What the 1980s can teach us about interest rates and inflation

The textbooks predict that once you raise interest rates high enough, the economic system will collapse, and this is what happened: The second The Volcker recession started in July 1981 and lasted until November 1982.

Nevertheless, it simplified Mr. Volcker’s business. There was no longer any reason to doubt that the Fed was synonymous with business. Another recession? Pass it on! Something it took, as long as it stifled inflation. As William L. Silber, the New York College economist, puts it in “Volcker: The Triumph of Persistence”: “His stewardship of the Federal Reserve from 1979 to 1987 rekindled confidence in the central financial institution – almost as if he had restored the custom of gold – and ushered in an era of financial stability.

Buying and selling stocks, bonds and commodities like gold during this risky time was exciting but excruciating. Many so-called knowledgeable “consultants” buy and sell stocks at inappropriate times. Thousands and thousands of people have lost money.

The short-term characteristics – and the losses – had been spectacular. Gold sold for $282.70 an ounce the day Mr. Volcker took office. It reached $850 5 months later, on January 21, 1980 – and would not flirt with this high value again until the monetary disaster of 2008, 28 years later. (This story is definitely one of the reasons I’ve been avoiding gold lately.)

For those who didn’t take note of inflation consuming the value of your investments, the numbers were unlikely. Here are a few, compiled by the Federal Reserve Bank of St. Louis. Six-month certificates of deposit were yielding over 18 pc in March 1980, but mortgage charges were also incredibly high, averaging 18.6 pc in October 1981. In August 1981, three-month Treasury payments months brought in more. more than 15% and cash market funds were very popular. However, these yields fell into single-digit ranges in 1984, when inflation was again under control.

Buying and selling was a matter of timing, which no one will achieve all the time.

That’s why I stay away from it. Instead, I try to stay humble, settle for long-term market returns, and stick with them regardless of short-term losses.

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