“If It Looks Like A Duck” – The Man In The Moon: Part 2
In part 2 of the “Man in the Moon” series we look at Paul Volcker’s roundtrip – monetary policies and their impacts from 1971 through the Great Leveraging to today. Part 1 can be found here.
If it Looks Like a Duck…
Prior to 1971, all global currencies were valued based on a fixed exchange rate system, commonly referred to as “Bretton Woods”. Each currency was directly linked to the US dollar’s fixed exchange rate to gold.
Bretton Woods effectively died in August 1971 (officially 1973) when the U.S. Treasury ceased exchanging dollars for gold in what became known as “The Nixon Shock”. Overnight, global money and credit became un-tethered to anything scarce. (The Man in the Moon is concerned only with understanding the value of money, not gold’s status as an economic, financial and political lightning rod.)
What followed from 1973 to 1982 in the West was a period of significant inflation coincident with economic stagnation (i.e., “stagflation”), a state of dis-equilibrium with which most global economists were unfamiliar. 1970s stagflation is now commonly blamed on two Middle East wars, in 1973 and 1979, which led the Organization of Oil Producing Exporters (OPEC) to embargo crude oil and drive its price higher. It is thought the embargo created higher prices coincident with an economic slowdown because consumption dropped without a commensurate and offsetting downward adjustment in oil prices.
Such macroeconomic analysis begins with the vagaries of geopolitics – the wars. Less blame is placed on what was then the new threat of a dramatically increasing stock of global currency – currency the OPEC cartel would have to accept in exchange for their relatively finite oil.
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