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Is Paul Volcker Right? Not This Time
It is hard not to admire Paul Volcker. He is that odd thing in contemporary America, a truly dedicated public servant to whom, it seems, making money in the private sector was always secondary. He is a straight shooter. He tells it like he sees it.
As Federal Reserve chairman, appointed by Jimmy Carter in 1979, he eventually broke the back of inflation by imposing a harsh monetary policy of very high interest rates. For this, he is canonized today.
Now, Volcker is saying in public speeches that we should be wary of inflation again, drawing parallels to the high-inflation 1970s that was so painful for the nation. Rising food and fuel prices sound awfully familiar. In other words, he is telling the central bank not to be too loose with monetary policy, that maybe they let rates go too low and it is time to stop the generosity.
But, in fact, we are not nearly in the same historical position as we were in then. Even by the early 1970s, when Richard Nixon was president, consumer price inflation had reached six percent, not on the basis of food and fuel price hikes, but the general rise in the price level. Already, business was getting accustomed to raising prices and workers to asking for higher wages. Many wage contracts were formally indexed to inflation. The recession of 1969-70 did not knock the inflation rate down very far.
After Nixon imposed a wage-price freeze in August 1971, which by the way Volcker helped design as part of Nixon's Treasury Department -- he had has always been an inflation hawk -- the paranoid president stepped on the fiscal gas and got his friend, the relatively new chairman of the Federal Reserve, Arthur Burns, to step on the monetary gas. They pumped up the economy so hard in 1972 so Nixon could win re-election, there was no turning inflation back without pain.
At the same time, crops around the world went bad, then in 1973 and 1974 OPEC quadrupled the oil price, and then Nixon ended controls, which had almost as much impact on inflation as OPEC had.
Inflation became deeply embedded. As inflation rose, business prices and wages rose to keep up, sending inflation still higher. People bought now when prices increased, rather than deferring purchases, because they thought inflation would go only higher. By the end of the decade, the CPI hit an annual rate of 13 percent.
Can we get to that point again? Sure. But we are not nearly there, not remotely there. Underlying inflation is not rising now, food and fuel prices are. Inflation at current levels, which are still below 4 percent, is almost certainly temporary. Why? Because the economy is weak, not strong as under the Nixon stimulus. Because food and fuel are not likely to keep rising at current rates, even if they stay at current prices. Because there is a reasonable chance food and fuel prices may actually come down rapidly once a speculative bubbles pops.
Because inflation is not embedded in our consumer and business decisions, in our wage setting, and in our interest rates. No one thinks the Fed won't step on the brakes far sooner this time then in the 1970s.
And, finally, given the depth of the credit crisis and the ongoing fall in house prices, there is a far bigger risk of worldwide economic cataclysm than there was in the 1970s.
So the Fed is doing the right thing now. Don't overreact to inflation now. Avoid the larger pain. If inflation keeps rising, which is unlikely, then apply the brakes mildly but persistently. It is highly likely this Ben Bernanke Fed will do that. If the economy turns the corner and starts up again, expect the Fed to raise short-term rates sooner rather than later.
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They are burning coal to make ethanol. Now how stupid is this with tax credits to do it.
BUILD ELECTRIC CARS DUMMY'S!!!!!!!!!!!
"...then in 1973 and 1974 OPEC quadrupled the oil price..." I LOVE THIS!
OPEC did this in response to Nixon devaluing the dollars that existed outside of The United States. OPEC wanted to recoup their losses on the dollars they already possessed. So.... Israel did have a small part to play in providing a pretext to do so.
The dollar has been devalued by, around, fifty percent over the last few years thanks to the fiscal policy of The Federal Reserve. They do know what they are doing. Because, in no small part, of this, oil will continue to rise.
The dollars days are numbered if this planned fiscal policy of The Fed continues. Look at Germany's Wiemar Republic. That is America's future if they current crop of Demo-Republican Partymembers, The Federal Reserve, and Wall Street are not replaced by a more rational capitalistic system.
I do not look forward to the day when I stop buying toilet paper and use the dollar to wipe my bottom. Because the toilet paper will be worth more.
For a different poin of view (one with actual figures) check this site out.:
http://www.urbansurvival.com/week.htm
There is even a chart from the Fed showing current bank reserves, which appear to have fallen off a cliff, dropping precipitously over the last year or 2 and are now in NEGATIVE NUMBERS that equal the positive reserves that banks carried just a few years ago.
Mr. Madrick is asking for our patience, as the banks and the fed and the current administration that allowed so much bankers mischief to take place haven't quite finished robbing us yet.
Wouldn't it be nice if someone, anyone in our government delt with anything remotely resembling reality? Let's look at this last economic "expansion". The total growth was the same as our increase in national debt. In other words, we borrowed every bit of growth. But look deeper, at the same time we added over 6 trillion in personal debt that doesn't show up at all in the growth, so it was lost completely. Why is this? Because during this time private sector jobs actually decreased. The republicans ran this so-called expansion completely on debt and growing the size of government by 45%. Sound conservative to anybody?
And the Democrats went along. So, what difference is their between the two parties, ultimately? None.
Then why don't you vote for a third party. I seem to recall only two parties in power over, oh say, the last one hundred years. That is enough time for the rot to set in.
Rising prices are not inflation though they may be a symptom of inflation. Inflation is the increase in the money supply in relationship to the total amount of goods and services available. Anyone notice that Uncle Alan stopped publishing the M3 numbers "because they have become too expensive to collect." Peter Schiff lays it out rather clearly. The Fed has deliberately inculcated inflation into the monetary system as a hidden tax on working slobs. I am not a big fan of capitalism, but capitalism does not require inflation. This country went through its first 150 years without consistent inflation, except during the Civil War, when paper money was introduced and then withdrawn, without consistent inflation. It's just when JP Morgan and John D. Rockefeller hoodwinked the American public in 1913 by getting Congress to pass an unconstitutional law establishing the Federal Reserve system, that inflation has become a "fact of life."
When you borrow your way out of a recession and defer taxes with money you don't have -- that effectively increases the money supply relative to goods. When you keep interest rates artifically low for year after year ... that effectively increases the money supply, relative to goods.
And this is exactly what has happened.
Who is paying the bankers to lie to us?
The Federal Reserve was created to deter inflation. What a terrible job it has done. Actually, has America suffered more inflation after The Fed was created?
And I do like the nickname of "The Fed". It is well Fed on the bloated corpse of America.
Wow, I almost lost it, till I read the comments. I am not insane, alone, or misinformed. Jeff, who is paying you to put out this nonsense? Ask anyone on the street who works for a living and shops for food and gas what the real rate of inflation is. CPI is crooked, I mean cooked statistics. And more and more middle class across the globe want their piece of the pie. Fuel and food going lower? I'm in recovery, but man, otherwise, I'd love to smoke whatever you have in your bong.
Why then, does not Congress do anything? Because, their are part of the corruption and rot in our government? And let us not even discuss the Administration.
Your entire premise is based on the current inflation rate being truthfully reported by the government. It's not.
They lie worse than Shatner's toupee; collapsing your whole house of cards.
Who is paying for this lie?
You and I.
"... food and fuel are not likely to keep rising at current rates... "
Maybe if you subscribe to the supply-side school of infinite resources. The fact of the matter is that we'd need 7-8 Earths worth of arable land and extractable hydrocarbons to lift the developing world up to what we would consider a minimally middle-class standard of living, and that is precisely what globalization promises to do.
If we're going to have 8+ billion people on this planet, then most of them need to live in pre-industrial subsistence communities. If we integrate these communities into the global economy, then several billion people will starve, and we will be headed toward a global oceanic anoxia that may rival the Turonian stage of the Cretaceous Epoch.
Quite frankly, if we're debating monetary policy within the constructs of an expansionary economic system, then nobody is right. The only correct answer is that we need to quarter the Earth's human population AND reduce our per-capita energy consumption by an order of magnitude within two generations. We have to choose between adopting a contractionary economic system or extinction, and I bet we choose the latter.
Capitalism, as currently practiced, needs to keep people poor. If everyone was rich, bread would cost $10 a loaf or more. Why are our elected and unelected officials lying to us and who is paying them to lie? Who bought them?
This is tragically uninformed hogwash. That's mainly because we don't calculate the CPI honestly like we did back in the 60's and 70's. Today's CPI is a rigged fantasy.
In the 90's they added statistical gimmicks to artificially lower the CPI. These tricks include geometric weighting, substitution and seasonal adjustments, among others. The result is the CPI rate of inflation is nowhere near the real rate of inflation. This helps keep payments that are tied to the CPI artificially low as well as hiding bad policy that creates massive inflation.
If you use the old formulas, the CPI would have been between 9% and 13% for most of the Bush presidency. So yes, it is absolutely as bad as it was back in the Nixon era.
But hey, let's all pretend inflation is only 4%. PROBLEM SOLVED!
While a CPI of 9% to 13% may be overstating it a bit, I agree the article is hogwash. Forget CPI and look what's happened to the middle class. Back in the 70's when I started working full-time ...
1) I could buy a new car and pay it off with three-year financing. Today, it takes a minimum of five years .
2) My company-sponsored health insurance cost me nothing. Today, it costs me $350 out-of-pocket each month.
3) Houses were bought and financed with 30-year fixed rate mortgages. Today, it requires gimmicky ARM's or 40 to 50-year fixed rate mortgages to buy a decent home.
4) I had a contributory pension plan which would furnish a more than comfortable retirement. Today, the company puts a maximum of $2000 a year into a 401(k) pension fund which means you better get some serious compounded interest for a comfortable retirement.
Speaking of bogus CPI numbers, check out the following web site for other bogus government data like GDP, unemployment rates, etc:
http://www.shadowstats.com/
Why are you poorer now? Which two "independent" parties have controlled our government over this period? And who is paying them? And why is The Fed deliberately inflating money supply? How long before the dollar completely collapses due to the poor fiscal policies of The Fed and our government? Why is our government selling us out and who is paying them to do so?
I'm not an economist, but my gut is screaming that this article is bullshit.
It's not "inflation" I'm worried about; it's the systematic destruction of the middle class so that the wealthy elite will have a workforce that is too beaten down to complain.
A corollary goal might be to reduce benefits to older people to the point where they die earlier. If they're not useful in the slave labor pool, they're expendable.
Every neocon needs to be tried, convicted, and imprisoned for this attack on America.
Elites! What a dirty word. They don't exist! There is no more aristocracy in the world. Because, us humans have learned. We've evolved past the need for an aristocracy.... LOL.
Bernanke thinks he's running a public company and looking only at quarter to quarter results. The author of this blog would have us believe:
A). Core inflation is actually under 5% (It is to laugh!)
B). Employment numbers are good. (Nonsense)
C), Bernanke knows how to drive this car (Stevie Wonder would be a better driver)
D). That the Fed is spot on.
Presumably Bernanke has pics of Madrick en flagrante with a goat. How else to explain such concentrated, incorrect, fallacious and fatuous commentary?
Meh, Jeff won't post this, but this really reads like something out of the GOP reality distortion field.
Shame on HuffPo for giving voice to this numbskull.
Bernanke is running a private corporation dedicated to profits. Congress has no effective oversight of The Federal Reserve. Remember that surprise taxpayer financed loan to bail out Bear Stearns? Congress was surprised when that was announced.
There are two worlds at play here. The Wall Street world and The Poor. And The Poor are losing. You only think you are rich. Think about all those dollars you have saved in your 401K and other financial instruments. CDOs are financial instruments also, and they collapsed.
As for the Bullshit Economic Stats the government force feeds to the gullible, ill-educated masses. Why are they lying and who is paying them to lie to us? Who is benefiting from this? Follow the money.
I suggest it will not be possible to separate "energy inflation" from "core inflation," since energy inflation will affect every product/service that requires transportation/shipping. If anything, this strikes me as a more pernicious form of inflation, since it is not associated with wage increases -- which means prices go up and people's ability to handle the increases does not go up.
GRRRRRRR! How can you be so dense?!?
"Underlying inflation is not rising now, food and fuel prices are. Inflation at current levels, which are still below 4 percent, is almost certainly temporary."
"By the end of the decade, [the 70s] the CPI hit an annual rate of 13 percent."
The reason that inflation right now is only 4% is WE CHANGED THE FREAKING RULES!!! If we were to go by the methods of measuring inflation that we used before Reagan (which you happily quote as 13%) inflation RIGHT NOW IS ALMOST 12%!!!!!!!
http://www.shadowstats.com/alternate_data
Your comparison is not apples and oranges. Your comparison is so invalid, you've gone past apples and oranges, all the way out to comparing apples and rotten hamburgers.
Take a good look at the CPI numbers that I linked to above. Scroll down to the Annual Consumer Inflation chart.
Although we've been told that inflation has been under control since '83, inflation has actually been on a steady increase ever since '87, when Volcker left office. The man is an expert on inflation. You should take another look at what he has to say.
The Federal Reserve has failed in its job of controlling inflation. Actually, they have made a ton of money by doing just the opposite.
We look upon our system as being incorruptible despite the glaring evidence we see today in the Statistics. Ask yourself, "Just what exactly are they hiding?" After all, many know that the our institutions are lying to us. But, what is the real secret?
Everyone here is focused on the obvious. Your keeping your eye on the brightly colored ball. The ball is neon yellow to attract your attention. Keeps you distracted from what is really going on. What is really going on?
Yep, the thesis of the article was based upon erroneous data. The current inflation rate is a lie. If we were dealing with honest numbers, TIPS would be yielding 14%, SSI recipients would be getting 12% raises instead of 2%, Social Security recipients would be getting far more, workers would be getting 15% raises, and interest rates would be going through the roof. This is the reality of what we're in. Policy is being determined on the basis of Dept. of Labor statistics that are deliberately falsified so that the common people get screwed while the plutocracy makes a bundle. Unfortunately, the masses get their information from CNN and Fox, so by the time they realize what is happening it will be too late. The bandits will have gotten away with their plunder and the rest of us will pay for it.
Capitalism has failed. At least this version of it.
The money-men lied. America died. Economically speaking. Manufacturing left the US. Banking is on the verge of leaving the US. The very top of our government is capable of leaving the US. Most Americans, in the event of an economic collapse, cannot leave the US. We are stuck here. Special interests have spent their euros, yuans, and pesos to fill the coffers of our politicians so they can jigger the rules in their favor.
Americans will be left in the fields if we collapse. Dying. America will become a warning to the rest of the world. They will look at our economic corpse. Already, we are on life-support provided by the bankers. Before we went into ICU, the took our wallet, stole our watch, and confiscated the gold wedding ring. The money-men who played their game according to their rules and sold us the Kool-Aid. Just look at the jiggered statistics.
You may be right, in terms of core inflation, but every time the Fed lowers the interest rates, the dollar takes another hit -- that will increase inflation, so much that we buy is imported. It is an integral part of economics that money is a stable commodity.
Does the system have to be this way? If so, why was America so much better off in terms of inflation before the creation of The Fed? Sure, we had to take hits because foreign markets affected America's economy. Why, after the creation of The Fed has inflation gone so out of control?
We can see a problem coming at us at breakneck speed. So what you are saying is that we should ignore it until it is too late to change the dynamics with small, corrective steps and wait until it takes major surgery for the patient to survive. Sounds about right... isn't that what the GOP is doing all the time? Except that they then deny the surgery to the patient because it is "too expensive".
Major change requires a revolution. Are you willing to participate in one? America is becoming a police state. After all, the government spies on Americans more now, and so brazenly open about it, in the name of terrorism. Yet, terrorism prosecutions are DOWN.
I don't advocate revolution. However, the political process is broken. Not only broken, but owned by special interests. Call those interests The New Aristorcracy. Congress and the Administration, more and more, resemble the old Soviet Politburo and Premiere. They lied to the their people about how good it was before completely collapsing.
If that collapse does happen, look to the years after the Soviet collapse for a taste of just how bad it will be.
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Posted May 20, 2008 | 08:47 AM (EST)