The Nixon era was a particularly critical period in terms of monetary policy, and the current concern that “if the Fed cuts rates, markets will crash” actually has its roots in that time. Let’s look at the similarities between then and now. In Richard Nixon’s foreign policy, there was an approach known as the “Madman Theory.” This was a strategy in which Nixon, especially during the Vietnam War, tried to appear deliberately unpredictable and crazy in order to scare his enemies. Nixon thought that if he seemed crazy enough to do anything even using nuclear weapons his threats would be more credible against North Vietnam and the Soviet Union.
At the end of the 1960s, the U.S. economy was still strong, but the spending on the Vietnam War and the Great Society social programs had widened the budget deficit. In this environment, the Fed did not tighten aggressively enough to control inflation. The Nixon administration, under political pressure, supported loose policies. Nixon’s most famous move was ending the Bretton Woods system in 1971, which had tied the dollar to gold. This resulted in the dollar being allowed to float freely. Sound familiar? 😊
In 1971, Nixon imposed wage and price controls to curb inflation. In the short term, this suppressed inflation but distorted supply-demand balances and created economic dislocations. Once controls were lifted, inflation exploded at an even faster pace. The Fed and the government entered a cycle of first tightening the economy and then easing too early. That meant as soon as growth slowed a little, rates were cut, and then inflation quickly surged again. This laid the foundation for the “stagflation” of the 1970s.
The Nixon era was a period when political pressure on the Fed increased. Nixon pressured Fed Chair Arthur Burns to keep rates low if he wanted to be reappointed. 😊 Still sound familiar? In the end, inflation reached double-digit levels by the late 1970s and had to be crushed with very sharp rate hikes under Paul Volcker.
In short, the Nixon era is seen as a textbook example of how “early and politically motivated rate cuts” can blow up inflation and cause much greater long-term damage to the economy. Today, Powell’s “let’s be patient, let’s not cut early” approach is backed by this historical memory.
Now let’s move to today. AI is going to shape the future of the world. AI spending will increase productivity, reduce costs, and determine the winners in these years. America is currently the leading country. It has the best companies. Whoever wins AI wins the future. Enormous energy demand will be required. For this, nuclear is necessary. In addition, rare earth elements (REEs) are indispensable for defense (missiles, radars, fighter jets), technology (semiconductors, magnets, batteries), and energy (wind turbines, electric vehicles). For Trump, REEs are also part of the “Made in USA” industrial transformation. He wants to bring all factories back to the U.S.
In short, he has pushed America into a structural transformation. If successful, America which was already a superpower will become a hyperpower this time.
What does it need for this? To refinance debts at low interest rates. How can it do that? By devaluing the money in which the debt is denominated. And a little inflation is good, too. It both erodes the value of money and fuels the growth engine. Also, since he knows he cannot reduce debt directly, GDP must rise so that the share of debt in GDP falls. In other words, he is holding the ear from the other side. Even the call for Japan to raise rates is aimed at pushing down the DXY. So: America is in a structural transformation, and it will do everything within that. I don’t think Fed rate cuts will crash markets like in the Nixon era. Because tariff effects are most likely temporary. Blue-chip technology giants’ Capex spending is rising, and it is now equivalent to household consumption spending. That means they are supporting consumption, too.
This time the story has real substance behind it. Fed rate cuts would fuel markets, provide lifeblood to small companies, and this drift could evolve into a bubble even bigger than the dot-com.
This is not a bad thing; we may be in the first quarter of a rally that will last for many years.
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Will a Crash Come If the Fed Cuts Rates?
The Nixon era was a particularly critical period in terms of monetary policy, and the current concern that “if the Fed cuts rates, markets will crash” actually has its roots in that time.
Let’s look at the similarities between then and now.
In Richard Nixon’s foreign policy, there was an approach known as the “Madman Theory.” This was a strategy in which Nixon, especially during the Vietnam War, tried to appear deliberately unpredictable and crazy in order to scare his enemies. Nixon thought that if he seemed crazy enough to do anything even using nuclear weapons his threats would be more credible against North Vietnam and the Soviet Union.
At the end of the 1960s, the U.S. economy was still strong, but the spending on the Vietnam War and the Great Society social programs had widened the budget deficit. In this environment, the Fed did not tighten aggressively enough to control inflation. The Nixon administration, under political pressure, supported loose policies. Nixon’s most famous move was ending the Bretton Woods system in 1971, which had tied the dollar to gold. This resulted in the dollar being allowed to float freely.
Sound familiar? 😊
In 1971, Nixon imposed wage and price controls to curb inflation. In the short term, this suppressed inflation but distorted supply-demand balances and created economic dislocations. Once controls were lifted, inflation exploded at an even faster pace.
The Fed and the government entered a cycle of first tightening the economy and then easing too early. That meant as soon as growth slowed a little, rates were cut, and then inflation quickly surged again. This laid the foundation for the “stagflation” of the 1970s.
The Nixon era was a period when political pressure on the Fed increased. Nixon pressured Fed Chair Arthur Burns to keep rates low if he wanted to be reappointed. 😊 Still sound familiar? In the end, inflation reached double-digit levels by the late 1970s and had to be crushed with very sharp rate hikes under Paul Volcker.
In short, the Nixon era is seen as a textbook example of how “early and politically motivated rate cuts” can blow up inflation and cause much greater long-term damage to the economy. Today, Powell’s “let’s be patient, let’s not cut early” approach is backed by this historical memory.
Now let’s move to today. AI is going to shape the future of the world. AI spending will increase productivity, reduce costs, and determine the winners in these years. America is currently the leading country. It has the best companies. Whoever wins AI wins the future. Enormous energy demand will be required. For this, nuclear is necessary. In addition, rare earth elements (REEs) are indispensable for defense (missiles, radars, fighter jets), technology (semiconductors, magnets, batteries), and energy (wind turbines, electric vehicles). For Trump, REEs are also part of the “Made in USA” industrial transformation.
He wants to bring all factories back to the U.S.
In short, he has pushed America into a structural transformation. If successful, America which was already a superpower will become a hyperpower this time.
What does it need for this? To refinance debts at low interest rates. How can it do that? By devaluing the money in which the debt is denominated. And a little inflation is good, too. It both erodes the value of money and fuels the growth engine. Also, since he knows he cannot reduce debt directly, GDP must rise so that the share of debt in GDP falls. In other words, he is holding the ear from the other side. Even the call for Japan to raise rates is aimed at pushing down the DXY.
So: America is in a structural transformation, and it will do everything within that. I don’t think Fed rate cuts will crash markets like in the Nixon era. Because tariff effects are most likely temporary. Blue-chip technology giants’ Capex spending is rising, and it is now equivalent to household consumption spending. That means they are supporting consumption, too.
This time the story has real substance behind it.
Fed rate cuts would fuel markets, provide lifeblood to small companies, and this drift could evolve into a bubble even bigger than the dot-com.
This is not a bad thing; we may be in the first quarter of a rally that will last for many years.