In part one we introduced the Obama-Carter analogy. In part two, we make a firm case – and invite you to weigh in. Does a return to the 1970s seem likely from here? Read on and decide...

If a historian examined the data on prices across the entire sweep of American history, an obvious pattern was visible. What caused inflation? The recurring experience of inflationary spirals strongly suggested that the underlying source of these traumas lay not in economics but in politics – the choices made by government or, more precisely, the choices government refused to make.

– Secrets of the Temple: How the Federal Reserve Runs the Country, by William Greider

Previously, we laid the groundwork for a 1970s return and the Barack Obama/Jimmy Carter connection. Today we’ll take a closer look at that connection – and then you can weigh in.

To begin, consider a quick rundown of the similarities of the two presidents in question:

• Like Barack Obama, Jimmy Carter was a virtual unknown at the time of throwing his hat into the ring, with national name recognition of just 2%. Also like Obama, Carter “made his bones” in 1976 by winning the Iowa caucuses... and was seen as a breath of fresh air after the disgraceful stewardship of Tricky Dick Nixon.
• President Obama is exceptionally intelligent, as was President Carter. As campaigners on the trail, both men had a clear gift for presenting themselves as thoughtful, pragmatic outsiders. The modest peanut farmer from Plains, Ga., shared a number of grass-roots-style traits with the community organizer from Chicago.
• As further result of their intelligence and idealism, both men share a tendency to focus on ambitious (some might say grandiose) plans in areas they care deeply about, like energy, healthcare and the environment, while leaving critically important areas of the economy (like the financial system) to be run by technocrats with dubious bona fides.

• One of President Carter’s great failings came in matters of monetary policy – a subject he showed no great interest in that turned out to be of vital concern to the country. By outsourcing his views to captive creatures of Wall Street (Geithner, Summers, Blackrock, Pimco et al.), President Obama suffers from the same blind spot – and takes the same gamble.
• On the matter of monetary problems, the Carter administration “inherited” an awful mess, just as the Obama administration did. Nixon (and LBJ before him) got the bad ball rolling for Carter, much as George W. Bush and Alan Greenspan handed off a booby-trapped baton to Obama and Bernanke. But it was the Carter administration that developed an unshakeable reputation for being listless and ineffectual when it came to tackling the problem.
• Near the end of his term, Carter found himself hapless and adrift. Weakened to the core by years of overweening distractions and myopic decision-making, engulfed by “malaise” and an entrenched inflationary mindset, Carter was forced to hand the Federal Reserve reins to a cultural and political outsider. The new Fed chairman, Paul Volcker, all but promised Carter he might have to throw the economy into recession – killing Carter’s re-election hopes – in order to solve the inflation problem once and for all. Whether in 2012 or 2016, it is not hard to imagine a similar endgame for the Obama presidency.

Proximate Causes

In Secrets of the Temple, Greider seeks to pinpoint the main causes of the great 1970s inflation – the beast whose back Volcker was called in to break. What many do not realize is just how persistent this inflation was, and how early it got started. Greider writes:

The Consumer Price Index was calculated as 100 with 1967 prices. By 1970, the price index was 116. By 1975, it was 161. Four years later, it was 217. During the Civil War, prices doubled in only a few years, but Lincoln was fighting a war. This time, the price level nearly tripled in less than twenty years. And the nation was at peace.

What were the causes behind this nominal price run-up for the ages? Greider offers up a few culprits, briefly summarized as follows:

• Newly independent (i.e. “poor”) nations had the ability to leverage their terms of trade for the first time, leading to a long-term price rise in all sorts of raw materials – from copper to coffee to crude oil. (The “most spectacular” rise, Greider notes, was in the price of crude.)
• Memories of the Great Depression were “still fresh” in the ‘60s and ‘70s, with “neither political party [wanting] to risk repeating the misery of the 1930s.” This mindset thus “pushed policy makers in the opposite direction – pursuing economic expansion and accepting the risk of inflation.”
• Government defense spending, boosted by the Cold War with the Soviet Union, “absorbed a permanent share of the economy’s output, boosting employment and incomes but also competing with other desires.”

Again remember, Greider put pen to paper back in 1987. I find it remarkable how closely his assessment of inflationary causes, recorded more than two decades ago, hews to today’s environment.

As for the then-versus-now match-up: We already know about raw materials and crude oil... in addition to the slow (or perhaps not so slow) demise of the U.S. dollar, we are now contending with the phenomena of peak oil, peak soil, 3 billion new capitalists, and a voracious China bidding up every industrial inflation hedge in sight.

We are also aware – all too aware – of the return of Great Depression fears and their electrifying effect on politics. The mindset Greider speaks of has been translated directly into stated policy these days – straight from the mouth of the Fed Chairman himself.

As for the third point, some would argue there is no new “Cold War” brewing, at least for now... or is there? When one considers the war in Iraq, the war in Afghanistan, the building threats in nuclear-armed hotspots like Pakistan (and possibly Iran), and the growing need for a counterbalance to China’s might in the East – not to mention the still-growling Russian bear – one could say that the multiple mini-sized “cold wars” of today more than equate to the old mega-sized one.

Four Breathtaking Blowouts

In Secrets of the Temple, Greider notes at least one other very important thing. The half dozen or so major inflationary episodes that swept through U.S. history all shared at least one common factor – explosive government spending.

Past instances of government spending blowouts were usually linked to war. Today we also have literal war – recall Iraq and Afghanistan – but we also have four other candidates for prodigious spending on a scale never before seen. Those four candidates are:

• Healthcare, Social Security and Medicare. The cost to overhaul the nation’s healthcare system, and to shore up the failing Social Security and Medicare programs, will be off the charts. In addition to hundreds of billions to trillions in official Washington-sanctioned expenditures, there will be trillions more in hidden costs, liabilities and inefficiencies to deal with before all is said and done. The party line is that this massively ambitious revamp will be paid for through innovative savings and cost-cutting measures... and that those savings will come sooner rather than later. Yeah, right.
• Environmental Regulations. The “cap and trade” program designed to lower greenhouse gas emissions will function as a hidden tax on industry that could wind up costing trillions. New auto regulations – not to mention direct marching orders issued to the quasi-government-owned car companies to start churning out “green” cars – will also have indirect, yet massive, tax-and-spend type consequences.
• The Ongoing Bank Bailouts. The frightening thing about the hundreds of billions to trillions thrown at America’s flailing banks is that, by some measures, the crisis is not even halfway done. The illusory “profits” shown thus far are mostly the result of insane government largesse, and the supposed “stress tests” look all too rosy compared to what’s ahead. Thanks to an upcoming wave of mortgage resets, credit card defaults and widespread commercial real estate failures, some gloomy analysts are predicting the banks could remain in “crisis mode” for another four years at least, into the year 2013. This means more potential bailouts, of both the front-door and back-door variety.... and further trillions down the drain.
• Nationwide Union Buyouts. The upper hand given to the unions in the Chrysler reorganization (in a blatant violation of creditor contract law, according to some) shows the great lengths to which the Obama administration is willing to go in order to keep the unions placated. The knock-on effect of a White House willing to put union demands above free market principles – to publicly “stand with them” against the greedy capitalist class, as President Obama flatly stated – is an open invitation for ever-bolder union gambits, as we are already seeing with the Hart Marx/Wells Fargo flap in Chicago. These populist, pro-union policies will also wind up costing hundreds of billions to trillions, both in direct federal subsidies and indirect losses born of wary investors pulling back from dealings with an unpredictable White House.

As the pièce de résistance to all the above, consider the global backdrop. This tidal wave of rampant spending will come at a time of unprecedented indebtedness and general economic weakness, for both U.S. consumers and the country at large, with the rest of the globe looking on as the world’s reserve currency is turned into confetti.

Is it any wonder, then, that some of the biggest and most successful hedge fund managers in the world – the ones who made a killing in the subprime crisis and called the tune correctly from the start – have been in the news of late for plowing a substantial portion of their assets under management into gold?

And finally, I’d love to hear your thoughts on the matter. Is the Obama-Carter comparison a fair one? Or is it an unjustified slight... and if so, to which man? Do you see any way we can avoid a repeat of the 1970s – and we’re talking inflation here, not fashion – given the historic parallels and the mind-blowing tsunami of unchecked spending ahead? Looking forward to your feedback: justice@taipandaily.com.

Other Related Topics: Editorial Opinion , Inflation Rate , Justice Litle , Macro Trader

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