Friday Haymaker

6 months ago 385 views 18 min read

David Hay

Editor

Haymaker

Friday Haymaker

G&R on Inflation

“The dictum that truth always triumphs over persecution is one of the pleasant falsehoods which men repeat after one another till they pass into commonplaces, but which all experience refutes.” -John Stuart Mill

Upgrade to paid

Hello, Subscribers:

Those among you paying even a small measure of attention to current events know that much of what is and has been proclaimed on matters of consequence is not necessarily truthful, but broadly agreeable (when the two overlap, let us all give thanks). In no case is this more apparent than with the peculiar role of the Federal Reserve chair, a role which is often spoken of as being not merely separate from politics, but entirely removed from political influence. Markets, investors, fiscally prudent souls, and even the average citizen, all seem to find some comfort in imagining the nation’s monetary gears are managed not by short-term-focused politicians, but by wise mathematicians and logical functionaries. These higher beings are, of course, unmoved by petty partisan pugilism. Does it sound like rubbish to you? It should, because it is.

The Next Inflationary Surge is About to Begin

From Goehring & Rozencwajg, Originally published on August 4th, 2025 – (Abridged version below)

* * *

Those inclined to view President Trump’s needling of Federal Reserve Chairman Jerome Powell as an unprecedented breach of decorum might wish to brush up on their monetary history. The truth is, tormenting the Fed chairman—whether through verbal assault, political manipulation, or, on at least one remarkable occasion, an actual shove—has long been part of the American political tradition. Over the past sixty years, this peculiar sport has produced no shortage of high drama and, more worryingly, some truly calamitous inflation.

The pressures now bearing down on Jerome Powell have an air of déjà vu about them—eerily so. If whispers from the Hill Country are to be believed, the last time a Fed Chairman found himself in similar crosshairs, it ended with a shove against the stone wall of a Texas ranch house, courtesy of President Lyndon B. Johnson himself. That chairman was William McChesney Martin. Not long after, another president—Richard Nixon—took a more insidious, if less physical, approach, orchestrating a sustained campaign of psychological siege against Arthur Burns between 1970 and 1972. In each case, the reason for the presidential ire was the same: interest rates were too high for political comfort. That same tension, dressed in the garments of a different era, now encircles Chairman Powell.

William McChesney Martin, with fifteen years at the helm of the Federal Reserve, had come to embody the very notion of postwar monetary statesmanship—a man who took central banking as seriously as a judge takes the law. Arthur Burns, for his part, was the very image of the learned economist: pipe in hand, gold standard in heart, and an unswerving belief that monetary policy should be both principled and apolitical. Yet when push came—quite literally, in Martin’s case—and presidential will collided with economic orthodoxy, both men yielded. Each, under the weight of executive pressure, sanctioned sweeping and ill-timed expansions of monetary policy. Their concessions helped ignite the runaway inflation of the 1970s. Natural resource equities were one of the few places to protect your portfolio. And now, half a century later, the same winds appear to be gathering once again.

Just as Martin and Burns, despite their reputations and resolve, eventually bowed to the pressure from their respective Commanders-in-Chief, we believe Jerome Powell will—sooner or later—do the same. Whether by reluctantly guiding interest rates downward himself or by exiting stage left to make room for a more compliant successor, the outcome is likely to be identical. One way or another, monetary policy will loosen. We are confident that Trump’s new appointee will arrive in his office; sleeves rolled up and rate cuts ready.

* * *

Since the close of the Second World War, the economic history of the United States can be read as a tale of two great arcs. First came the long, grinding rise of inflation—from the late 1940s through the early 1980s—a period in which prices climbed, yields soared, and policymakers seemed forever one step behind. Then, just as suddenly, came the great disinflation. Beginning in the early 1980s, it carried on—relentless, reassuring—until 2020. A glance at the yield on the 10-year U.S. Treasury bond over those seventy years tells the story better than any textbook: the rise, the fall, the quiet before the next storm.

We are firmly in the camp that believes the great disinflationary arc, which began in the stern days of Paul Volcker’s Fed, has run its course. The era of falling yields and fading price pressures is over. In its place, a new cycle has begun—an inflationary one, with the potential to stretch across decades. And if history is any indication, it will not pass quietly. It will bring with it the kind of problems that compound—politically, economically, and socially—until they can no longer be ignored.

* * *

Investors, ever eager to believe in happy endings, have largely declared the inflation scare of 2021 a closed chapter. The narrative now making the rounds is one of restored order—of price stability returning like an old friend, ready to stay a while. The exuberant rebound in long-duration assets, especially the ever-popular large-cap growth stocks, has only added fuel to this comforting belief. If the markets are a mood ring, they are glowing with complacency.

* * *

The renewed political pressure bearing down on the Federal Reserve—quiet to some, unmistakable to others—carries with it deeply unsettling implications. We believe inflation is not retreating, but merely pausing. And soon enough, it will accelerate again—swiftly, stubbornly, and disruptively.

* * *

William McChesney Martin, who presided over the Federal Reserve from 1951 to 1970, is best remembered for a metaphor that has aged better than most monetary theories: the job of the Fed, he said, was to take away the punch bowl just as the party gets going. In December of 1965, Martin decided it was time to make good on that credo. With the U.S. economy running a fever—fueled by the twin furnaces of Vietnam War spending and the domestic ambitions of the Great Society—he nudged the discount rate up by 50 basis points. It was, in his view, time to signal last call.

President Lyndon B. Johnson, on the other hand, had little patience for teetotalers at his party. While Martin fussed with the punch bowl, Johnson wanted to keep it flowing—generously and without interruption. With an escalating war in Southeast Asia and an ambitious domestic agenda at home, the President needed low interest rates like a patient needs oxygen. Martin believed rates had to rise. Johnson insisted they must fall. In such moments, compromise tends to give way to confrontation.

So it was that Martin found himself summoned, like an unruly subordinate, to President Johnson’s ranch in December 1965. What unfolded there now lives in central banking lore. According to those present, the encounter was less a meeting than a mauling. Johnson, never known for subtlety, let loose with a torrent of invective—waving his arms, crowding Martin’s space, and, if accounts are to be believed, even shoving him against the wall. The message was unmistakable: the discount rate hike must be undone. Martin, to his credit, stood firm. This only further enraged Johnson, who saw Martin’s resistance not merely as insubordination but as a constitutional affront. “You went ahead and did something that I disapprove of,” the President barked. “It will affect my entire term here.” Then came the line that echoed across history: “My boys are dying in Vietnam, and you won’t print the money I need.”

Though visibly rattled by his Lyndonland encounter, Martin did not give Johnson the immediate trophy he sought. The discount rate remained untouched—for a time. Yet in the months that followed, the Fed under Martin’s stewardship began to soften its stance. Reserve requirements were eased. Open-market operations took a more generous turn. The money supply, like champagne at a state dinner, began to flow more freely. And then, in May of 1967—perhaps as a gesture to a still-undecided Johnson—Martin quietly trimmed the discount rate by 50 basis points, bringing it back to 4.0%. The principle may have remained, but the posture had changed.

In hindsight—a lens that spares no one—Martin’s pivot toward easier money proved to be a grievous error. When he first stood his ground in late 1965, inflation hovered at a modest 2.4%. By the close of the decade, it had vaulted past 6%. While Arthur Burns would later inherit—and amplify—the inflationary mess, the seeds had already been sown. Today, many economists argue that the great inflation of the 1970s did not begin with Burns at all, but rather with Martin, whose reluctant concessions marked the true turning point. The blame, it seems, lies less with the man who poured the gasoline than with the one who struck the match.

* * *

At [Martin’s] 1970 retirement party, in a moment of rare candor for a central banker, he looked around the room and simply said, “I’ve failed.”

Anyone hoping that the Martin–Johnson saga was a one-off—an unfortunate but isolated rupture in the normally decorous relationship between President and Fed—was soon disabused of the notion. The era of open confrontation between the White House and Constitution Avenue was only just beginning.

* * *

When Richard Nixon won the presidency in 1968, he did not wait long to settle old scores. By 1970, with William McChesney Martin stepping down, Nixon seized the opportunity to appoint a Federal Reserve Chairman of his own choosing—and of his own memory. The man he selected, Arthur Burns, was not only a respected economist but an old confidant from the Eisenhower years, during which Burns had chaired the Council of Economic Advisors and cultivated a close rapport with then–Vice President Nixon. It had been Burns, back in 1958 and 1959, who warned Nixon that interest rates were politically perilous—that if the Fed didn’t lower them from 4% to 2%, the Republican Party would pay the price. Nixon believed him, and when he narrowly lost the 1960 election, he pinned the blame not on Kennedy’s charisma but on Martin’s monetary restraint. A decade later, Nixon wasn’t about to let history repeat itself. Burns was the perfect candidate—not just for his résumé, but because he had once told Nixon exactly what Nixon had always wanted to hear.

* * *

For the next eighteen months, Arthur Burns found himself in a slow, relentless squeeze. Nixon didn’t apply the pressure directly—at least not always. Instead, he deployed his operatives: the famously hard-edged John Ehrlichman, the ever-watchful H.R. Haldeman, and eventually, the swaggering new Treasury Secretary, John Connally. Their message was unambiguous and unrelenting: the President wanted lower rates, and he had little patience for academic lectures on central bank autonomy. Burns, who took great pride in his independence, was told—point-blank—that it was time to let go of such illusions. The President didn’t want a philosopher at the Fed. He wanted a team player.

* * *

In the end, Arthur Burns capitulated. After months of siege from Pennsylvania Avenue, the Fed Chairman laid down his arms. The discount rate, once held at 6%, was trimmed to 4.5% by the summer of 1972. The results were as swift as they were dramatic. Between late 1970 and the end of 1972, the money supply ballooned—both M1 and M2 grew by 50%—and unemployment figures began to edge downward. Nixon, who had vowed there would be no repeat of 1960, got exactly what he wanted: a turbocharged economy and, come November, a landslide reelection. Burns had delivered—and history would judge the cost later.

* * *

Looking back, it’s clear that Arthur Burns’s policies—however reluctantly enacted, and however much they strained against his own economic instincts—ended in calamity. The inflation that followed was not a byproduct of unforeseeable shocks, but the direct result of decisions made under pressure.

* * *

Whatever the mix of motives—fear, loyalty, political arithmetic—Burns’s actions helped unleash one of the most punishing inflationary episodes in American economic history.

The strain now being applied to Jerome Powell bears an uncomfortable resemblance to the pressure once exerted on Martin and Burns. The tools may be more modern—press conferences and social media rather than ranch house shoving matches or planted newspaper stories—but the intention is unmistakably familiar. If history is any guide, Powell will be faced with the same grim choice: accommodate the president’s wishes by cutting rates, or step aside in favor of someone more compliant. One way or another, the outcome looks poised to rhyme with the past.

* * *

We believe the inflationary era now beginning could match that disinflationary stretch in both length and consequence. And once again, the match may be struck at the Federal Reserve. Just as Martin and Burns—each under immense presidential pressure—reluctantly opened the monetary spigots, we suspect Jerome Powell will do the same. Whether by resignation or capitulation, the result will be familiar: a surge in inflation, swift and difficult to contain. The past, it seems, is not done with us yet.