Volker:Nervous About Inflation; China Chose to Hold Dollars

[Munger]

When talk at the Journal’s Future of Finance Initiative turned to inflation, participants turned the resident expert: Paul Volcker. He had a lot to say.

The former Federal Reserve chairman touched on a number of subjects ranging from the Fed’s communication strategy to China’s concerns about the U.S. debt load. The latter sparked questions over whether the U.S. could default on its debt — it effectively had done that at least once, Yale professor Robert Shiller noted. When President Roosevelt took the U.S. off the gold standard and unilaterally devalued the dollar, the move wiped out some 75% of dollar-denominated debt. “Maybe I shouldn’t even mention this,” Shiller joked.

Volcker, who as head of the White House’s Economic Recovery Advisory Board is a key adviser to President Obama, expressed concerns about inflation as a way of dealing with mounting debt. “One historic way of getting yourself out of this situation — or trying to — is to inflate. Either you do it deliberately or you allow it to happen,” he said. “And if we permit that to happen then I think all these dollars will come tumbling down on us.” He said the U.S.’s greatest strength is its history and reputation, and suggested that shouldn’t be put at risk.

He also critiqued the Fed. “I get a little nervous when I see the Federal Reserve announcements that they want have the amount of inflation that’s conducive to recovery,” Volcker said. “I don’t know what ‘the amount of inflation that’s conducive to recovery’ would be appropriate. I’d much rather they say that they want to maintain stability in the currency, which is conducive to confidence and recovery.”

As for China’s criticism of the U.S., Volcker was unsympathetic. “I think the Chinese are a little disingenuous to say, ‘Now isn’t it so bad that we hold all these dollars.’ They hold all these dollars because they chose to buy the dollars, and they didn’t want to sell the dollars because they didn’t want to depreciate their currency. It was a very simple calculation on their part, so they shouldn’t come around blaming it all on us.”

The 81-year-old elder statesman commented on the current state of the U.S. economy: “We’re in a government-dependent financial system; I never thought I would live to see the day… We’ve got to fight to get away from that.”

http://blogs.wsj.com/economics/2009/...ars/tab/print/

[aaron]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

When they brought Volcker in, I thought it must be for a purpose. I think he is there to replace Bernanke once inflation starts sky-rocketing. Volcker's name alone will lower inflation a few percentage points. I am scared what he might do if given half a chance. He'd sell tons of gold onto the market. He'd jack interest rates up 30%. He'd throw currency into the Fed's incinerator with his own bare hands. He's old and he is mean and I would not want to mess with him.

[doom&gloom]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

I think Volcker is just there for 'window dressing' -- they ask him his thoughts and move along doing whatever they want anyway. At his age there is no way he takes over Treasury, Fed, or any other position anymore. Why would he want the stress?

[bpr]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

When they brought Volcker in, I thought it must be for a purpose. I think he is there to replace Bernanke once inflation starts sky-rocketing. Volcker's name alone will lower inflation a few percentage points. I am scared what he might do if given half a chance. He'd sell tons of gold onto the market. He'd jack interest rates up 30%. He'd throw currency into the Fed's incinerator with his own bare hands. He's old and he is mean and I would not want to mess with him.

This might be my favorite post ever on iT. I think he's there as a possible replacement for someone, maybe Ben, maybe Tim. Volcker's presence is far more important than any cabinet-level post Obama has made. Fact is, if those two can't magically fix things, Volcker's voice is going to get louder and meaner, and I think the administration will listen on bended knee.

I think Volcker is just there for 'window dressing' -- they ask him his thoughts and move along doing whatever they want anyway. At his age there is no way he takes over Treasury, Fed, or any other position anymore. Why would he want the stress?

Why would he be involved at all if stress were an issue? You may be right, but I think you're discounting the sense of public service these folks have. Even when they're crushing us they think it's for our own (and the country's) good. And when you think you're that right, the ego/legacy boost accompanying a successful turnaround is undeniable.

[GRG55]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

When they brought Volcker in, I thought it must be for a purpose. I think he is there to replace Bernanke once inflation starts sky-rocketing. Volcker's name alone will lower inflation a few percentage points. I am scared what he might do if given half a chance. He'd sell tons of gold onto the market. He'd jack interest rates up 30%. He'd throw currency into the Fed's incinerator with his own bare hands. He's old and he is mean and I would not want to mess with him.

On whose watch did FIRE economy v.2 really get going?

C'mon folks, remember your history, and don't fall for the hype...:p

[World Traveler]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

I read an article 2-3 months ago quoting Volcker, who said that interest rates as high as in late '70's, very early '80's could not be done today, it would be be too harmful to the economy in today's environment.

It was in response to a question regrading the potential inflationary effects of all the government money being thrown at the economy and how that could be controlled if things got out of hand (i.e. a serious inflation).

[jtabeb]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

On whose watch did FIRE economy v.2 really get going?

C'mon folks, remember your history, and don't fall for the hype...:p

Reagan then bill clinton, correct?

[nero3]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

Volcker, and Summers don't get along, and I think Volcker is being ignored by the administration. That's what cause him to do this outbursts.

[nero3]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

One more thing on volcker:

As seen by the COP chart (oil company), and John Deere, tractor company, all inflation things, inflation was perfectly under control, until Alan Greenspan took over. Since then inflation have been going crazy ,and the US treasury market have been a huge bubble, being worth more and more, while inflation have increased more and more. He understands that with his post in the NY times or wall street journal when he said already a few years ago that the US was skating on increasingly thin Ice. I think he is one of the few good guys out there.

http://finance.yahoo.com/echarts?s=C...urce=undefined

[GRG55]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

One more thing on volcker:

As seen by the COP chart (oil company), and John Deere, tractor company, all inflation things, inflation was perfectly under control, until Alan Greenspan took over. Since then inflation have been going crazy ,and the US treasury market have been a huge bubble, being worth more and more, while inflation have increased more and more. He understands that with his post in the NY times or wall street journal when he said already a few years ago that the US was skating on increasingly thin Ice. I think he is one of the few good guys out there.

http://finance.yahoo.com/echarts?s=C...urce=undefined

I'd like to know what flavour Kool-Aid did you choose? :p

The inflation during the FIRE economy era was in FINANCIAL ASSETS, not oil, not tractors, not gold, not any hard asset or "typical" inflation hedge. You are looking in the wrong place. Just like the Fed governors, that apparently couldn't see a bubble, any bubble, until it burst in their faces.

Reagan then bill clinton, correct?

Paul Volcker.

After eight years in the position, Volcker handed off the Fed Chairmanship to Alan Greenspan on August 11, 1987. On October 19, 1987 the DJIA dropped more than 22%...at the time the largest one-day percentage decline in US stock market history.

This was the first crash of over-inflated financial instruments during FIRE economy v.2. The conditions that led to the inflating of financial instruments and this collapse did NOT occur in the eight-and-one-half weeks that Alan Greenspan was the Fed head.

Paul Volcker rightly deserves credit for putting an end to the persistent stagflation of the 1970s. Even more, he deserves respect for his high personal standards of ethical conduct, in this era of incompetent politicians and corrupt business leaders. However, the foundation of the FIRE economy was built on his watch, and the first clear indications that the Fed was participating in steering things on a path to disaster were in October 1987. In the years after, Alan Greenspan and cohorts merrily continued to build a multi-story house of cards, on Volcker's foundation.

[jk]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

I'd like to know what flavour Kool-Aid did you choose? :p

The inflation during the FIRE economy era was in FINANCIAL ASSETS, not oil, not tractors, not gold, not any hard asset or "typical" inflation hedge. You are looking in the wrong place. Just like the Fed governors, that apparently couldn't see a bubble, any bubble, until it burst in their faces.



Paul Volcker.

After eight years in the position, Volcker handed off the Fed Chairmanship to Alan Greenspan on August 11, 1987. On October 19, 1987 the DJIA dropped more than 22%...at the time the largest one-day percentage decline in US stock market history.

This was the first crash of over-inflated financial instruments during FIRE economy v.2. The conditions that led to the inflating of financial instruments and this collapse did NOT occur in the eight-and-one-half weeks that Alan Greenspan was the Fed head.

Paul Volcker rightly deserves credit for putting an end to the persistent stagflation of the 1970s. Even more, he deserves respect for his high personal standards of ethical conduct, in this era of incompetent politicians and corrupt business leaders. However, the foundation of the FIRE economy was built on his watch, and the first clear indications that the Fed was participating in steering things on a path to disaster were in October 1987. In the years after, Alan Greenspan and cohorts merrily continued to build a multi-story house of cards, on Volcker's foundation.

i read that history a little differently. volcker et al couldn't crush inflation without raising rates enough to put the u.s. into a significant recession. bonds, aka at the time as "certificates of guaranteed confiscation," had been selling off for some time- rates didn't just spike from low levels, they built a base. those bonds had to benefit exactly to the degree that volcker succeeded in lowering inflationary expections. thus he couldn't kill inflation without making those sold-off bonds incredible long term winners. the resuscitation of the bond market then triggered the rise in equities. the real question, to which i don't think we really know the answer, is whether volcker would have reacted to the '87 crash in the same manner as greenspan. it was the "rescue" after the '87 crash that marked the first issue of the "greenspan put."

[FRED]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

i read that history a little differently. volcker et al couldn't crush inflation without raising rates enough to put the u.s. into a significant recession. bonds, aka at the time as "certificates of guaranteed confiscation," had been selling off for some time- rates didn't just spike from low levels, they built a base. those bonds had to benefit exactly to the degree that volcker succeeded in lowering inflationary expections. thus he couldn't kill inflation without making those sold-off bonds incredible long term winners. the resuscitation of the bond market then triggered the rise in equities. the real question, to which i don't think we really know the answer, is whether volcker would have reacted to the '87 crash in the same manner as greenspan. it was the "rescue" after the '87 crash that marked the first issue of the "greenspan put."

Best quote from the article: “We’re in a government-dependent financial system; I never thought I would live to see the day… We’ve got to fight to get away from that.” – Paul Volcker, March 24, 2009

Yes, let’s get away from that.

Volcker tossed the hot potato to Greenspan a few months before the market crashed.

Greenspan tossed it to Bernanke a year before the next big crash.

Even if Volcker did not knowingly launch the FIRE Economy, why didn't he speak up more when all of these risks were building in the system?

Because Volcker is a politician, that's why. Now here he is scratching his head and wondering what happened. Time for the Volcker glorification to end. There are no heroes in central banking.

[jk]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

it takes a hell of a politician to get sign off on the biggest recession since the depression [til today's]. that's what volcker did, and he slayed the inflation dragon of the 60's- '70s. i agree, though, that he did not deliver financial nirvana and freedom from all future financial crises and contradictions. the inflation of the 60's and 70's set up the disinflation of the '80s-'90s, and the concomitant growth of the fire economy.

the inflation of the 60s-70s followed from the guns AND butter economic policies under johnson. this was an earlier example of the unwillingness of politicians to bite the bullet and allow the system to experience some pain.

greenspan combined the cowardice of most politicians with an ideological aversion to using the regulatory powers available to him at the fed. he was exactly as much a true leader at the fed as he was when he put on his "win" ["whip inflation now"] button as an economic advisor.

so, fred, let's hear the long list of politicians who consciously and willingly chose immediate economic pain when it was the best long-run choice for the country.

[nero3]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

I'd like to know what flavour Kool-Aid did you choose? :p

The inflation during the FIRE economy era was in FINANCIAL ASSETS, not oil, not tractors, not gold, not any hard asset or "typical" inflation hedge. You are looking in the wrong place. Just like the Fed governors, that apparently couldn't see a bubble, any bubble, until it burst in their faces.



Paul Volcker.

After eight years in the position, Volcker handed off the Fed Chairmanship to Alan Greenspan on August 11, 1987. On October 19, 1987 the DJIA dropped more than 22%...at the time the largest one-day percentage decline in US stock market history.

This was the first crash of over-inflated financial instruments during FIRE economy v.2. The conditions that led to the inflating of financial instruments and this collapse did NOT occur in the eight-and-one-half weeks that Alan Greenspan was the Fed head.

Paul Volcker rightly deserves credit for putting an end to the persistent stagflation of the 1970s. Even more, he deserves respect for his high personal standards of ethical conduct, in this era of incompetent politicians and corrupt business leaders. However, the foundation of the FIRE economy was built on his watch, and the first clear indications that the Fed was participating in steering things on a path to disaster were in October 1987. In the years after, Alan Greenspan and cohorts merrily continued to build a multi-story house of cards, on Volcker's foundation.

I disagree with you. The commodity companies, were flat during his term, the dollar was strong, inflation was low, the stock market was never expensive or in a bubble, not even after the 1987 crash. After he left, or maybe a little before after the plaza accord already in 1986 to when the economy overheated in 1987 inflation became a problem, and the huge bubble in US treasuries began.

[nero3]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

I read an article 2-3 months ago quoting Volcker, who said that interest rates as high as in late '70's, very early '80's could not be done today, it would be be too harmful to the economy in today's environment.

It was in response to a question regrading the potential inflationary effects of all the government money being thrown at the economy and how that could be controlled if things got out of hand (i.e. a serious inflation).

That's it. Monetize treasuries, and all sorts of stuff, sending the US towards hyperinflation. Volcker seems to know what's coming. The idea that computers, flat screen tv's, a ton of sugar and all that cheap stuff made by cheap labour is going to get even cheaper, at least to me, seems perverse, it have to get more expensive, not cheaper, inflation, not deflation. The something for nothing era, is probably over, if the bubble can't be blown up further, but even if that happen, the ratio of non producing service jobs hours, to a poor sugar worker's hour pay, what is it now, a 100:1 or more ?, is probably heading in a way that benefit the sugar worker, not the service job employee, as in inflation, not deflation.