What happened during the 'Nixon Shock' in 1971, the best benchmark for the 'Trump Shock'?

As reported by CCTV News, former U.S. Treasury Secretary Summers stated in an interview that the claim that "increased tariffs have positive effects" is "fraudulent rhetoric." Currently, the market is concerned that Trump's tariff stick may lead to a repeat of the financial turmoil of 1971 under Nixon, posing a historic challenge to the dollar.

Nick Timiraos, referred to as the "new Federal Reserve correspondent," has explicitly made this point in an article published on Thursday, stating that the U.S. is attempting to overturn the global trade order it has built, ushering in an era filled with uncertainty. He believes that if these tariff policies are implemented long-term, the impact could be comparable to President Nixon's decision to abandon the gold standard in 1971, which ended the post-war financial framework established by the U.S. and its World War II allies.

Huw van Steenis, Vice Chairman of Oliver Wyman, also pointed out this historical similarity in an article over the weekend. At that time, Nixon detached the dollar from the gold standard, imposed a 10% import tariff, and introduced temporary price controls.

Steenis believes that the "Nixon Shock" not only failed to achieve its intended goals but also led to a loss of business confidence and brought about stagflation. Nixon's price and wage control measures severely failed, causing shortages of goods and fueling a wage-price spiral. This entire event was a key driver of severe inflation in the 1970s.

Steenis stated that like Trump's tariffs, Nixon's measures were also aimed at forcing countries to change trade terms to help reduce the U.S. trade deficit. The remarks made by then-Treasury Secretary John Connally about Nixon are strikingly similar to the current government's trade logic:

Mr. President, my idea is that all foreigners want to squeeze us, and our job is to squeeze them first.

In this context, more investors are shifting their asset allocation towards gold and physical assets for preservation of value, while businesses and savers are increasingly moving their activities from banks to the bond market.

Dollar Instability: Investors Turn to Gold and Physical Assets for Preservation of Value

As the dollar index fell from a high of 110.18 on January 13 to 100.10, a cumulative decline of 9.1%, investors began to reassess their investment strategies. According to Steenis's analysis, the inflation pain following the "Nixon Shock" in the 1970s prompted significant changes in financial behavior and regulation.

Investors are reallocating assets towards gold and physical assets for preservation of value. Meanwhile, businesses and savers are increasingly moving their activities from banks to the bond market. Since then, the share of bank loans in total economic borrowing has been declining. In short, the modern financial system was forged in the early 1970s.**

Steenis believes that we may be witnessing a similar market shift today.

Some investors have begun to leave the United States, and the market is reassessing the dollar's status as a reserve currency, undergoing a rapid process of de-dollarization. In the past, the dollar as a safe-haven asset often benefited from market volatility, but currently, U.S. stocks, U.S. bonds, and the dollar are being sold off simultaneously, indicating that investors are losing confidence in U.S. assets.

Tariff Impact: Short-term Political Tool, Long-term Economic Pain

Steenis states that Nixon's four-month tariff may have helped promote the appreciation of the dollar, but it failed to achieve its intended goals and did not have a significant impact on imports. However, the economic shockwaves from this move have lasted for decades. Even the birth of the euro can be traced back to this.

Steenis notes that whether a digital euro or deeper European capital markets will emerge next remains uncertain, but history shows that the consequences of this latest shock may also persist for many years.

The Nixon Administration Pressured the Federal Reserve

Steenis also points out that in today's hyper-financialized world, the bond market can force politicians to change policies more quickly than in 1971. In 1971, Nixon's tariffs were canceled four months later through the Smithsonian Agreement, but today's market reactions may be even faster and more severe.

It is worth mentioning that the Nixon administration also exerted tremendous pressure on the Federal Reserve at that time, demanding the implementation of expansionary monetary policies to offset the shock.

According to the accounts of Nixon's speechwriter William Safire, the government pressured then-Federal Reserve Chairman Arthur Burns through a series of anonymous leaks, even suggesting an expansion of the Federal Reserve's size so that Nixon could appoint new members who supported his policies