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Inflation Trivia

Here is some useful context for central bank policy makers, Wall Street and Main Street.

Let's learn from history, not repeat it.

February 13, 2023 - Inflation Trivia #14  What happens to longer-term rates during the inflation cycle.

In its fight against inflation, the Fed has been raising its target overnight interest rate.  But what about longer-term rates? Do they lag or lead?  What can we learn from the last cycle?

Q:  During the last inflation cycle, the 10yr Treasury closed above 5.0% on 6-14-1967.  When did it next close below 5.0%?

Answer Choices:

a) 6-21-1981

b) 10-27-1987

c) 9-30-1998

d) 12-31-1992

  • The correct answer is C) .  More than 31 years passed before the 10-yr Treasury rate fell below 5%.

  • It peaked on 9/30/1981 at 15.84%.  Note the monthly average Fed Funds rates peaked much higher at 19.1%

  • That was three months after the fed funds rate peaked and eighteen months after inflation peaked.

  • Today, 4% on the ten year (with 5% on the overnight) seems to be the magic number for analysts and policy makers.  

  • Are we fooling ourselves?  Follow our latest commentary here.   

January 19, 2023 - Inflation Trivia #13  When Year over Year Inflation Declines

Everyone, especially government officials and policy makers, seems pleased that YoY inflation has now declined for six consecutive months. But what does that really signal?

Q:  During the last great inflation cycle ending in 1981, how many six+ consecutive monthly declines occurred before inflation was actually defeated?

Answer Choices:

a) 1

b) 3

c) 5

d) 8

  • The correct answer is D) 8.  The EIGHTH streak beginning in April 1980 and lasting for fifteen consecutive months was the one that set the downward trajectory to 4% by 1983.  It was a very long and slow process.

  • The first seven streaks ranged in length from six months to as long as fourteen months.

  • The current cycle will continue to show at least three more months of YoY declines as last spring's higher numbers begin to roll off.

  • Then a clearer picture will emerge. 

  • The Shadow believes that a premature declaration of victory in the inflation fight, as happened several times in the last cycle, will almost certainly lead to a repeat of that period's failed policies and outcomes

November 29, 2022 - Inflation Trivia #12  Money Supply Contraction

A key inflation fighting tool is monetary policy.  In the U.S., that means Federal Reserve's control over M2 Money Supply. Since GDP = Money Supply times Velocity, this is a critically important item.


Year-to-date, the growth in M2 has been negative.  The money supply is shrinking.  It could likely be negative for the entire 2022 calendar year.

Q:  Prior to 2022, when was the last calendar year in which U.S. money supply growth was negative?

Answer Choices:

a) 2008

b) 1980

c) 1971

d) 1933

  • The correct answer is D 1933, the depths of the great depression.  It's been nearly 100 years.  Today's economy is quite a bit different from that of 1933 so we're truly in uncharted territory. 

  • Adjusted for inflation, real M2 could fall by 8 - 10% for 2022.

  • Remember that GDP = M2 x Velocity.  It will require a sharp increase in velocity to avert a serious recession.

  • The Shadow believes that government policies which crowed out private sector economic activities slow Velocity.  Thus, the solution must policies which reverse the past several years of crowding out. 

October 12, 2022 - Inflation Trivia #11  When Inflation Retreats

The last great inflation peaked (following three intermediate, wrongly declared peaks) at 14.6% in April of 1980.  

Q:  How many months elapsed following the peak before inflation fell below 5%?


Answer Choices:

a) 15 months

b) 33 months

c) 45 months

d) 72 months


  • It took almost three years for inflation to fall below 5% for three consecutive months.  B is the correct answer.  Notably, the Fed continued raising rates for more than a year following the peak.  Although inflation peaked in April, 1980, Fed tightening continued through June, 1981.

  • Within 40 months of the peak, inflation temporarily dipped below 3% then rebounded back up to 4%.

September 9, 2022 - Inflation Trivia #10  When Does "Peak" Inflation Really Peak?

After the July downward move in the twelve month inflation rate, pundits and government officials alike claimed that inflation had peaked and would continue to decline.  Are these declarations of victory premature? 

Q:  During the last great inflation, how many intermediate "peaks" were there until inflation ultimately peaked?


Answer Choices:

a) 0

b) 3

c) 5

d) 7

  • The correct answer is B).  Three times, inflation hit a new high and fell back 35% or more.  Twice, it fell 50% or more.

  • The cycles were:

    • Oct 1966  -   3.79%

      • May 1967  -   2.32%

    • Feb 1970  -   6.42%

      • Aug 1972  -   2.95%

    • Nov 1974  -  12.20%

      • Dec 1976  -   5.04%

    • Mar 1980  -  14.59%

  • Each new peak was higher the previous peak.

  • There were also several occasions during which inflation declined for a short period, only to reverse course and head back higher.


August 8, 2022 - Inflation Trivia #9  Peak Inflation, Peak Rates


Traditional economists argue that interest rates must exceed the rate of inflation (see Real Interest Rates below) in order to break the back of inflation.  


Q:  During the last great inflation, the annual inflation rate peaked at 14.6% in March, 1980. When did interest rates peak?


Answer Choices:

a) March, 1979

b) January, 1980

c) March, 1980

d) June, 1981

  • The correct answer is D) June, 1981.  That's right!  Interest rates kept climbing for more than a year after inflation peaked.

  • It doesn't matter which rates you study.

    • Fed Funds peaked at 19.1% in June 1981, fifteen months after peak inflation.

    • The 90-day Treasury peaked at 16.3% in May, 1981. 

    • The one-year Treasury peaked at 15.1% in Sept, 1981. 

    • The ten-year  Treasury peaked at 15.9% in Sept, 1981. 

  • The peak rate of Fed Funds was 4.5% above the rate of inflation.

  • The peak for all other treasury rates along the yield curve exceeded the rate of inflation.

July 6, 2022 - Inflation Trivia #8  Policy Solutions


During the prior inflationary cycle, under several U.S. presidents, the government implemented a wide variety of policy approaches.  Most were utter failures.  


Q:  Which one of the following actually worked to break inflation.


Answer Choices:

a) Wage-price controls

b) Positive real interest rates

c) Energy rationing

d) Tax increases

  • The correct answer is B) Positive real interest rates.  

  • In the early 1980s, Fed Chairman Paul Volcker rapidly raised short-term U.S. interest rates to unprecedented levels.

    • To achieve positive real interest rates, nominal rates must exceed the ratio of inflation.

    • See Inflation Trivia #6 below. 

    • The Carfang Group estimates that June 30 2022 "real" interest rate was NEGATIVE 5.93%.  Not very positive.

  • There is some argument whether other policies such as the Reagan tax cuts, or his relaxed regulatory agenda played critical or even larger roles.  

  • There is no question that the timing of all three of these was coincident with beginning of declining inflation.

  • There is also no question that a long and deep recession followed.  

June 8, 2022 - Inflation Trivia #7  Beating Inflation.  

By 1974, inflation was in its seventh year and nothing seems to have worked.  U.S. President Gerald Ford came up with a slogan "WIN" intended to generate grass roots support for individual sacrifice and discipline to bring down inflation.  The program was immediately ridiculed as trite and superficial.

The White House even passed out free red and white "WIN" buttons.


Q:  What did "WIN" stand for?

  • Answer Choices:

    • a)  Ford's campaign slogan

    • b)  "No Immediate Miracles"

    • c)  "Whip Inflation Now"

    • d)  "Where Is Nixon?" 

  • There are two answers to this question.

  • C) President Ford's WIN button stood for "Whip Inflation Now".

  • B) Democrats blasted President Ford's sloganeering and wore the WIN bottoms upside down to spell NIM.  That stood for "No Immediate Miracles".

  • Economic advisor and later Fed Chairman Alan Greenspan called the program "unbelievable stupidity".

  • Comedian Bob Hope quipped "Ford said we would Whip Inflation Now and the price of whips jumped $0.50."

  • Even a prominent NY newspaper chided that although the buttons were free, less than half the country could afford them.

  • Gerald  Ford did not win reelection.

May 8, 2022 - Inflation Trivia #6  The REAL rate of interest.  

The REAL rate of interest is the nominal or headline rate adjusted for inflation.  Most economists see this is the true measure of whether monetary policy is tight (high rate) or loose/stimulative (low rate).  Many compute the REAL rate as the nominal one-year treasury rate minus trailing twelve months inflation.

Over many decades, the real rate of interest generally hovered in a 1% - 3% range.


Q:  During the past 70 years ending first quarter 2022, REAL interest rates at one point reached a highly expansionary low of NEGATIVE 7.51%. When did that occur?

  • Answer Choices:

    • a)  August 1971

    • b)  May 1980

    • c)  July 2008

    • d)  February 2022  

  • A) In August of 1971, the U.S. left the gold standard and moved to floating exchange rates.  It is also the month in which wage and price controls were implemented to fight inflation.  That month began with the one-year treasury at 5.15% and trailing twelve-month inflation of 4.62%.  The REAL rate of interest was a POSITIVE 0.53%.

  • B) In June of 1980, the Fed was ratcheting up to a 20% fed funds rates.  As late as May 1980, with inflation soaring, the REAL interest rate was a NEGATIVE 5.86%.

  • C) With the financial crisis approaching in July 2008, the REAL interest rate bottomed at NEGATIVE 3.37%.  The nominal one-year rate was 2.23% but inflation had reached an eighteen year high of 5.60%.

  • The correct answer is D.  In February 2022, the one-year treasury rate was 1.03%.  However, after adjusting for inflation of 8.54%, the effective or REAL interest rate was NEGATIVE 7.51%.  That reflected the most stimulative Federal Reserve monetary policy of the past 70 years.  Even as the central bank talks about tightening, money became even cheaper.  We await the May 11 report on the consumer price index.​  (Source:  LongtermTrends)

April 5, 2022 - Inflation Trivia #5  Inflation and Stock Prices


How does inflation impact stock prices?  On February 6, 1966, the Dow Jones Industrial Average closed at 995.15, It was closing in of the milestone 1000 level.  In that same month, inflation crossed above the 2.5% mark.  Except for two outlier months, inflation remained above 2.5% until Feb. 1986, twenty years later.

Q:  As measured in 1966 dollars, when did the Dow finally reach the 1000 milestone?

  • Answer Choices:

    • a)  Nov. 10 1972

    • b)  Nov. 13 1982

    • c)  Feb. 21 1986

    • d)  July 7 1995 

  • The correct answer is D.  It took almost 30 years for the Dow (in 1966 dollars) to add those next five points.

    • On July 7, 1995, the Dow closed at 4703.

    • By then, the 1966 dollar was worth only $0.21, having lost 79% of its purchasing power.

    • Thus, a basket of Dow stocks in 1995 could finally have enough value to buy the same $1,000 of goods and services that the Dow could by in 1966.

  • Even in nominal terms, the Dow didn't sustainably cross the 1000 level until Nov. 1982.

    • It briefly topped 1000 in Nov. 1972 but quickly fell back by Jan. 1973.

    • At its worst, the Dow had dropped 45% to 550 in 1974.

    • Inflation during that cycle peaked at 14.8% in March 1980.

March 9, 2022 - Inflation Trivia #4  Wage and Price Controls  

In a last-ditch effort to stop run-away inflation, Richard Nixon instituted wage and price controls on August 15, 1971. These were widely viewed as a short-term political success and a long-term economic failure leading to acute shortages of goods and services.  Per Yergin and Stanislaw's book The Commanding Heights: “Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.”  


Q:  What was the rate of inflation when Nixon, in desperation,  ordered wage and price controls?

  • Answer Choices (and poll results from first 1,065 responses):

    • a)  4.38%  (12%)

    • b)  6.38%  (19%)

    • c)  9.38%  (29%)

    • d)  15.38%  (40%)​  

  • Nixon's August 15 1971 Executive Order, after consultation with Fed Chairman Arthur Burns, did three things:

    • Instituted wage and price controls

    • Removed the USD's convertibility into gold

    • Set surcharges on imports

  • At the time of this last-ditch effort to control inflation, the YoY rate of inflation was 4.38%

    • The program was an economic failure and inflation rose to 12.20% by 1974.

    • Inflation peaked at 14.59% in 1980.

  • Daniel Yergin and Joseph Stanislaw explain in The Commanding Heights: The Battle for the World Economy, it was obvious that price controls didn’t work: “Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.”

Feb 7, 2022 - Inflation Trivia #3  Back in 1965 . . .  

Paul Volcker is widely credited with raising interest rates in 1980 to break the back of inflation during the last great inflationary cycle.  Less well known is the story of the first one half percent (50 bps) rate increase (to 4.50%) fifteen years earlier in the cycle as inflation crossed the 2% level.


Q:  U.S. Federal Reserve Chairman William McChesney Martin infuriated President Lyndon Johnson in Dec. 1965 with that 50 bps increase.  He famously remarked that:

  • Answer Choices

    • a)  "Guns and butter" are a bad fiscal policy mix.

    • b)  It was time to take away the "punch bowl".

    • c)  "Great Society" spending should be postponed.

    • d)  Nearing 1,000, the Dow Jones average was "irrationally exuberant"


Fed Chair Martin coined the "punch bowl" analogy in 1955 but didn't put it in practice until this famous clash in 1965.  That 50bps rate hike was the first of many, over a fifteen year period that finally broke the back of inflation.

Jan 8, 2022 - Inflation Trivia #2  How Long Does It Last? 


Inflation now exceeds central bank targets of 2% YoY and the U.S. Fed is no longer referring to inflation as "transitory".  Some central bankers even suggest that inflation could extend through late 2022 and into early 2023. Here's some missing historical context.

Q:  How many months did the last great inflation of a few decades ago last?

  • Answer Choices:

    • a)  29 months

    • b)  43 months

    • c)  61 months

    • d)  198 months

  • Let's think in terms of inflation at 3% +.

    • Inflation in the U.S. (CPI-U) crept up over 3% YoY in Nov. 1967.

    • Except for two outlier months, it remained above that level every month until May 1983, 198 months later.

  • Let's think in terms of 2.5%+.

    • Inflation in the U.S. (CPI-U) crept up over 2.5% YoY in Feb. 1966.

    • Except for two outlier months, it remained above that level until Feb 1986, 240 months later.

  • Let's think in terms of 2.5%+ and ignore the outlier year of 1986.

    • Inflation in the U.S. (CPI-U) crept up over 2.5% YoY in Feb. 1966.

    • Except for two outlier months, it remained above that level until April 1994, 338 months later.

  • It spanned seven U.S. presidents:  Johnson, Nixon, Ford, Carter, Reagan, Bush Sr. and Clinton.

  • This is what the Shadow calls "perspective".

Dec 18, 2021 - Inflation Trivia #1  When Rates Peak  

(the first in what history tells us may be a long series of not-so-trivial vignettes)  

Q:  On June 15, 1981, a previously unthinkable event occurred. What was it? 

  • Answer Choices and poll results:

    • a)  U.S. leaves the gold standard (36%)

    • b)  President Nixon resigns (5%)

    • c)  Mass margin calls threatened (34%)

    • d)  U.K. banks close for one week (24%)

  • On June 15, 1981, the Fed Funds rate hit 20.61%.

  • I remember that day sitting with Bob Arnold, Merrill Lynch's treasurer.  The Fed Funds rate was about to breach New York's usury ceiling.  We were gaming out several disaster scenarios.

    • Would Fedwire shut down, since, effectively, it was a system that transferred fed funds?

    • Would investors max out their margin accounts (capped at the ceiling) and invest risk free in treasuries at a handsome spread while at the same time collapsing the entire brokerage industry?

    • Would brokerages preserve their profits by preemptively issuing margin calls, possibly taking the markets down?

    • Would someone invoke the questionable phrase "institutional exemption" and just ignore the usury laws?

    • Would the interbank lending market freeze-up and what would be the results?

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