Inflation, a brief overview and what was done.

Inflation is defined as “Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.” Source’s link is at the bottom

Inflation is covered by 5 takeaways that determine what is the cause

  • Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.
  • Inflation is sometimes classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation.
  • The most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
  • Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change.
  • Those with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets.

    While we have been lucky up to this point in not having to deal with it. That doesn’t mean it hasn’t been free riding the entire time. One particular time when Inflation was an issue was in the 70s, and it is something that I suggest people study up on. It can help educate on what is going on today because there are some parallels I feel.

When Pres. Nixon came into office in 1969, one issue that was beginning to grab attention was inflation. At the time the country was in Vietnam, and there was expansion of Lyndon Johnson’s “The Great Society” policies. These two pivotal issues were a contribution to early signs of inflation. Also, another factor was the Fed’s attempt at monetary tightening (raising interest rates) which most times have cause economic recessions and in fact did cause a brief recession in 1969-1970.

Nixon attempted to address Inflation around 1971 when it rose to 5.84%. His first policy to address the issue was in 1970 actually when he signed on Executive Order 11615 which would impose a 90-day freeze on wages and prices in order to counter inflation. It was the first time since World War II that this was done.

These 3 items are what I mentioned that were executed by Nixon on Aug 13th 1971

  1. Nixon directed Treasury Secretary Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold.
  2. Nixon issued Executive Order 11615 (pursuant to the Economic Stabilization Act of 1970), imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the U.S. government had enacted wage and price controls since World War II.
  3. An import surcharge of 10 percent was set to ensure that American products would not be at a disadvantage because of the expected fluctuation in exchange rates

As for the Gold standard and Brettin woods system, I will address much deeper at a later date. Right now, I just want to explain inflation

Below is Nixon’s speech on the items above in his address to the nation in 1971

Initially it seemed like Nixon had succeeded. The stock market made a 33 point jump the following days and the New York Times editorial even credited the President with, “We unhesitatingly applaud the boldness with which the President has moved.”

Sadly however, it would be short lived as inflation would continue to jump and by 1973 it was 6.22%, and would skyrocket to 11.4%. It would also create a period that is known as “Stagflation”. Meaning, low economic growth, and high unemployment. Other factors would hamper Nixon, budget tightening, the energy crisis, and of course Watergate which would sink his Presidency.

Skipping Ford’s administration since his only attack was a pin that said WHIP (Whip Inflation Now), it would be inherited by Jimmy Carter.

Carter would not be able to do much either as he and his administration realized that it would only be fixed at the Fed Chair. To do that Carter would need to find a person to be able to address it. Arthur Burns who was Nixon’s pick would retire in shame. Burns showed a mass of incompetence and unprepared for this situation. His successor fared no better. Carter would pick Paul Volker. Volker had been in Washington for several years and had worked with the Nixon Administration during what was called later the “Nixon Shock”. I forgot to mention that earlier. My apologies.

Volker was approved by congress and would assume the head chairman position. He would realize that the best way to address this high inflation would be to raise the interest rates. Rates had been raised before, but not even high enough to address the inflation that it would reach. By 1980 it would reach 13.5%.

To counter it Volker would raise the interest rate to 11% in 1979 and 20% in 1980. While it would drive inflation down it would also trigger a brief recession for the incoming Reagan administration. Inflation would drop to 10% in 1981, and then even lower to 3.21% by 1983

Which brings us too today. While the country and the world are suffering a somewhat supply chain issue. We are also suffering from the need to continue printing money which can help contribute to inflation. Our massive government spending and ending of the stimuluses are also main contributing factors to our dilemma.

While Fed Chairman Jerome Powell is planning on raising the interest rates which is basically 0 at this point. While it may seem great, the levels he wants to raise it to may have no effect on the inflation number at all. The fear is that if he raises it very high, that it will cause a recession. That may be true, but it may also help in the long term for Americans who are going to suffer more during this inflation issue. The question still remains. Will the Fed chairman actually do what is necessary, or just puss out?

Below I have links and additional sources if you care to read. Any feedback is welcome. Nothing like learning something new every day.

Sources

https://www.federalreservehistory.org/essays/gold-convertibility-ends

https://www.presidency.ucsb.edu/documents/address-the-nation-outlining-new-economic-policy-the-challenge-peace

https://www.pbs.org/wgbh/commandingheights/shared/minitextlo/ess_nixongold.html

https://www.wsj.com/articles/nixon-fight-inflation-price-controls-stagflation-gas-shortages-biden-democrats-reconciliation-bill-federal-reserve-11628885071

https://www.wsj.com/articles/SB10001424053111904007304576494073418802358

https://www.cato.org/commentary/remembering-nixons-wage-price-controls

https://www.investopedia.com/ask/answers/111314/what-methods-can-government-use-control-inflation.asp#:~:text=Governments%20can%20use%20wage%20and,prices%20and%20increased%20interest%20rates.

https://www.cnbc.com/select/where-to-put-your-money-during-inflation-surge/

Published by My life so far

I am recently retired from the Air Force after 20 years and am beginning a new chapter in my life.

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