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Op-Ed: New York Sun - Is Jimmy Carter Back, or What?

June 11, 2021

The New York Sun

By: Larry Kudlow

Read the Full Article Here

Is Jimmy Carter back, or what? There’s a big inflation report today — another 0.6% in May. That’s 8.4% at an annual rate over the past three months. It’s 6.5% at an annual rate for the first five months of this year. The Federal Reserve’s target used to be 2%, which is what we had for over 20 years. It sounds really ominous.

What a minute, though conservatives might hate me for this. President Carter really, truthfully, factually did not launch double-digit inflation of the 1970s. He was merely captured by it, and his presidency was destroyed. I don’t think he really ever understood it. It wasn’t just about oil prices. He did, though, appoint Paul Volcker to run the Fed.

Volcker was my former boss at the New York Federal Reserve Bank. I was his executive assistant 46 years ago. It was Paul Volcker, under President Reagan, who slew inflation. Reagan gave Volcker the ground to stand on. The truth, though, factually and analytically is that the president who unleashed double-digit inflation was Richard Nixon.

That’s right. It was unfortunately the 37th president who closed the gold window where the dollar was exchangeable for gold at a 35th of an ounce. That went back to the post-war deal reached at Bretton Woods, New Hampshire. It restored to the world economy the gold exchange standard with the dollar at the center of that system.

Nixon was worried about trade deficits and a deteriorating balance of payments. He rejected the advice of Volcker, then treasury undersecretary, and the Fed chairman at the time, Arthur Burns. Instead, Nixon closed the gold window, meaning foreign governments could no longer exchange dollars for gold. The value of the greenback fell like a stone.

So as the value of our currency declined, prices denominated in dollars sky-rocketed. We printed bad money and too much of it, and that’s the definition of inflation. Excess money in relation to demand will do it every time. Lack of value will do it every time. In 1973, Nixon abolished all remaining remnants of the gold dollar exchange system.

Inflation soared, first hitting double-digits while Nixon was president. All commodity prices, including oil, sky-rocketed along with just about everything else. On top of that, income tax rates were not indexed to inflation in those days. So higher and higher inflation drove middle-class Americans into higher and higher tax rate brackets. That had a huge braking effect on the economy.

In other words — stagflation. Intermittently from then until Reagan, inflation would pop up to double-digits. Interest rates peaked at about 15% in the market in government bonds. The prime rate peaked at around 21.5%. Reagan came in and squelched it all. As a hard money gold advocate and friend of Milton Friedman, Reagan, who was also my former boss, gave Volcker *carte blanche* to restore dollar value and vanquish inflation.

Then Reagan slashed tax rates to 28% from 70%, providing fresh after-tax incentives to rejuvenate the economy and give folks back their real income lost during the Nixon-Carter years. Really since the early 1990s, inflation in America has averaged about 2%. That’s for almost 30 years.

One last point on inflation. It is everywhere and always a monetary phenomenon, as Milton Friedman taught us, and, as Presidential Medal of Freedom recipient Art Laffer and Nobel laureate Robert Mundell taught us, the optimal policy mix was stable money and low tax rates.

I coined the phrase “King Dollar” years ago, and it has stuck. But I was just referring to stable, sound money, and, of course, the Laffer curve has prevailed during the JFK and Reagan decades and most recently my boss President Trump.

Against that backdrop, this is not the 1970s. Despite the recent jump in inflation, the dollar has held its ground reasonably well. Financial market price-signals like 5-year and 10-year treasury break-evens have increased a bit toward 2.5% but have not reflected the 6% to 8% inflation we’ve had in the year to date.

Gold hasn’t moved much. Today it’s up about a buck but gold was below $1,700 at the end of March, and now it’s closing in on $1,900. That’s not a great signal. Which leads me to conclude with two points.

First, if Uncle Joe gets his Green Workers Paradise Soviet-style Bulgarian economic policies of tax increases, social spending, destroying the fossil fuel energy sector, then the dollar will collapse and leaping tax rates will choke-off economic growth.

Call it the 1970s with a socialist spin. In that case we would have permanently higher inflation and a weaker economy. If Mr. Biden’s Green Workers Paradise does not get voted in, then I would say that this inflation bump is temporary. It’s just a rebound from the pandemic deflation. It’s actually a sign of strong economic growth, and there will be no long term inflation consequences.

Right now we’re still operating under Trump rules. That is, tax cuts, minimal regulation, and energy independence. Hence the vaccinated V-shaped recovery. More people working is a good thing. Prosperity should be a great American goal — not the 1.8% economic growth baseline that Team Biden published as a pathetic defense of their left-wing redistributionist policies. So, we will see about this inflation story. I don’t think it’s there yet, but it sure is a threat.