reason inflation/interest rates skyrocketed. Reducing infla-
tion was the major economic problem facing U.S. policy-
makers at the start of the 1980s. With consumer prices at
the highest peacetime rate on record—up 13.3% in 1979—
the focus of economic policymakers was on “reducing infla-
tion, while achieving satisfactory growth in employment,
output and productivity.”
Three years later, the rate of inflation had slowed consider-
ably, with the Consumer Price Index for Urban Consumers
(CPI-U) advancing only 3.8% during the year. The success in
reducing inflation was largely attributable to monetary policy
resulting from actions of the Federal Reserve Board. In
October 1979, the Federal Reserve modified its monetary pol-
icy by giving greater emphasis to holding the growth of mon-
etary stock within target ranges and allowing interest rates to
vary widely. In essence, the Federal Reserve began to target
the quantity of money rather than its price. With the supply of
money curtailed, interest rates rose sharply. Mortgage rates
during this time period were in the mid-teens and the cost of
capital for businesses rose beyond the ability of most compa-
nies to be able to afford the pursuit of M&A activities.
The reduction in the rate of inflation from 1979 through
1983 was not costless. Two recessions—January 1980 to
July 1980 and July 1981 to November 1982—the second a
particularly severe one, resulted in double-digit unemployment rates, reduced incomes and a decline in output. The
loss of revenue resulted in a sharp increase in the Federal
deficit before economic recovery began at the end of 1982.
This had a negative impact on American businesses,
especially those businesses pursuing acquisitions. Most
companies simply abandoned further acquisition activities.
Hence, as shown in Figure 1, the dramatic drop in the number of acquisitions in the 80s versus the early 70s. Even
though there were a reasonable number of acquisitions in
the 70s, 80s and early 90s for the most part, they were
small, “add on” or “Bolt On” types (i.e., simple, low value
additions to an existing structure with limited duplication
of functions).
Figure 3
This is illustrated more clearly in Figure 3 in terms of the
value of the acquisitions during that time period. From the
1960s through the early part of the 1990s most companies
shied away from making huge acquisitions. That situation
changed in 1996.
From 1996 through 2007 approximately $12 trillion dol-
lars worth of acquisitions were completed—more than the
previous 30 years combined. The huge spike in acquisitions
during 2000 was the result of the dot.com phenomenon. Of
course, however, what goes “up” must also come “down.”
Going into 2000 the U.S. government pumped up the
money supply in preparation for a Y2K event that never
happened. Combined with low-priced labor from China,
this increased capital had nowhere to go except the stock
market, so rather than seeing price inflation we had “stock
inflation.” When the market crashed it effectively eliminat-
ed massive chunks of excess capital. So we entered the new
millennium with much lower levels of inflation than in the
70s and more overseas competition resulting in greater
supply. The market crash ushered in a very shallow reces-
sion as the government continued to stimulate the economy
through lower interest rates. Massive refinancing of high
interest home loans for lower interest ones allowed con-
sumers to survive, keep their homes and continue to spend.
This is a very different scenario than is present in today’s
economy.
Just as the 70s began with under-priced oil, an unusual
set of circumstances resulted in under-priced oil again in
2000. Supply had steadily increased through the late 90s
due to OPEC quota increases and increased production
from Russia. By 2001 increased supply met decreased
demand for oil because of the Asian recession.
In normal circumstances OPEC would have curtailed
supply to keep the price firm. However, it was politically
impossible for them to do so because of the events of 9/11,
so prices fell drastically and sheltering the U.S. from some
of the effects of the stock market crash. In 2002 a strike by
Venezuelan oil workers eliminated the excess supply and
solved OPEC’s problem. This was followed by the war in
Iraq, which further reduced supply. Now as the economies
of Asia heat up again the demand for oil has increased but
supply has not been able to keep up.
In 2002 worldwide excess oil capacity stood at more than
six million barrels per day but by 2005 excess capacity had
fallen to under one million barrels per day. Combined with
the short supply and the increased demand for oil from
Asia, especially China, we also have the U.S. government
spending unprecedented billions of dollars on hurricane
repairs and a war in Iraq. These are all inflationary factors.
We have to remember that inflation is primarily a monetary phenomenon. Increased money supply results in
increased inflation. Up until recently the government has
been able to export our inflation by selling bonds to foreign
governments. Recently the combined increase in inflation,
the falling dollar and falling interest rates has made those
sales less advantageous to foreigners. Fewer bond sales to
foreigners results in even more inflation. Given our current
