Not Your Grandfather’s Inflation, Part 4

We have set the 100.0 fulcrum point on the chart below at Q4 1965 because it tells you all you need to know about your grandfather’s inflation. During the previous 14 years, real GDP grew at 3.9% per annum, and that occurred at a time when both the Fed and consumer inflation were well behaved.

Growth Rates Between Q4 1951 and Q4 1965:

  • Fed Balance Sheet: 1.4% per annum;
  • CPI: 1.3% per annum;
  • Real GDP: 3.9% per annum

There wasn’t much to not like about non-inflationary prosperity. Well, except for politicians with grandiose designs of the own. To make a long story short, it can be said that in December 1965 LBJ broke Fed Chairman William McChesney Martin’s sound money resolve, and it was off to the races from there. During the next seven years the Fed’s balance sheet growth soared to 6.0% per annum, causing the inflation rate to more than quadruple, even as the real GDP growth rate slipped substantially.

Growth Rate Between Q4 1965 and Q2 1971:

  • Fed Balance Sheet: 6.0% per annum;
  • CPI: 5.5% per annum;
  • Real GDP: 3.2% per annum;

Next up was Tricky Dick Nixon, who hauled Fed Chairman Arthur Burns and the rest of his economic advisors out to Camp David in August 1971 and proceeded to really break the spell of post-war prosperity. During the next nine years growth rates accelerated even further—except for real GDP growth which continued to weaken.

Growth Rates Between Q2 1971 and Q4 1980:

  • Fed Balance Sheet: 7.5% per annum;
  • CPI: 8.3% per annum;
  • Real GDP: 3.1% per annum

Self evidently, back then when the Fed printed, rising inflation of goods and services at the consumer level was not far behind. And the latter was not beneficent: The real GDP growth rate eroded step-wise over the three periods.

As it happened, the demise of sound money had started down on LBJ’s ranch in December 1965, where he was recovering from gallbladder surgery, the scars from which LBJ thereafter famously shared with the rest of the world. But on the first Friday morning of that month, LBJ was livid and it wasn’t from his ailing gall bladder.



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