Will history repeat?

The usually conservative minded Barron’s has an article this weekend well worth perusing for you economic history buffs — See if this sounds familiar:

A SURGE IN GOVERNMENT SPENDING and persistently low interest rates have revived the U.S. economy. The stock market has rebounded after a nasty fall. The dollar is weakening, gold prices are rising, and the federal deficit has ballooned.

If you think that’s a description of the present, you’re forgiven for that assumption. Barron’s was, in fact “describing the state of the Union, or at least its finances, under a previous White House tenant, Richard M. Nixon. But the eerie parallels point to similar policies, and suggest to some sage observers that the Bush administration’s efforts to stimulate the economy will lead to similarly sorry ends.”

Consider some of the similarities: Wartime economies, ramped up spending, increasing federal deficits, state and municipal budgets shot. Sound familiar? The parallels get more eerily similar:

“In 1970, the Nixon White House ramped up federal spending in a bid to juice the economy and the financial markets, just before the president hit the campaign trail to secure his re-election. Afterward, it all fell apart — the economy, the stock and bond markets and eventually Nixon himself — amid soaring inflation, lingering anti-war sentiment and scandal.”

Nixon pumped up the economy before his re-election, only to see it sour. Will history repeat?” That’s gotta be a big concern for Karl Rove and Company, who, frankly, have proven themselves more adept at the art of getting elected than actually governing (hold your cards and letters — I know plenty of you would even argue with that).


Are these parallels all that close? Consider:

“Low interest rates have fostered excessive leverage, particularly among consumers. The deficit has reached record levels, owing to rising government spending and diminished tax receipts. The economy is strutting, with the stock market at its side, but it might not take much to trip up this deceptively dynamic duo. “We’ve revived the stock market, but at a tremendous cost to our national balance sheet . . .”

The Bush administration, like many supply siders before him, have ignored the two biggest economic lessons of the Nixon era: “Artificial stimulation of the economy, via tax or interest-rate cuts, almost always backfires; and running deficits can be dangerous, particularly when foreigners finance them.”

Typically, the dollar writes the story. If the buck declines dramatically, which would signal mounting concerns among the nation’s creditors, interest rates would have to rise to attract more capital. A dramatic increase in rates would dent consumer spending and probably spark a stock-market slide.

Nixon announced in the 1971 State of the Union address the goal of a “noninflationary economic recovery.” The following year saw the Federal deficit rise from $3 Billion to $23Billion; The Federal Reserve stopped fighting inflation, and dropped interest rates to 3.29% by February 1972.

The combination of low interest rates and big deficit spendingled to a spasm of growth — GDP was 12% that year. The Dow rally (started in 1970) lifted the index 67% by mid 1972. That set the stage for the 1972 elections:

Nixon won the ’72 election, but the good times ended quickly. Once price controls were lifted in April ’74, inflation soared and the Fed fought back by raising rates again. By the time the president resigned in August, under the cloud of the Watergate scandal, the federal-funds rate stood at 12%, the economy was in recession, and the Dow was en route to losing 45% of its value.

What is the point of recounting this mournful tale? Like Nixon, President Bush has used fiscal levers to bolster the economy; in May, Congress approved his $350 billion, 10-year tax-reduction package. The U.S. also has been spending heavily on the war in Iraq, and its aftermath. As a result, the Congressional Budget Office recently forecast a 2004 budget deficit of $480 billion, equal to nearly 4% of GDP. That’s quite a reversal from the modest surplus reported in 2001.

Lower rates have encouraged borrowing at all levels; consumer debt alone has risen to $1.97 trillion. Easy money also has worked its magic on the economy, which expanded at an annual 7.2% clip in the third quarter, and the stock market, which is up about 35% from its year-earlier low.

All might end well for the president and his party, not to mention the public, stockholders included. But the currency market already is voicing a worrisome view. Since February 2002 the dollar has fallen 20% against the yen, and also is losing value versus the euro. Gold prices, on the other hand, have risen 47% since Bush came to office, further signaling concern.

Sobering thoughts for the coming year . . .

That ’70’s Show
By Jacqueline Doherty
Barrons, November 17, 2003

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