The 1976 Politically-Driven inflation Reignition

For ZeroHedge

Remembering 1976's Politically Driven Inflation Reignition

Reading Michael Hartnett’s Flow Show report  and some Rabo commentary reminded us of prior times outsized cuts were made with poor unintended consequences  Here is one of those reminders experienced first hand

The 1976 Bicentennial Prep

Authored by GoldFix ZH Edit

Between 1975 and 1976, Hartnett notes the Fed cut interest rates 5% from approximately 9% to 4%. This was in the wake of Franklin National Bank’s 1974 failure. That rate cut regime was also on the eve of the nation’s Bicentennial, a big event, especially in Philadelphia.

The bank failure in 1974 had disinflationary consequences. The Fed decided inflation was dead, and opted to rescue the banking system. It was likely thought back then— as Hartnett opines Powell also thinks now— that doing so would prevent the Bank carnage from spilling over into main street.

The truth is, the US wanted to look good to the rest of the world and project strength at a time when we were looking weak. The cuts went far beyond what was needed and stoked inflation

This was more important as a Phila. person since Franklin Bank was viewed as a local Bank. Not realizing, (or caring) that it was actually Long Island based, and not a local bank. To top it off, in our neck of the woods, Italians loved to remind their children Franklin bank was run by Italians.1

I vividly remember asking my father why everything was getting cleaned up in the city and if things were getting better. Especially since Franklin Bank shut down. I hoped that bank would reopen. My father’s response was, ‘Maybe but probably not’. I asked why. And he said:

‘They’re cleaning everything up because we’re gonna have parades and we’re going to celebrate the bicentennial and politicians want to look good for the world. We look really bad after Nixon. Whatever they’re doing now they’ll have to make up for it by not doing it for the next 2 years after the ceremonies are over. Don’t expect this to last’

The Expensive All-Star Game

That year in Philadelphia hosted the All-Star game as well.July 4th 1976 was all about Philadelphia. I was lucky enough to go to attend, an awesome memory for a young child.

This was the year Mark Fidrych (vs Randy Jones) started for the AL. We booed the "Bird" as National Leaguers of course2  President Ford attended as well, causing even more money to be spent on cleaning up the streets for a month. The price paid for that extravagance came due rather quickly

Inflation Returns with a Vengeance

But, Philadelphia and the rest of the country paid the price over the next five years as the resulting cuts paved away for the biggest reignition of inflation of our generation.

July 4th 1976 almost marked the bottom in Inflation...

Family businesses, including my own family’s, collapsed serially over the next 8 years and families, like my own, were torn apart. There is no happy ending to the 1970s fiscal excesses enabled by a politically influenced Fed. Burns admitted as much in 1979 after he left the job .  The Volcker deflationary whipsaw that followed curing the 1970s inflation did so at the expense of killing those middle class families who managed to survive the prior inflation. So tell us Jerome.Why The Panic Cut?