Could America be headed for a replay of the 1970s? More specifically, could America’s much-feted president wind up as the next Jimmy Carter?

I read twenty or thirty books a year on average. A fascinating book I am reading now is Secrets of the Temple: How The Federal Reserve Runs the Country by William Greider. I’ve absorbed more than a few books on the inner workings of the Fed these past few years. But this is the first time I’ve gotten around to Greider’s magnum opus.

Secrets of the Temple is more than two decades old now. It was finished in 1987, before Alan Greenspan’s time (which is fine by me, as I am more than sick of that guy). Here and now in 2009, it feels like the perfect time to be reading Greider’s book. So much of what we are going through now has keen resonance with the past, the subject matter is more fresh and relevant than ever.

Greider opens the book in the summer of 1979, shortly before Jimmy Carter’s famous “malaise” speech... and just as the sweep of history is about to force the President’s hand. The Carter administration did not want to appoint Paul Volcker, a stubborn outsider with a vocal conservative bent, as Chairman of the Fed. Carter was in fact warned by his minions against doing so. But by the time the decision came, Carter felt he had little choice in the matter.

In addition to a gripping narrative covering Volcker’s tenure at the Fed, Secrets of the Temple digs deep into the question of money. Greider takes you on multiple journeys as you read... back and forth through the grand sweep of history, to see how the Federal Reserve was truly formed and why, and deep into the hidden nooks and crannies of policy and politics. The author’s own biases are not concealed from the reader, but that does little to take away from the story.

An Alien World

It really is eye-opening how swiftly times can change. Just a few years ago, the trials and tribulations of the 1970s seemed like ancient history – forever sealed in the vault of the past. The very mindset of the 1970s seemed unfathomable. A period of aggressive and relentless inflation that lasted for years on end? An entrenched conviction that inflation was here to stay, never to depart? Relative to the last quarter-century, it almost sounds like an alien world.

And in many ways the economic climate of the 1970s really was an alien world, at least in comparison to what most of us know. There are two terms that help describe why that inflationary past feels so inaccessible to us – chronological snobbery and recency bias.

“Chronological snobbery,” a phrase attributed to C.S. Lewis and Owen Barfield, refers to mankind’s general habit of seeing the present as superior to the past. To imagine the people and problems of twenty, fifty or a hundred years ago, say, is to imagine a world of folks less enlightened than we are... and thus, to put it bluntly, to see the mistakes of the past as “dumb” errors we are too smart to commit ourselves.

“Recency bias,” a more common term, refers to the human habit of placing too much psychological weight on familiar events. If conditions persist for a certain amount of time, it is natural for people to assume those conditions will last forever. This isn’t a conscious bias so much as a subconscious one. People don’t realize it when they shift from “it’s always been this way” to “this is how it will always be.” But that is exactly what people do – especially when entire careers have played out under one general set of conditions, as is the case with the current crop of Wall Street money managers who, prior to 2008, knew nothing but low inflation and equity bull markets.

The Turning of the Wheel...

The best antidote to recency bias – and to chronological snobbery for that matter – can be found in the study of market history.

It is easier to stay detached, and to see all the various possibilities in the turning of the wheel, if one is familiar with the major cycles that have come and gone. Someone who spends little or no time thinking about market history will likewise have little or no reason to question his or her own bias towards the present day. Someone who grasps the idea of multi-decade-cycles, however, will be more open to the possibility of breathtaking change.

As we head into ever more turbulent times, your humble editor is more convinced than ever that getting the big picture right will be vitally important. What type of world will we be living in? What mental models will prove most useful.... what lessons learned from the past most worthy of dusting off?

As I read Greider’s book, my conviction is strengthened that the 1970s could be a powerful historical analog. And I am openly beginning to wonder... could Barack Obama turn out to be the next Jimmy Carter?

...and a Familiar Rhyme

The parallels here are deeper than just the men. They also relate to the deeper philosophies that the Carter and Obama administrations bring to the table, and the type of problems both administrations were forced (or will be forced) to deal with.

It is perhaps a further irony that, at exactly the same time America is faced with the twilight of fiscal hegemony in the eyes of the world, the country now seems poised and determined to heap even more spending on the pile than has ever been witnessed before.

This is not an endorsement of President Obama’s Republican opposition (or of any political party anywhere). It is merely a reflection on what may be coming next. What’s more, this observation is not just political in nature – or political for its own sake – but could have a very powerful effect on what happens to your money. Because if the 1970s rhyme holds true, we are going to enter an era in which fiscal policy is weak, debt burdens are high, and growth is lax for years and years to come. And that means serious inflation.

We obviously have no clear bead on what 2012 will look like. But I suspect the brainy, idealistic and breathtakingly accommodative (dare I say Carteresque?) policies of the Obama administration will eventually lead to a loss of fiscal control... in turn leading to a backlash so strong that Obama could be forced to find his own Volcker. (Assuming the genuine article isn’t up for a rematch.)

Tomorrow we’ll dig deeper into the Obama/Carter parallels, and make a more detailed case for the similarities between then (the 1970s) and now. And then, as always, I’ll ask you what you think...

Other Related Topics: Economic Crisis , Editorial Opinion , Justice Litle , Safe Haven Investor

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