Thursday, October 23, 2008

America's Parallel Universe — Back to The Future

As America faces a critical and defining moment in its 232 year history, history itself may offer us a rare glimpse into the future.

Those who are over the age of fifty will find themselves in a sort of parallel universe. It's August 9, 1974, and Richard M. Nixon has just resigned in disgrace from the office of the Presidency of the United States. The stock market shakes but does not crash. Less than two months later, however, OPEC (Organization of Petroleum Exporting Countries) announces that they will terminate all oil exports to the US. The Dow Jones Industrial Average (DJIA) begins a sharp 45% decline from 1051 to 577. The economy sinks into a severe recession as gasoline increases from $.30/gal to $1.25/gal.

Fast forward into our parallel universe. It is exactly 34 years later. Another Republican, George W. Bush, is a lame duck president, discredited and seemingly unable to deal effectively with a similar potentially calamitous collapse of the country's financial system. The DJIA has declined over 40% and the Country is on the verge of a severe recession or worse.

Back to the future. Richard Nixon has been succeeded by Gerald Ford, an honorable and under- rated President whose media-induced image is one of a clumsy ex-football player who played too many games without a helmet and is portrayed as an ideological clone of the ex-president.

Out of the deep south emerges a two-year term, unknown but charismatic governor from Georgia who charms the nation with his drawl, easy manner and forthrightness. He promises change, to cleanse the government of corruption and get the economy going again. Jimmy Carter decisively wins the presidency in 1976.

Carter appoints a long-time friend, G. William Miller, as Chairman of the Federal Reserve Board with a strategy to grow the stagnant economy. The stock market soon returns to its 1974 high and consumer sentiment rises as pent-up demand and easy money boosts the economy. The President glows with an aura of success despite the ominous signs of inflation brewing.

By 1978 the Consumer Price Index (CPI) reaches 13%, the highest inflation since the civil War. Despite long term mortgage interest rates rising dramatically from 7% when Carter took office to 16% by 1980, real property values in some areas of the country double in four years. As Paul Volker assumes the role of the new Fed Chairman, the prime rate reaches 21.5% and gold, the ultimate inflation barometer, increases 700% to $850/oz. On November 4, 1979, the Iranian Theocracy over throws the Shah and Jimmy Carter's world unravels in the oily sands of the Persian Gulf.

January 20, 2009, Barrack Obama, begins his first term as the nation's 44th President determined to do whatever needs to be done to cure the economic ills of America's middle class. Congress has already made fundamental changes as it always does through legislation (Housing & Economic Recovery Act of 2008 and Troubled Asset Relief Protection Act) which will infuse (potential) trillions of newly created fiat dollars into America's financial system. The young, charismatic President, like his parallel predecessor, Jimmy Carter, successfully alters the mood of the country and euphoria breaks out as the DJIA reaches and then exceeds its previous historic high.

Suddenly, however, after a couple years of a seemingly stable growth economy, the evil dragon known as inflation emerges from its lair and begins its relentless and accelerated destruction of the US dollar. When the understated and fraudulent CPI increases at an annualized rate of 25% inflation morphs into HYPERINFLATION and an ultimate "Crack-Up Boom" will mark the second calamitous economic event in American history.

This parable of a parallel universe offers us an opportunity as well as an omen. During the first couple years of this new administration, outsized gains could be realized in stocks, real estate and commodities. The time will come however, when it may be prudent to divest yourself from all equity investments. God willing, I'll be able to alert you how to deal with hyperinflation. In the interim, now is the time to read, "The Aftermath of Greed: Get Ready for the Coming Inflationary Boom." Your perspective of the future begins in the past.

-- H. L. Quist

1 comment:

Adam said...

HL,

Great article. I saw you speak a couple of weekends ago while in Phoenix from Vancouver. I bought your book - very insightful and interesting.

Looking forward to more of your thoughts on what's to come and more of the wit too!

Adam