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The author is vice president of Oliver Wyman and former World Head of Banks and Financial Research Diversified in Morgan Stanley
What will be the long -term financial consequences of Trump’s rates? We can be in a 90 -day pause, but the question is still urgent. A look at Richard Nixon’s experience in 1971 could help investors to understand what could happen next.
Certainly, recent events share some distinctive stamps with the “Nixon Shock”, which occurred when the then president removed the dollar of the gold standard, implemented an import rate of 10 percent and introduced temporary price controls. This elimination of the regime resulted in a period of global economic instability and uncertainty. Not only caused a loss in business confidence, but led to stagflation. Nixon’s price and salary controls spectacularly recruited, triggering product scarcity and helping to feed a salary price spiral. The entire episode was a fundamental taxpayer to the great inflation of the 70s.
As with Trump’s tariffs, Nixon introduced Cudgel countries to change trade terms to help reduce the United States trade deficit. His greatest concerns were Japan and Germany. “My philosophy, Mr. President, is that all foreigners are willing to fuck and it is our work to fuck them first,” Treasure Secretary John Connally had told him.
In the hyperfinantialized world today, we have already seen that bond markets can force politicians much faster. It spent four months in 1971 before Nixon rates were eliminated through the Smithsonian Agreement. But the shock had already done enough to catalyze extraordinary changes in finance, which led to the creation of new instruments to bet on the direction of interest rates and the risk of coverage currency, including future future and FX options.
The pain of stagflation in the banking system caused a great change in financial behavior and financial regulation. Investors changed the assignment of assets to gold and real assets to preserve the value. Meanwhile, companies and depositors increasingly transferred their banks’ activities to bond markets. Bank loans as a part of total loans in the economy have been falling since then. In summary, modern finances were forged in the early 1970s.
There are also parallels for countries outside the United States that currently care about tariffs. In 1971 there was also a poor quality treatment for the closest allies in the United States. Nixon hit Canada with rates despite its currency already floating. Like Prime Minister Mark Carney today, the Canadians did not go back and finally the rates were eliminated. It could have been even worse: Connally had also wanted the United States to retire from a long data pact with Canada in cars and auto parts. But Paul Volcker solved that, according to his memoirs, blatantly encouraging an official of the State Department to start the last page of each press release who mentioned it.
Ultimately, the need to stabilize international relations with allies helped to incline the balance of tariffs. Henry Kissinger, then national security advisor, “worried about the disturbing impact of a prolonged confrontation on allied relationships.”
Nixon also exerted great pressure on the Fed for an expansive monetary policy to compensate for shock. William Safire, writer of Nixon speeches, recounts how the administration maintained a constant flow of anonymous leaks to the president of the pressure, Arthur Burns, including a floating proposal to expand the size of the Federal Reserve, so that Nixon could pack the committee with new support members.
At the end of everything, Nixon’s four -month tax may have helped to facilitate the revaluation of the dollar, but did not reach the desired objectives and did not have a discernible impact on imports. However, the economic shock waves extended during the decades. Even the creation of the euro comes from it. Could it be a digital euro or the deepest European capital markets? It is not yet clear, but the story suggests that the consequences of this last shock will feel in the coming years.
