CHAPTER 11
How Did We Arrive Here Historically? Where Might We Go Prospectively?
If we could first know where we are and whither we are tending, we could then better judge what to do, and how to do it.
—Abraham Lincoln
It is useful to begin our historical presentation in the early 1970s. It was a time of significant structural and intellectual change in economics and finance. Due to the heavy monetary and fiscal stimulus in the American economy throughout the 1960s, inflationary pressures were boiling. The dollar had been depegged from the gold standard and allowed to float versus other currencies, thereby banishing forever the phrase that many generations grew up with: “sound as a dollar.” Wage and price controls were a feckless attempt to battle a phenomenon alien to the prevailing Keynesian paradigm: stagflation, the simultaneous acceleration of inflation and deceleration of macroeconomic activity. The pullback from involvement in Vietnam aggravated a sense of national self-doubt that permeated thinking from Main Street to Wall Street.
The Arab-Israeli War of 1973 and the subsequent oil embargo by the Organization of Petroleum Exporting Countries (OPEC) were the catalysts that transformed the prevailing negative conditions into a full-scale economic contraction and major stock market retreat in 1974. Even the darling stocks of the prior years, the so-called Nifty Fifty, were hammered down in the bear market of 1974.
During this period of economic turmoil and financial market ...
