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A Short History of American Panics, Recessions, Depressions: PART II: 1973 - 2020 (6-12-2020)

ME has spent most of his retirement from service to the United States studying, thinking, and writing about the country he served.

PART II - This is a continuation of part one which simply became too lengthy to contain in one hub. I am surprised the hub editors didn't say something. Anyway, enjoy.

10/19/18 - I finally, after many years of procrastination, sent the manuscript of this series of hubs out for publishing as a book.

1/11/19 - I am Published :-) !!!!

11/24/2022 - Started adding the 2019 and 2022 downturns

RICHARD MILHOUS NIXON

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RECESSION OF 1973

EVERYTHING CONSIDERED, THIS RECESSION was the worst since 1937, until 2008. At one year four months in length, it was three months longer than one in 1937, but only two month shorter than 2008. Unemployment, however, hit 9%, far less than the 19% seen in 1937 as well as the 25% in 1933, but, nevertheless it was the highest until the 1981 and 2008 recessions, both of which surpassed a 10% unemployment rate. You should also begin to be able to understand how different recessions were between the pre- and post-Keynesian economic periods by comparing declines in GDP. In 1933, GDP fell 26.7% and in 1937 it fell 18.7%. Compare this to 1958 and 1973, when GDP only fell 3.7% and 3.2%, respectively; these remained the low points until 2008, when GDP declined 5.1%.

What led to the “worst” downturn since 1937? Many events, the Vietnam War and the 1973 OPEC-inspired oil crisis being the primary ones. One of the main factors leading to recovery was a page President Nixon took from President Franklin Roosevelt; he unilaterally (something Roosevelt didn't do) took America off the gold standard for the final time. Unlike many recessions, the 1973 recession was a rather complex one, with many internal and external factors all coming to a head in 1973, which precipitated a major stock market crash; heralding the beginning of the recession.

LYNDON B. JOHNSON WAR WITH THE GREAT SOCIETY

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GUNS AND BUTTER

ONE FACTOR LEADING TO THE RECESSION was the cost of the Vietnam War. That cost, in and of itself might have been bearable, if it were not for the compounding effect which was starting to be felt from the effects of President Johnson's Great New Society program. Like President George W. Bush in the beginning of the twenty-first century, President Johnson refused to raise taxes to pay for the cost of the Great Society and Vietnam War; instead, he started to borrow money to pay for both and began running a larger and larger budget deficit (printing money) and increasing the national debt.

Everything else being equal, printing money leads to inflation in normal times and the late 1960s was no exception since the economy was still booming. Generally, inflation in one country leads to larger and larger trade deficits, which is what began happening in America. The effect of this is to weaken the dollar which, because of the restrictions of the 1944 Bretton Woods monetary system, established to keep the international monetary system stable, increased the depletion of America's gold reserves. (The reasons for this are rather intricate and were complicated by the advent of currency speculation among nations and huge banks.) The Bretton Woods agreement, among other things, had two requirements, 1) the dollar would be pegged to gold at $35/ounce and 2) the U.S. guaranteed that it would convert dollars into gold upon demand. This worked fine while the private market for gold remained near $35/ounce, but by the late 1960s it had increased to $40/ounce and as it headed even higher, the weaker the dollar got.

Various patches were tried to repair the collapsing system, such as letting the price of gold float, while still keeping the dollar pegged to gold, but nothing really worked. The situation kept deteriorating; inflation kept rising; and so did the unemployment rate; enter Richard Nixon - stage right.

INFLATION RATES (%) 1966 - 1987

CHART 1

CHART 1

THE RUN-UP

RICHARD NIXON HAD A MESS on his hands when he took office in January 1969. The Vietnam War was not going well and the world economy he inherited was structurally coming apart at the seams, given the tug-of-war going on between currency and gold speculators on the one hand, and the restrictions caused by trying to maintain the gold standard on the other. Eleven months after taking office, Nixon had to endure a small, short recession; a precursor to what was to come.

To combat the rising the inflation, in 1971, Nixon implemented his famous wage and price freeze. At the same time, he unilaterally took America, and therefore the world, off the gold standard, thereby totally dismantling the Bretton Wood agreement; this was known as the Nixon Shock. As you can see in Chart 1, inflation had already peaked in 1969 and had already fallen significantly by the time these two actions occurred, but they probably did help to continue the slide until mid-1972. Nevertheless, these moves set the stage for problems later, especially the fall-out from the wage-price freeze policy

THE 1973 OIL CRISIS AND 1973 RECESSION

ON OCTOBER 6, 1973, SYRIA AND EGYPT ATTACKED ISRAEL, and the Yom Kipper War was on. On October 12, 1973, President Nixon authorized Operation Nickel Grass, an overt strategic airlift to deliver weapons and supplies to Israel, after the Soviet Union began sending arms to Syria and Egypt. On October 16, 1973, the Organization of Petroleum Exporting Countries (OPEC) declared a 70% increase in oil prices and on October 20, 1973, the Arab exporting countries began an oil embargo on the West. In November 1973, the 1973 recession began

UNEMPLOYMENT RATES (%) 1966 - 1987

CHART 2

CHART 2

RECESSIONS AREN’T ALWAYS CAUSED by internal economic or financial conditions or policies, they are sometimes caused by external events, such as the Civil War. The 1970s recession was a poster child of such an event and Presidents Nixon, Carter, and Reagan were standing in the way of an economic avalanche. This is not to say that governmental monetary and fiscal policies didn't aggravate the situation on occasion (on other occasions, of course, they helped), but the economic events in America in the 1970s and early 1980s were largely driven by what was happening in the Middle East and Southeast Asia.

The 1970s was beset by three major external events, the Vietnam War, the 1973 Oil Crisis, and the 1979 Oil Crisis, see Chart 2. It is said the "good times can't last" and that is certainly true here. After one of the longest periods of economic expansion in the 1960s, the economy was ready for a change and these outside events provided the catalyst.

The economic pressure brought on by the Vietnam War began raising deficits in the early 1970s which, along with a crisis developing around the divergence of the private price of gold compared to "pegged" rate, created the first ripple, the 1970s recession with the accompanying rise in unemployment and interest rates. President Nixon's reaction to that in taking America off the gold standard, coupled with the fed tightening the money supply and Nixon's wage and price controls, helped bring things under control, or so it seemed for both inflation and unemployment started coming down. Unlike the 1960s, the 1970s was a volatile time relative to world politics and events which left confidence in the economy weak.

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Then the huge shock of having oil prices increase 70% almost overnight was too much; the stock market crashed and the economy tanked as the gas lines grew; unemployment and inflation skyrocketed, even though the fed did all it could to stop it from happening; all they could do was mitigate it, the result was the infamous "stagflation", unusual for a recession.

Government countermeasures kept the recession from spiraling out of control until it had run its course. The recession ended in May 1975 but unemployment kept rising until it hit 9% before sliding back down until the next oil crisis drove it, and inflation, up to its all time high in the early 1980s since the Great Depression period.

CLASSIC U-SHAPED RECESSION

CHART 5

CHART 5

The recession of 1973 was the worst overall recession since 1937 when you consider length, unemployment, inflation, and decline in business activity. This recession lasted one year, four months, a characteristic of the 'U'-shaped recession seen in Chart 3; as reported, unemployment hit a recent record of 9%; inflation rose to 12%, second highest ever except for the 15.1% reached in 1981; and business activity (GDP) fell 3.2%; only the latter metric was less than previous recessions in the last 30 years, but only by .5%.

When compared to the Great Depression or the 1937 recession, 1973 was a drop in the bucket, hardly a blip, but then that was the point of all the structural protections built into the Progressive version of economic policy, but more on that later.

SHAW OF IRAN

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RECESSION OF 1980

The Carter-Reagan Recession started with a short downturn from Jan - Jul 1980, but began in earnest in 1981. It was a major recession primarily brought on by the confluence of three world-wide events. Most people now call it, perhaps unfairly, the Reagan recession because he was in power when it was officially announced and, coincidentally, my second attempt at entrepreneurship went down the tubes. (Of course, I could thank him as well because I ended up with a pretty interesting career as a civil servant.)

The kick-off event was the 1979 overthrow of the not so nice Shaw of Iran, Mohammad Reza Pahlavi, Mohammad Reza Pahlavi, by the order of magnitude worse religious tyranny the world has seen since the Catholic Inquisition in the 1400s. Oil production fell off considerably and this destabilized world oil prices considerably which then led to a quick, huge run up in oil prices to their highest levels to that point in history.

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The next factor that led to the 1980 Recession was the run-up in the Federal Reserves Prime Interest rate which is their main monetary policy weapon used to battle inflation. As you can see from the Chart 1 above, as a general rule, as the price of a barrel of increased so did inflation. This results from the fact that the price of oil wasn't being driven up by market forces, in other words not by supply and demand, but by external events, speculation, and greed. Because so much production and transportation relies on oil and oil products, their prices were forced to increase for non-economic reasons. That, by definition, is inflation. You can also see that the Fed kept raising the prime (discount) rate in an effort to battle inflation.

Now look at the Chart 2 below. It shows the change in the Gross Domestic Product The GDP reflects the cumulative effect of the titanic struggle between the inflationary forces of ever increasing oil prices and the resulting run-up in inflation and the Fed's effort to curb inflation by turning down the fire underpinning economic activity. The Fed ultimately won ... as you can see from the upper chart, in a BIG way.

The period between 1977 and 1981 was called "stagflation". It is the worst of all possible worlds as it is when you have flat or falling economic growth coupled with high inflation. It is what some people call a death spiral, a situation that is very hard to break-out of. This is why Paul Volcker, the current Fed Chief, went to such drastic measures to break the spiral.

ANNUAL % GDP DURING THE NIXON AND CARTER ADMINISTRATIONS AND THE FIRST PART OF THE REAGAN ADMINISTRATION

THIS PERIOD IS NOTED FOR THE WILD SWINGS IN ECONOMIC ACTIVITY BEFORE SETTLING INTO A SHORT PERIOD OF GROWTH (not shown) AND THEN A LONG DECLINE INTO ANOTHER RECESSION.

THIS PERIOD IS NOTED FOR THE WILD SWINGS IN ECONOMIC ACTIVITY BEFORE SETTLING INTO A SHORT PERIOD OF GROWTH (not shown) AND THEN A LONG DECLINE INTO ANOTHER RECESSION.

The third factor that led to the 1981 Recession was the Oil Embargoes of 1967-1968 and 1973-1974. You can easily see one Charts 1 and 2 that both brought on economic chaos followed by negative growth and two recessions. These were like the before shocks that strike just ahead of the Big One. This may also be one reason why the unemployment rates for the 1981 recession aren't remembered as vividly as they should be. This earlier recession led to higher unemployment rates (10.8%) that stayed above 10% much longer than the same rates did this time around. Our current unemployment problems have a long way to go before they break the longevity record of the 1981 recession as well. For example, unemployment hit its low point of 5.9% two years before the 1981 recession started and didn't get back to that level until 6 years after the recession was over. I don't remember anyone complaining about how terrible a job President Reagan was doing getting people back to work, do you? Under his Presidency he had unemployment rates above 8% from from the end of 1981 to the beginning of 1984! It didn't get below 7% until 1986! Do you think today's Right-wing Conservatives who are in power now said one word of complaint against Reagan back then? I think not. (Darn these soapboxes, they keep jumping in front of me.) Anyway, unemployment was at 4.2% only 6 months before the official start of the 2007 recession. We don't know if will ever get that low again since 5-6% is normal.

Notice how I have not brought up either President Carter or President Reagan as being associated with the cause of this recession? That is because I personally don't think they are. From the discussion above that the real culprits were the Arab oil moguls and Paul Volcker's necessary reaction to the calamity they caused, don't you see.

President Carter is out of the picture because the stage was set for the big fall when he took office in 1977. He had no control over the rapid increase in oil prices and the reaction by Paul Volcker. The 1981 recession was a done deal and just needed to happen.

I do think President Reagan's fiscal policies set the stage for future problems, mainly America's first runaway deficit, but not this recession. He was just the unlucky fellow who happened to be President when it landed in his lap.

ANNUAL % GDP DURING BUSH 43 ADMINISTRATION

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THE ARCHITECTS OF DOOM AND SAVIORS, ALL BUT ONE WERE BOTH

CONGRESS PASSED THE LAWS DEREGULATING THE FINANCIAL INDUSTRY

CONGRESS PASSED THE LAWS DEREGULATING THE FINANCIAL INDUSTRY

PRESIDENT CLINTON, POTUS #42 - SIGNED THE LAW THAT REPEALED THE GLASS-STEAGALL ACT OF 1937

PRESIDENT CLINTON, POTUS #42 - SIGNED THE LAW THAT REPEALED THE GLASS-STEAGALL ACT OF 1937

PRESIDENT GEORGE W. BUSH. POTUS #43-PROMOTED THE ECONOMIC POLICIES LEADING TO THE RECESSION BUT MADE THE DECISION TO SET-UP TARP AND THE AUTO BAIL-OUT, BOTH CRITICAL TO PREVENTING A DEPRESSION

PRESIDENT GEORGE W. BUSH. POTUS #43-PROMOTED THE ECONOMIC POLICIES LEADING TO THE RECESSION BUT MADE THE DECISION TO SET-UP TARP AND THE AUTO BAIL-OUT, BOTH CRITICAL TO PREVENTING A DEPRESSION

HENRY PAULSON, SECRETARY OF THE TREASURY FOR PRESIDENT GEORGE W. BUSH-PROMOTED THE ECONOMIC POLICIES LEADING TO THE RECESSION BUT MADE THE DECISION TO SET-UP TARP AND THE AUTO BAIL-OUT, BOTH CRITICAL TO PREVENTING A DEPRESSION

HENRY PAULSON, SECRETARY OF THE TREASURY FOR PRESIDENT GEORGE W. BUSH-PROMOTED THE ECONOMIC POLICIES LEADING TO THE RECESSION BUT MADE THE DECISION TO SET-UP TARP AND THE AUTO BAIL-OUT, BOTH CRITICAL TO PREVENTING A DEPRESSION

ALAN GREENSPAN, FORMER CHAIRMAN OF THE FEDERAL RESERVE-AFTER DEREGULATION, MOST RESPONSIBLE GOVERNMENT OFFICIAL FOR THE RECESSION BY IGNORING ALL OF THE WARNING SIGNS OF IMPENDING DOOM

ALAN GREENSPAN, FORMER CHAIRMAN OF THE FEDERAL RESERVE-AFTER DEREGULATION, MOST RESPONSIBLE GOVERNMENT OFFICIAL FOR THE RECESSION BY IGNORING ALL OF THE WARNING SIGNS OF IMPENDING DOOM

BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE - STARTED TO FOLLOW IN GREENSPAN'S FOOTSTEPS (SAME ECONOMIC PHILOSOPHY) BUT PROPERLY READ THE TEA LEAVES AND BEGAN IMPLEMENTING POLICIES TO MITIGATE A DEPRESSION

BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE - STARTED TO FOLLOW IN GREENSPAN'S FOOTSTEPS (SAME ECONOMIC PHILOSOPHY) BUT PROPERLY READ THE TEA LEAVES AND BEGAN IMPLEMENTING POLICIES TO MITIGATE A DEPRESSION

PRESIDENT BARACK OBAMA, POTUS #44 - TOOK THE POLITICAL HEAT AND INSTITUTED THE POLICIES NEEDED TO GUARANTEE NO DEPRESSION AND BEGIN A RECOVERY

PRESIDENT BARACK OBAMA, POTUS #44 - TOOK THE POLITICAL HEAT AND INSTITUTED THE POLICIES NEEDED TO GUARANTEE NO DEPRESSION AND BEGIN A RECOVERY

The Great Recession of 2007 - 2009

The Great Recession of 2007 officially started, according to the NBER, in December 2007. It officially ended in June 2010, again according to the NBER. Official or not and whether the American economy is actually expanding again or not is a bit mute if the American People feel we are not; and right now they still don't!

[Let me digress a moment and hop on one of my favorite soapboxes. One reason the people don't feel the economy is good - is jobs. Unemployment is hovering a little under 10%. I want to talk about why it is staying at that number in the face of twelve months of private sector job growth! Count them Twelve Months!! President Obama's stimulus policies have added more than 1,000,000 private sector jobs since Jan 1, 2010! Granted, it is not the 6 million jobs that the Republicans and their policies caused to be lost in the first place but it isn't a bad start in trying to stop the boulder they started rolling downhill.

The reason the unemployment number hasn't come down is because of the stupid way we count unemployment. Get this! If a person stops looking for work, we stop counting them!! So, in an extreme and unrealistic example, if, for one week, everybody who had been looking for work the previous week, quit looking and simply gave up ... the unemployment rate would drop to zero; go figure, lol. Now, of course, this would never happen, but what is happening is that when people start going back to work, then those who had previously given up looking, start looking again and we start counting them again; ergo the unemployment numbers don't change. They won't change until the number of people who get hired exceed the number of people begin looking for work again. In addition, the number of new people joining the workforce keeps growing also adding upward pressure on the unemployment numbers. So long as major corporations want to sit on the billions of dollars of cash they have accumulated and not invest and hire, those altruistic son-of-a-guns, then unemployment has to remain high.

In the mean time, those who want to do damage to President Obama's domestic and economic policy get to make hay by loudly (but stupidly) proclaiming that Obama is failing because all they need to do is point to those terrible unemployment numbers and ipso facto, Obama just doesn't have a clue, don't you see, on how to bring those unemployment numbers down ... rubbish. In fact, of course, he is doing what needs to be done, it is the Republicans and Corporate America who are not.]

OK, back on message. The recession lasted one year and six months which makes it the twelfth longest recession or depression that has been estimated by the NBER. The downturn in the GDP was -4.1% which is minuscule when compared to the double digit downturns from 1867 to 1938 which ranged anywhere from 26% to 37%! (and we thought we had it tough!!) Likewise, unemployment while high at the peak of 10.2% which lasted only one or two months, doesn't begin to compare with the Depression of 1929, 24.6%, and the Recession of 1937, 26.7%. Even the Carter-Reagan recession of 1980 had higher and longer unemployment rate at 10.8% than does the current recession.

Who gets the blame for the Great Recession of 2007? President Bush, of course. Everyone knows that the president in power always gets the credit or the blame. Well, I don't work that way. I try to find the real cause. In this case, it really is President Bush and the Republican fiscal policy philosophy. Although, I have to admit, they had more than a little help from the Democrats, mainly Presidents Carter and Clinton. But, nevertheless, when you dig down deep, the real culprit in my opinion is the proven failure of the Republican fiscal philosophy regarding the relationship between business and government (my first foray into this arena was via my first hub "Thoughts on the "New World Order And 2012") and, as I pointed out in the section on the 1873 Depression, the American citizen's and, more importantly, our politician's unforgivable and plain stupid inability to learn from past mistakes.

The prima fascia cause of the 2008 recession was the collapse of the Sub-Prime mortgage loan market from 2007 to 2009. For brevity and clarity I want to reproduce a section from Wikipedia's opening on this subject: