September 04, 2025
Dear Investors and Friends,
Last month, we explored the paradox of rising equity markets in a world where purchasing power is declining. Our point was simple: nominal gains are not always real gains. When the value of money erodes, asset prices may climb, but that does not necessarily mean investors are wealthier in real terms.
This month, we extend that thought by examining what history shows when political leaders pressure central banks. The real issue is independence. When monetary policy becomes a tool of politics, credibility erodes, inflation expectations shift, and both bondholders and stockholders ultimately pay the price.
Case Studies from Abroad
In Turkey, President Erdoğan openly rejected conventional economics, arguing that high rates cause inflation. He forced his central bank to cut repeatedly even as prices were already rising. For a brief time, the stock market seemed to respond positively, but inflation soon exploded above 80 percent. Bond yields spiked as investors demanded protection, and the lira collapsed. What looked like prosperity in nominal terms left investors poorer in real terms.
Argentina offers a longer-running example. For decades, governments leaned on the central bank to fund deficits and keep borrowing costs low. Inflation became chronic, often in triple digits, and the bond market stopped functioning in any meaningful way. Local equities periodically soared, but those gains evaporated once adjusted for the peso’s collapse. Investors learned the hard way that without independence, financial assets cannot preserve wealth.
In Italy during the 1970s, the Bank of Italy was obliged to purchase any government debt that the market would not absorb. This guaranteed financing for the state, but at the cost of credibility. Inflation regularly exceeded 10 percent, long-term yields moved into double digits, and equity investors found that rising prices in the economy eroded the value of any nominal gains.
India faced a similar challenge in the 1970s and 1980s. Populist programs required easy financing, and politicians leaned on the Reserve Bank of India to deliver it. Inflation remained stubbornly high, borrowing costs climbed, and equity markets struggled to deliver real wealth creation.
In Brazil and Mexico during the 1980s and 1990s, political influence over monetary policy produced deficits and ultimately hyperinflation. Brazil saw annual inflation surpass 2,500 percent in 1993. Bonds became uninvestable, and while equities rose sharply in nominal terms, the gains were meaningless once currencies collapsed.
The story of Weimar Germany is perhaps the most dramatic. To meet reparation payments after World War I, the government directed the Reichsbank to print money. The mark collapsed, and stock prices soared in nominal terms. Yet this was not wealth creation, it was simply capital fleeing into equities as a temporary refuge. Once adjusted for purchasing power, equity holders suffered devastating real losses.
Hungary in the 1940s went further still. After World War II, forced money creation produced the world’s worst recorded hyperinflation, with prices doubling every 15 hours. Both the bond market and the stock market ceased to function.
Even in more modern times, Russia offers a cautionary tale. During the sanctions era, President Putin pressured the central bank to ease policy. Bond yields swung into the teens, and equities became highly volatile. Markets were not reflecting confidence, but a combination of political pressure and geopolitical risk.
Finally, Japan stands as an exception. In the 1990s, after its economic bubble burst, the government encouraged the Bank of Japan to pursue ultra-loose policy and later yield-curve control. Inflation never took hold, largely because demographics and structural deflation were too powerful. Long-term yields stayed near zero, and equities stagnated for decades despite extraordinary monetary accommodation.
Why Leaders Push for Lower Rates
Across countries and across time, the motivation has been remarkably consistent. Lower interest rates are politically attractive because they provide short-term growth, reduce the cost of servicing government debt, and create the appearance of prosperity in rising stock and housing markets.
The problem is that these benefits are temporary. When central bank independence is compromised, inflation expectations rise, long-term borrowing costs follow, and both bondholders and stockholders ultimately pay the price.
Key Themes Across History
Looking across these examples, several themes emerge. When central bank independence is undermined, inflation accelerates. Short-term relief quickly gives way to higher prices.
Long-term borrowing costs rise, not fall. Even if yields decline initially, investors eventually demand higher returns to compensate for the loss of credibility.
Equities do not escape the damage. They may rally briefly on easier money, but sustained inflation compresses valuations and erodes real returns. In the most extreme cases, such as Weimar Germany, equities rose only as a nominal refuge against collapsing money.
And finally, exceptions like Japan prove the rule. In a deflationary environment, political influence failed to ignite inflation, but it also failed to create growth or lasting equity performance.
Lessons for Investors
At Roosevelt Capital Management, we are not political actors. We are economic observers and stewards of client capital. And we know this much: independent central banks are essential to healthy markets.
For investors, the message is clear. Where independence has been compromised, inflation expectations become unanchored, long-term rates climb, and equity markets struggle. Independence is the anchor of stability for both bonds and stocks.
Today’s U.S. Context
In the United States, presidents on both sides of the aisle have often tried to sway the Federal Reserve. Lyndon Johnson pressed William McChesney Martin in the 1960s. Richard Nixon leaned on Arthur Burns ahead of the 1972 election, contributing to the inflation of the 1970s.
More recently, former President Donald Trump has also been vocal in urging rate cuts, has openly criticized Chair Powell, and has suggested using presidential authority to remove Fed officials “for cause.” These are factual developments, not partisan judgments, and they fit into the broader global and historical pattern of executive pressure on central banks. What matters for investors is not which leader applies the pressure, but whether the Federal Reserve maintains independence.
The difference today is that the Federal Reserve remains formally independent, and the U.S. dollar is still the world’s reserve currency. But history suggests that if the Fed were ever to yield to political demands rather than economic conditions, the result would not be lasting prosperity, but higher inflation, steeper long-term yields, and equity markets that appear strong in nominal terms yet weak in real purchasing power.
Closing Thought
History shows us that when politics overrides monetary independence, easy money quickly becomes hard medicine. Both bondholders and stockholders pay the price, whether through higher inflation, higher borrowing costs, or real returns that vanish once adjusted for purchasing power.
At RCM, our responsibility is clear. We do not predict political outcomes; we prepare portfolios using timeless risk management and investment principles. History shows that independence is the anchor of stability, but our approach is built to protect client capital whether independence holds or not.
Warm regards,
David and Mike
Disclaimer
Roosevelt Capital Management LLC is a registered investment adviser. The information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
Past performance is not indicative of future performance. Principal value and investment return will fluctuate. No guarantees or assurances that the target returns will be achieved, or objectives will be met are implied. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal.
While all the values used in this report were obtained from sources believed to be reliable, all calculations that underly numbers shown in this report believed to be accurate, and all assumptions made in this report believed to be reasonable, Roosevelt Capital Management LLC neither represents nor warrants the values, calculations or assumptions and encourages each prospective investor to conduct their own review of the audits, values, calculations and assumptions.