Currency Wars_ The Making of the Next Global Crisis - James Rickards [42]
Despite the persistence of Bretton Woods into the 1970s, the seeds of Currency War II were sown in the mid- to late 1960s. One can date the beginning of CWII from 1967, while its antecedents lie in the 1964 landslide election of Lyndon B. Johnson and his “guns and butter” platform. The guns referred to the war in Vietnam and the butter referred to the Great Society social programs, including the war on poverty.
Although the United States had maintained a military presence in Vietnam since 1950, the first large-scale combat troop deployments took place in 1965, escalating the costs of the war effort. The Democratic landslide in the 1964 election resulted in a new Congress that convened in January 1965, and Johnson’s State of the Union address that month marked the unofficial launch of the full-scale Great Society agenda.
This convergence of the costs of escalation in Vietnam and the Great Society in early 1965 marked the real turning away from America’s successful postwar economic policies. However, it would take several years for those costs to become apparent. America had built up a reservoir of economic strength at home and political goodwill abroad and that reservoir now slowly began to be drained.
At first, it seemed that the United States could afford both guns and butter. The Kennedy tax cuts, signed by President Johnson shortly after President John F. Kennedy’s assassination in 1963, had given a boost to the economy. Gross domestic product rose over 5 percent in the first year of the tax cuts and growth averaged over 4.8 percent annually during the Kennedy-Johnson years. But almost from the start, inflation accelerated in the face of the twin budget and trade deficits that Johnson’s policies engendered.
Inflation, measured year over year, almost doubled from an acceptable 1.9 percent in 1965 to a more threatening 3.5 percent in 1966. Inflation then ran out of control for twenty years. It was not until 1986 that inflation returned to the level of just over 1 percent. In one incredible five-year stretch from 1977 to 1981, cumulative inflation was over 50 percent; the value of the dollar was cut in half.
U.S. citizens in this period made the same analytic mistake as their counterparts in Weimar Germany had in 1921. Their initial perception was that prices were going up; what was really happening was that the currency was collapsing. Higher prices are the symptom, not the cause, of currency collapse. The arc of Currency War II is really the arc of U.S. dollar inflation and the decline of the dollar.
Despite the centrality of U.S. policies and U.S. inflation to the course of CWII, the opening shots were fired not in the United States but in Britain, where a sterling crisis had been brewing since 1964 and came to a boil in 1967 with the first major currency devaluation since Bretton Woods. While sterling was less significant than the dollar in the Bretton Woods system, it was still an important reserve and trade currency. In 1945, UK pounds sterling comprised a larger percentage of global reserves—the combined holdings of all central banks—than the dollar. This position deteriorated steadily, and by 1965 only 26 percent of global reserves were in sterling. The British balance of payments had been deteriorating since the early 1960s, but grew sharply negative in late 1964.
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