Volker:Nervous About Inflation; China Chose to Hold Dollars

[ssvasulu]

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

I remember (but can't post links) Volcker warning about building imbalances somewhere towards the end of 2005. He kept warning about recycling of dollars by foreign central banks, as not good for America. I don't remember he warning about paying debt with new debt, but at least he warned about dollar recycling before.

[FRED]

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.

EJ writes in:

Carter appointed Volcker in 1979.

It took Volcker four years, while he was president of the Federal Reserve Bank of New York from 1975 to 1979, to build the consensus necessary to execute on a plan that included throwing Carter under the bus, along with all of Latin America and many countries around the world. It was the last unilateral monetary action that the U.S. will ever take.

This is why we have spent years interviewing various people in our network looking for the new leader who will take us into a new regime from the Volcker launched and Greenspan developed FIRE regime. When we saw Bush appoint Bernanke in 2006 we knew we had an ideological bag man on our hands, the opposite of a Volcker, an academic with limited political skills, not quite a Burns but no Volcker, either.

Volcker is not a leader or boat rocker. He is a consensus builder. The FIRE Economy leadership wanted low inflation because Nixon then Carter had turned many Wall Street brokerage firms' stocks into penny stocks. The ideology behind the consensus that formed appealed to Volcker--free markets, deregulation, limited government. But the fact is that industrial economies can run effectively with inflation rates as high as 40% per year, as Korea's did during its early industrialization growth phase, but finance-based economies cannot function with inflation rates much above 3%.

All that said, Volcker is an honest person, and unlike Greenspan, not a gun for hire. Volcker is high integrity and follows his beliefs. He thought he was doing the right thing, and in a way he was, but for the wrong people. So did Milton Friedman. Both men, in my estimation, were used.

[*T*]

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

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.

Volker is that most dangerous of animals, the clever politician.
He will let Summers/Rubin/Geithner/Bernanke fail first then centralise power to himself when they are cleared out.

[bill]

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

EJ writes in:

Carter appointed Volcker in 1979.

It took Volcker four years, while he was president of the Federal Reserve Bank of New York from 1975 to 1979, to build the consensus necessary to execute on a plan that included throwing Carter under the bus, along with all of Latin America and many countries around the world. It was the last unilateral monetary action that the U.S. will ever take.

This is why we have spent years interviewing various people in our network looking for the new leader who will take us into a new regime from the Volcker launched and Greenspan developed FIRE regime. When we saw Bush appoint Bernanke in 2006 we knew we had an ideological bag man on our hands, the opposite of a Volcker, an academic with limited political skills, not quite a Burns but no Volcker, either.

Volcker is not a leader or boat rocker. He is a consensus builder. The FIRE Economy leadership wanted low inflation because Nixon then Carter had turned many Wall Street brokerage firms' stocks into penny stocks. The ideology behind the consensus that formed appealed to Volcker--free markets, deregulation, limited government. But the fact is that industrial economies can run effectively with inflation rates as high as 40% per year, as Korea's did during its early industrialization growth phase, but finance-based economies cannot function with inflation rates much above 3%.

All that said, Volcker is an honest person, and unlike Greenspan, not a gun for hire. Volcker is high integrity and follows his beliefs. He thought he was doing the right thing, and in a way he was, but for the wrong people. So did Milton Friedman. Both men, in my estimation, were used.

and now his new job,,,tax man
http://www.bloomberg.com/apps/news?p...5to&refer=home

Obama Asks Volcker to Lead Panel on Tax-Code Overhaul (Update4)
March 25 (Bloomberg) -- President Barack Obama is putting former Federal Reserve Chairman Paul Volcker in charge of a tax-code review aimed at closing loopholes, streamlining the law and generating revenue, budget Director Peter Orszag said.
Volcker, 81, who heads the president’s Economic Recovery Advisory Board, is being asked to take a look at the laws in an effort to rebalance the tax system.
Orszag said the review, given a deadline of Dec. 4, is being ordered to make recommendations on steps to simplify the code, built over the last 96 years, in ways that would reduce tax evasion and what he called “corporate welfare.”
“There are hundreds of billions of dollars in uncollected taxes each year,” Orszag said in a conference call. The Volcker board “will be examining ways of being even more aggressive on reducing the tax gap.”

[GRG55]

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

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.

The stock market may not have been "expensive" AFTER the 1987 crash, but it sure must have been BEFORE that crash...;)

You are arguing there was a policy discontinuity as the Volcker Fed gave way to the Greenspan Fed. I will argue you cannot make that case with any durable argument.

For example commodities were smashed when Volcker ramped rates in the early 1980s. They did not recover until after 1999. Commodities were in a secular decline for 20+ years under both Volcker AND Greenspan. In fact Greenspan presided over more years of general commodity decline than Volcker did.

But if you wish to believe that Volcker is a hero and Greenspan a goat, fine by me. It's a free world, and you have lots of company.

[nero3]

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

The stock market may not have been "expensive" AFTER the 1987 crash, but it sure must have been BEFORE that crash...;)

You are arguing there was a policy discontinuity as the Volcker Fed gave way to the Greenspan Fed. I will argue you cannot make that case with any durable argument.

For example commodities were smashed when Volcker ramped rates in the early 1980s. They did not recover until after 1999. Commodities were in a secular decline for 20+ years under both Volcker AND Greenspan. In fact Greenspan presided over more years of general commodity decline than Volcker did.

But if you wish to believe that Volcker is a hero and Greenspan a goat, fine by me. It's a free world, and you have lots of company.

It was more that it was cheap in 1982. In 87, the market as a whole was normally priced. Even there of course was individual high fliers.

[charliebrown]

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

I am a simple man who views the world simply. Look at total U.S. Debt to GDP. Two spikes guess where they are?? 1920's reached 300%, 2008, reached 360% of GDP. The 2008 peak started in about 1982. Who was at the controls then? Hmm??



Now the question is do we pay/write this debt down to the historical average of roughly 200% or ... like in the 40's, over shoot to 140%? You know when running my household, I never liked going over 200% of my income in debt. That includes all debt; credit card, mortgage, autos, school loans etc. I now live debt free. Is it a coincidence that my comfort level with my personal debt is about the same as the historical norm? I based my 200% level on my sleep good at night feeling based upon the interest payments that had to be met and my income. Once over 200%, i really had little discretionary income left. I only breached this point once in my life when I bough a new home, and then had to buy a new car. I paid down the car quickly.

[nero3]

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

I am a simple man who views the world simply. Look at total U.S. Debt to GDP. Two spikes guess where they are?? 1920's reached 300%, 2008, reached 360% of GDP. The 2008 peak started in about 1982. Who was at the controls then? Hmm??



Now the question is do we pay/write this debt down to the historical average of roughly 200% or ... like in the 40's, over shoot to 140%? You know when running my household, I never liked going over 200% of my income in debt. That includes all debt; credit card, mortgage, autos, school loans etc. I now live debt free. Is it a coincidence that my comfort level with my personal debt is about the same as the historical norm? I based my 200% level on my sleep good at night feeling based upon the interest payments that had to be met and my income. Once over 200%, i really had little discretionary income left. I only breached this point once in my life when I bough a new home, and then had to buy a new car. I paid down the car quickly.

I think it could be possible to take it up to 500 %. I think that's what's going to happen. Remember it's just a number. If real interest rates are negative, it will probably increase.

[GRG55]

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

I think it could be possible to take it up to 500 %. I think that's what's going to happen. Remember it's just a number. If real interest rates are negative, it will probably increase.

"...it's just a number..."

"...deficits don't matter..."

"...sub-prime is contained..."

"...inflation expectations are well anchored..."

"...the US economy is resilient..."

"...there is no evidence the US is in recession..."

"...holy shzt, what just happened..." [I made that last one up ]

Problem is you could well be proved correct, because as you say it's just a number, and the denominator might play a bigger role than people expect.

[nero3]

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

and now his new job,,,tax man
http://www.bloomberg.com/apps/news?p...5to&refer=home

They are really doing what they can to get him out of the way.

[charliebrown]

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

The only one who can borrow at below real rates is Uncle Sam.
AA corporate rates are north of 6% and climbing. The only reason
why Mortgages rates are down is the USg is backing them. Once the credit rating of said institution starts falling we'll see what happens.
Can the USg make up for private sector, and state an local government pull backs? Would anyone in their right mind lend 250K to a young couple, with 30 year terms at 4.8%?? They wont lend the money to Walmart or McDonalds at that rate.

I also agree with GRG5 that we may see the denominator of this ratio decline. If debts stay constant, and we have a 10% reduction in GDP,
well hit 400% with no change in debt level.

[Guest]

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

GRG55 - I'm more in tune with Nero3 and JK's reading of this. You want to cite the 1987 crash as an expression of FIRE economics distortions which can be hung around the Volker FED's neck, but that seems like a reach to me. You could expand that simile to encompas multiple other even prior market crashes and postulate there were release valves for FIRE economics - which obviously weakens the argument. The 1987 crash was not a clear cut case of FIRE economics backing up the plumbing and causing the crash, at least it's not apparent to me. The very rapid recovery from that crash in itself suggests that this crash was not an expression of already severely distorted FIRE economics.

It was more that it was cheap in 1982. In 87, the market as a whole was normally priced. Even there of course was individual high fliers.

[jk]

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

GRG55 - I'm more in tune with Nero3 and JK's reading of this. You want to cite the 1987 crash as an expression of FIRE economics distortions which can be hung around the Volker FED's neck, but that seems like a reach to me. You could expand that simile to encompas multiple other even prior market crashes and postulate there were release valves for FIRE economics - which obviously weakens the argument. The 1987 crash was not a clear cut case of FIRE economics backing up the plumbing and causing the crash, at least it's not apparent to me. The very rapid recovery from that crash in itself puts the lie to the fact that this crash was an expression of already severely distorted FIRE economics.

i think the '87 run up and crash was the product of portfolio insurance, aka dynamic hedging. this notional "insurance" allowed portfolio managers to take on more risk and leverage on the way up, then caused a melt-down feedback loop on the way down, as equity selling begat futures selling begat more equity selling by the arbitrage which closed the loop. i only go into this because i think we're seeing the same thing now, but in the credit markets instead of the equity markets. cds provide the "insurance", mark to market writedowns the loop-closing function.

[Guest]

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

IMO Nero3 is on to something solid. His viewpoint is a breath of fresh air in the "John Steinbeck - Grapes of Wrath" flavored atmosphere that has prevailed here recently. Smart cookie.

i think the '87 run up and crash was the product of portfolio insurance, aka dynamic hedging. this notional "insurance" allowed portfolio managers to take on more risk and leverage on the way up, then caused a melt-down feedback loop on the way down, as equity selling begat futures selling begat more equity selling by the arbitrage which closed the loop. i only go into this because i think we're seeing the same thing now, but in the credit markets instead of the equity markets. cds provide the "insurance", mark to market writedowns the loop-closing function.

[GRG55]

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

GRG55 - I'm more in tune with Nero3 and JK's reading of this. You want to cite the 1987 crash as an expression of FIRE economics distortions which can be hung around the Volker FED's neck, but that seems like a reach to me. You could expand that simile to encompas multiple other even prior market crashes and postulate there were release valves for FIRE economics - which obviously weakens the argument. The 1987 crash was not a clear cut case of FIRE economics backing up the plumbing and causing the crash, at least it's not apparent to me. The very rapid recovery from that crash in itself suggests that this crash was not an expression of already severely distorted FIRE economics.

The immediately prior market crash comparable to 1987 in terms of magnitude was 1929. That marked the beginning of the end of FIRE economy v.1.

This does not weaken the argument at all Lukester.

However, at the end of the day it really does not matter. Dissecting the chicken entrails of market history is an exercise in seeing what we want to see, coloured by what we believe ["I'll see it when I believe it"]. What you see is different from what I see. So be it.