April 28, 2025
In 1979, Federal Reserve Chair Paul Volcker inherited a real mess. Government overspending led to budget deficits and a massive increase in the national debt.
By 1974, inflation climbed to as high as 12%. To combat that, the Fed raised interest rates as high as 13%. Higher rates choked off inflation but led to a 16-month recession.
The government’s answer, of course, was to print money. The money supply exploded higher, and inflation soared again with no signs of slowing.
Enter Paul Volcker.
Two months after he was made the new Fed chair, Volcker announced a drastic policy shift: interest rates would need to go much higher.
With inflation at 15% in 1980, Volcker raised rates to nearly 20%. That meant a lot of pain.
But the hard medicine worked. Inflation sank to around 2.5% by the middle of 1983. Volker succeeded where other Fed chairs had failed because he understood there was no easy, painless way to cure inflation.
We’re seeing a similar situation today.
Everybody thinks inflation is tamed, but government spending is out of control and the money supply is rising. A recession is likely nearby.
I expect the government will make the same mistake as in the 1970s and try to fix the economy with more stimulus that will only make things worse. Thus, the seeds are in place today for another 1970s’ “twin peaks” of inflation.
We’ve never seen an increase in the money supply like the pandemic in 2020. And now the money supply is once again increasing.
In fact, the money supply has increased every month for the past 15 years! That’s why I think the inflationary 1970s are on their way back.