debt, accelerated. That created the money and credit crisis of 1979-82, during which time the US dollar and dollar-
denominated debt were at risk of ceasing to be an accepted storehold of wealth. Of course, the average citizen
didn’t understand how this money and credit dynamic worked, but they felt it in the form of high inflation and high
interest rates, so it was a huge political issue. President Carter, who like most political leaders didn’t understand
the monetary mechanics very well, knew that something had to be done to stop it and appointed a strong monetary
policy maker, Paul Volcker. Just about everyone who followed such things, including me, hung on his every word.
He was strong enough to do the painful but right things needed to break the back of inflation. He became a hero of
mine and eventually a good personal friend because of his great character and great capabilities, and I loved his
wry humor too.
To deal with that monetary inflation crisis and to break the back of inflation, Volcker tightened the supply
of money, which drove interest rates to the highest level “since Jesus Christ,” according to German Chancellor
Helmut Schmidt. Because the interest rate was far above the inflation rate debtors had to pay much more in
debt service at the same time as their incomes and assets fell in value. That squeezed the debtors and
required them to sell assets. Because of the great need for dollars, the dollar was strong. For these reasons,
inflation rates fell, which allowed the Federal Reserve to lower interest rates and to ease money and credit
for Americans. Of course many debtors and holders of these assets that were falling in value went broke. So in
the 1980s these debtors, especially foreign debtors and more especially those in emerging countries, went
through a decade-long depression and debt-restructuring period. The Federal Reserve protected the American
banks by providing them with the money they needed, and the American accounting system protected them from
going broke by not requiring them to account for these bad debts as losses or value these debt assets at realistic
prices. This debt management and restructuring process lasted until 1991, when it was completed through the
Brady Bond agreement, named after Nicholas Brady who was the US Secretary of Treasury at the time. This whole
1971-91 cycle, which affected just about everyone in the world, was the result of the US going off the gold
standard. It led to the soaring of inflation and inflation-hedge assets in the 1970s, which led to the 1979-81
tightening and a lot of deflationary debt restructuring by non-American debtors, falling inflation rates, and
excellent performance of bonds and other deflationary assets in the 1980s. The entire period was a forceful
demonstration of the power of the US having the world’s reserve currency—and the implications for everyone
around the world of how that currency was managed.
From that 1979-81 peak in dollar-denominated inflation and dollar-denominated interest rates until now,
both the inflation rates and interest rates have fallen to nearly 0%. You can clearly see that whole big cycle up
and down in interest rates and inflation rates since the new dollar-denominated monetary system.