{"id":1530175,"date":"2025-04-14T00:50:00","date_gmt":"2025-04-14T04:50:00","guid":{"rendered":"https:\/\/bugaluu.com\/news\/?p=1530175"},"modified":"2025-04-14T00:50:00","modified_gmt":"2025-04-14T04:50:00","slug":"the-nixon-shock-might-help-us-make-sense-of-the-trump-one","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/the-nixon-shock-might-help-us-make-sense-of-the-trump-one\/1530175\/","title":{"rendered":"The ‘Nixon Shock’ Might Help Us Make Sense Of The Trump One"},"content":{"rendered":"

The ‘Nixon Shock’ Might Help Us Make Sense Of The Trump One<\/span><\/p>\n

\n

Submitted by Huw van Steenis via the Financial Times<\/a>,<\/em><\/p>\n

The author is vice-chair at Oliver Wyman and former global head of banks and diversified financials research at Morgan Stanley<\/em><\/p>\n

What will the longer-term financial consequences of Trump\u2019s tariffs be?<\/strong> We may be in a 90-day pause but the question remains urgent.\u00a0A look back at Richard Nixon\u2019s experience in 1971 could help investors understand what might happen next.<\/p>\n

President Richard Nixon addresses Congress to explain his new economic policy in 1971 \u00a9 AP<\/em><\/a><\/p>\n

Certainly recent events share some hallmarks with the \u201cNixon shock\u201d, which occurred when the then president took the dollar off the gold standard, implemented a 10 per cent import tariff and introduced temporary price controls<\/strong>. This de-anchoring of the regime resulted in a period of global economic instability and uncertainty.\u00a0It not only caused a loss in business confidence but led to stagflation.\u00a0Nixon\u2019s price and wage controls spectacularly backfired, triggering product shortages and helping to fuel a wage-price spiral. The whole episode was a pivotal contributor to the huge inflation of the \u201970s.<\/p>\n

As with Trump\u2019s tariffs, Nixon\u2019s were introduced to cudgel countries into changing the terms of trade to help reduce the US trade deficit. <\/strong>His biggest concerns were Japan and Germany. \u201cMy philosophy, Mr President, is that all foreigners are out to screw us and it\u2019s our job to screw them first,<\/strong>\u201d\u00a0Treasury secretary John Connally had said to him.<\/p>\n

In today\u2019s hyperfinancialised world, we have already seen that bond markets can force the hands of politicians far more quickly. It took four months in 1971 before Nixon\u2019s tariffs were removed via the Smithsonian agreement. But the shock had already done enough to catalyse extraordinary changes in finance, leading to the creation of new instruments to bet on the direction of interest rates and hedge currency risk, including FX futures and options.\u00a0<\/p>\n

The pain of stagflation in the banking system prompted a huge change in financial behaviour and financial regulation. Investors shifted asset allocation to gold and real assets to preserve value<\/strong>. Meanwhile corporates and depositors increasingly moved their activities from banks to bond markets<\/strong>. Bank lending as a share of total borrowing in the economy has been falling ever since. In short, modern finance was forged in the early 1970s.\u00a0<\/p>\n

There are parallels as well for countries outside the US currently worrying about tariffs. <\/strong>Back in 1971 there was also shoddy treatment for the US\u2019s\u00a0closest allies.\u00a0Nixon hit Canada with tariffs despite its currency already floating. Like Prime Minister Mark Carney today, Canadians didn\u2019t back down and eventually the tariffs were removed. It could have been even worse: Connally had also wanted the US to withdraw from a long-standing pact with Canada on cars and auto parts. But Paul Volcker fixed that, according to his memoirs, by cheekily encouraging a State Department official to tear off the last page of every press release which mentioned it.\u00a0<\/p>\n

Ultimately, the need to stabilise international relations with allies helped tip the balance away from the tariffs.\u00a0<\/strong>Henry Kissinger, then the national security adviser, \u201cgrew concerned about the unsettling impact of a prolonged confrontation on allied relationships\u201d.\u00a0<\/p>\n

Nixon also put huge pressure on the Fed for expansionary monetary policy to offset the shock.\u00a0William Safire, Nixon\u2019s speechwriter, recounts how the administration kept up a steady stream of anonymous leaks to pressure Fed chair Arthur Burns<\/strong>, including floating one proposal to expand the size of the Federal Reserve, so that Nixon could pack the committee with supportive new members.<\/p>\n

At the end of it all, Nixon\u2019s four-month tax may have helped facilitate dollar revaluation, but it fell short of the desired goals and had no discernible impact on imports. <\/strong>The move\u2019s economic shockwaves, however, rippled through the decades.\u00a0Even the creation of the euro stems from it.\u00a0Might a digital euro or deeper European capital markets be next? It\u2019s not yet clear but history suggests the fallout from this latest shock will be felt for years to come.<\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nSun, 04\/13\/2025 – 20:50<\/span><\/p>\n

\u200bhttps:\/\/www.zerohedge.com\/economics\/nixon-shock-might-help-us-make-sense-trump-one<\/a>\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

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