Touchbutton 101 – ‘Nixon Shock’, ‘Trump Tariffs’ and the ‘Reagan Boom’
“You can’t make a buck in this market. The country’s going to hell faster than when Roosevelt was in charge. Too much cheap money sloshing around in the world. Worst mistake we ever made was letting Nixon get off the gold standard.”
So says Lou Mannheim (played by Hal Holbrook) a senior partner of fictional stockbroker Jackson Steinen & Co. in the film ‘Wall Street’. Set in 1985, the film, produced by Oliver Stone, follows the fortunes of a young broker Bud Fox (Charlie Sheen) and ruthless corporate raider Gordon Gekko (Michael Douglas) and is still totemic in its depiction of 1980s excess and the consequent moral conflicts.
The event to which Mannheim refers was the ‘Nixon Shock’, which was initiated by US President Richard Nixon in August 1971. At that time, inflation in the US was increasing, unemployment was rising. US dollars were spent overseas in exchange for imported non-US goods and the country was facing a trade deficit for the first time. In short, recession loomed.
In the same way that US President Donald Trump has been trying to coerce the US Federal Reserve Chair, Jerome Powell, into resuming cuts to interest rates, Nixon tried to pressure Powell’s predecessor, Arthur Burns, into doing the same. Apparently, Burns commented that he thought Nixon was “going mad”.
Nixon, together with Treasury Secretary, John Connally, and Paul Volcker, then Under Secretary for International Monetary Affairs, and a chastened Burns, had a secret meeting in Camp David. They came up with an audacious plan to re-engineer the world in America’s favour.
With markets closed on Sunday 15 August, Nixon went on US television to announce the end of the gold standard (the so-called ‘Bretton Woods’ framework) devaluing the dollar; price and wage controls; and a 10% tariff on imports.
Unlike now, the markets reacted positively: on Monday 16 August the Dow Jones Industrial Average rose 33 points, its then biggest daily gain. Prices stabilised and, in the following year, Nixon was re-elected president beating the democrat, George McGovern in one of the greatest landslides in US presidential history.
“There are parallels here in that both Nixon and Trump share a common goal: putting domestic political objectives over international stability.”
There are parallels here in that both Nixon and Trump share a common goal: putting domestic political objectives over international stability. For Nixon, it was about curbing inflation and unemployment; for Trump, it is about leveraging tariffs to boost revenue while cutting taxes.
There are further similar parallels; the ‘Nixon Shock’ was an inevitable, though revolutionary, response to unsustainable pressures within the workings of the Bretton Woods system that fixed exchange rates pegged to the price of gold. In the same way, ‘Trump Tariffs’ and tax policies reflect mounting tensions within today’s global economic order: rising debt levels, imbalances in the labour markets, and growing protectionist sentiment.
“…while Nixon was being reactive in addressing an immediate crisis, Trump and his allies are being aggressively proactive.”
However, while Nixon was being reactive in addressing an immediate crisis, Trump and his allies are being aggressively proactive. Nixon was responding to economic challenges; Trump is redefining them.
Returning to Lou Mannheim’s observation, he was by that point lamenting the era for cheap money consequent on the ‘Reagan Boom’, which by 1985 was in full swing. Ronald Reagan had been elected US President in 1981, promising a return to the free enterprise principles, and a free market economy that had been in favour before the Great Depression and Franklin D. Roosevelt’s ‘New Deal’ policies of the 1930s. Indeed, the years under Reagan saw the S&P 500 Index increase by 113% compared with 10% over the corresponding period immediately before his presidency.
Although such events as ‘Trump Tariffs’, the ‘Nixon Shock’ and indeed the ‘Reagan Boom’ are extremely disruptive at the time, and can have far reaching consequences, history tells us that stability does return and that those who hold to their long-term risk adjusted strategy benefit ultimately.
As the fictional sage of ‘Wall Street’ Mannheim observes further: “Quick-buck artists come and go with every bull market, but the steady players make it through the bear markets”.
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