interest rates. This ultimately squeezed inflation out of the economy at the cost of high unemployment and helped squeeze him [Carter] out of a second term,” —Stuart Eisenstat.
The Iranian hostage crisis ended ’70s despair. To defeat Communism, Reagan’s deficit spending ballooned from 2.5% of GDP to 5.7% in 1983. Even with higher interest rates, housing was cheaper in the ’70s because it was simpler and less regulated. Clinton and Gingrich actually balanced budgets to lower long-term inflation.
Nothing is guaranteed, but date high mortgage rates for now to marry affordable houses while egocentric politics defeats itself. Inflation takes the fun from bondholding. When our country returns to fiscal sanity, rally stocks long run for resurgent free trade and “the last, best, hope of mankind.”
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial and tax advice as his client’s fee-only fiduciary. This Mortgage Loan Originator (NMLS #2565162) serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
