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Awesome video! Many thanks for putting this video up on the weekend. As you speak, I was thinking of Paul Volcker. History tells us that:
ReplyDeleteThe Federal Reserve board led by Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime rate rose to 21.5% in 1981 as well, which helped lead to the 1980–1982 recession, in which the national unemployment rate rose to over 10%.
Like you have been saying for many months that as much as Fed Powell mentioned of Volcker lately since Jackson Hole, Fed Powell does not have the low national debts like Volcker to allow him to do what he did in the '80s. Nonetheless, Fed Powell would like to avoid making the mistake of not raising interest rate enough and inflation would come back much higher than before. As a result, Fed Powell in my opinion would stay course of raising interest rates until inflation is significantly dropped off.
Yes, no doubt US economy is still good. In my opinion, because of the economy, it would be Fed Powell saving grace, recorded in the history book, for the mistake he made of not tackling inflation much earlier in the game. It would be much worst if we were to have stagflation.
I think the unsettled elections and the collapse of FTX are very interesting. You have been saying all along that crypto has been very risky and crypto has no backing from anything. Like the old saying, if it is too good to be true, it is probably so.
Thanks Sam! Yes, Volcker didn't have a debt bubble to pierce, which allowed for his aggressiveness... Powell, while you're right, would love to go down as the next Fed chief to slay inflation, he simply doesn't have the setup Volcker did... And that's, again, from a debt perspective, but also from the perspective of structural shifts that are on the other end of the spectrum from the shifts that were just occurring under Volcker.
DeleteVolcker was prominently on the scene when the likes of Ronald Regan and Margaret Thatcher were in the early stages of their respective top political positions... They ushered an era of a globalized, capital friendly, supply side (VERY DISINFLATIONARY) approach to leadership/economics... This is in direct opposition to where we are today... Today's regime is characterized by a DE-globalized, labor friendly (INFLATIONARY) approach to leadership/economics...
One could argue that the ultimate come-down from the late-70s/early 80s inflation was as much (if not more) about newfound globalization, and capital friendly regimes that it was Volcker's policies...
Here's an excerpt from my September 14 blogpost:
"...we simply haven't experienced inflation remotely to this degree since the days of Greenspan's immediate predecessor, Paul Volcker. And that, frankly, demands a Volckerian re-think of priorities for today's Federal Reserve.
Problem (big problem!) being, the underlying general setup today isn't remotely what it was when Volcker allegedly, in singlehanded fashion, slayed the 70s inflation dragon.
You see, back then we had the likes of Ronald Regan and Margaret Thatcher pumping supply side, globally-friendly economic policy into the world... I.e., they unleashed disinflationary forces that combined with Volcker's willingness to attack rising prices in a manner that his predecessors -- who operated within a labor-friendly, protectionist, inflationary regime -- simply couldn't successfully pull off.
Plus (big plus!), the US was sporting a mere 30% debt to GDP back in those days. I.e., the Fed could hike away without blowing up the credit markets... Today we're facing a debt load to GDP of 123%!! So, no can do on double-digit policy rates.
Legend has it that even Volcker -- himself being prone to recency bias -- was doubtful that his aggressive approach would actually do the trick.
Well, folks, we've come full circle. Globalization has, at least politically-speaking, run its course -- while wealth and income inequality have reached historic proportions. Therefore, the kinds of labor/consumer-friendly, protectionist, inflation-stoking policies that predated Volker, Regan and Thatcher are resoundingly back in vogue.
So what does that (along with historic debt to GDP) mean for present-day monetary policy? Well, it means that getting inflation back to the Fed's 2% target ain't gonna be easy -- not without breaking something in the process.
We'll see if, as some have suggested, the Fed doesn't actually articulate a goal other than 2% inflation at some point going forward... That's certainly within the realm of possibilities in our view...
Some form of yield curve control (à la the 1940s) -- where the Fed caps longer-term rates while allowing the economy to run somewhat hot -- to over time inflate away that debt to GDP number (i.e., inflate the economy faster than the debt piles up) may ultimately be on the table as well."
Thanks!
DeleteI have a question. What would happen to the world market, to oil, to the Euro market, and to the US equities if there were to a negotiation of a peace deal between Russia and Ukraine in 2023?
ReplyDeleteSafe to say that, initially, we'd see a sharp decline in the price of commodities, oil and wheat in particular, and a rally in both equities and debt... Beyond "initially" things would settle back, and again reflect the long-term structural realities of today...
DeleteThanks!
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