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Back to the future 1982

Updated: Sep 22, 2022

Am I the only person that see's a similarity to what is happening now, to what happened in 1982, the biggest recession in this century, (next to the depression) and it was caused by the Fed trying aggressively to fight inflation.



https://www.federalreservehistory.org/essays/recession-of-1981-82


So using this as a reference, what it says is Paul A Volcker was trying to balance unemployment and a staggering inflation rate of 11%. In his view, inflation was the biggest threat, so they kept raising rates, until unemployment rose, and then dropped, but it all fell apart in the mid 70's when inflation and unemployment began to rise at the same time.


Volkers believed at all cost, Inflation needed to be tamed, and he was right. this is the same policy that stands today. But there are numerous differences. Long and the short, interest rates jumped from 13% in 1980 to 21% in late 1981... they have been dropping ever since.


Inflation today is has dropped from 9.1% to about 8.3% in the US, and interest rates have gone from 2.5% to 6.29% ... do you see the problem? And this is in only 6 months... In 1982 interest rates increased 70%, in 2022 interest rates increased over 200%, and we are now 60% more leveraged than ever before in Canada, due to the ultra low rates from the last 10 years. and at a 3.7% unemployment rate, there is no stopping the Feds from raising rates further and driving us into a Recession like they did in 1982.


Rate hikes take 3 months to reflect on the economy, at least when it comes to mortgages, as borrowers lock in their rate for that period of time, and the feds are raising rates drastically, once a month, so the real impact of even the first has not even been felt. Its like steering a ship with a canoe paddle, the effects take time, but they don't want to wait. To steer a ship quickly, you crank the rudder all the way over, and wait for the effect. But once the ship starts to turn, its hard to stop it from turning, which is why its better to do it gradually. You create what is called a Pendulum effect, and this is what I believe we will see... well, just look back at history, have they ever really gotten it right?

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