A Little Volcker Rerun

No, not from the Fed but a forced recession

Submitted by FEDwatcher

Inflation was the hot topic for Biden’s term. Transitory was the initial pitch. When that didn’t pan out, outright denial was the tactic deployed by the media. The other issue was that we had a mini-recession that ended swiftly thanks to explosive government spending and lies. We have been in one for a while but no one slaps the label on it for broader society to acknowledge. This offers a tactic deployed before to wring inflation out of an economy. Do not look to Chairman Powell. It will be Trump’s admin that triggers this and applies the stick former Chairman Volcker used.

In the annals of American economic history, few figures loom as large as Paul Volcker, the cigar-chomping colossus who, in the early 1980s, wrestled inflation to the ground with a tenacity of a custom bred pitbull. At 6 feet 7 inches, Volcker was a physical giant, but it was his intellectual heft and moral resolve that made him the scourge of double-digit price spirals, a feat that restored the dollar’s dignity and, not incidentally, the nation’s confidence in its economic stewardship. His tenure as Fed Chairman, beginning in 1979 under Jimmy Carter and extending through Ronald Reagan’s first term, stands as a monument to the proposition that sometimes the cure, though bitter, must be swallowed whole. The ‘70s were a decade of can-kicking and avoiding consequences. Volcker was done with that because the rest of the world have developed enough to begin to dictate terms to America.

The late 1970s were a time of economic dyspepsia. Inflation, that invisible tax, had climbed to an awful 13.5 percent by 1980, a figure that mocked the post-war promise of stability. The New Deal consensus was over, and America needed to adjust for the emerging new world well out of the shadow of WW2. This was a multivariable issue as profligate government spending, the OPEC oil shocks, and a monetary policy that had grown loose under Volcker’s predecessors all fueled inflation. The Fed, once a sentinel of price stability, had become a handmaiden to political expediency, printing money to paper over fiscal sins. The result was a malaise (Carter’s word) that eroded savings, confounded wage-earners, and turned the American Dream into a mirage.

Enter Volcker, a man whose face suggested a dour preacher and whose demeanor bespoke an Old Testament prophet. Appointed by Carter (driven to whip inflation now), he was no stranger to the dismal science, having served as President of the New York Fed. But it was his diagnosis of inflation’s root (excessive money supply) and his prescription (jack up rates to cause a recession) that set him apart. On October 6, 1979, in a press conference that might as well have been delivered from a preacher’s pulpit, Volcker announced a radical shift. The Fed would target the money supply directly, letting interest rates climb as high as necessary to choke off inflation. It was a declaration of war on easy money, and the casualties would be many. He was choking off economic activity, and needed to in order to destroy the free-spending economy that had run wild for years. Crashing the plane was part of his master plan.

The Fed’s benchmark rate, which stood at 11 percent when Volcker took office, soared to 20 percent by mid-1981. Borrowing became an act of masochism; mortgages carried rates north of 18 percent, and businesses gasped for credit. The economy tanked. Unemployment spiked to 10.8 percent by late 1982, a level not seen since the Great Depression. Detroit’s assembly lines stalled, farmers faced foreclosure, and the Rust Belt became a tableau of shuttered factories. Critics howled. Congressmen demanded Volcker’s head. Pundits expected him to cave. Yet he stood firm, a granite giant alone in the storm, insisting that the fever must break before the patient could heal.

He was right. By 1983, inflation had plummeted to 3.2 percent, a testament to Volcker’s iron will and the inexorable logic of monetary discipline. Forget about caving. Volcker actually forced a back to back double dip type recession. Reagan pushed through tax cuts as a huge relief. The cost was steep, but the reward was a foundation for the prosperity that followed. Volcker killed inflation for decades. Reagan, re-elected in a landslide in 1984, reaped the political accolades, but it was Volcker who made it happen.

Volcker’s legacy is not without its quibbles. Some argue his sledgehammer approach needlessly prolonged the recession with the double dip. Academics contend that global factors, mainly falling oil prices, aided his crusade. Such sniping misses the meta picture. Inflation is a psychological beast as much as an economic one, and Volcker’s firm resolve shattered the expectation that prices would rise inexorably and we would not have to feel any pain to muddle through it. Sometimes you have to take a beating. He restored the Fed’s credibility, which was needed as the gold standard was gone, and proved that technocrats, when armed with principle, could succeed.

Today, as we navigate our own economic tempests, Volcker’s example looms large. Trump and Musk have been cutting billions and must be aware of the faux strength the Biden economy displayed. It will take a firm hand to throw the economy into an undeniable recession, but doing so could be the extinguisher our inflation fire needs. Trump does not face re-election. His backers and the forces on Wall Street that support onshoring know a difficult transition awaits us. All recent economic expansions have paired government policy changes followed by lower interest rates to fuel the new sectors of focus. Trump’s team might be looking at the opportunity to “answer” a recession with a refocusing of goals for a new era. Why wait when he can rip the bandaid off now? Volcker gambled but won and pivoted the entire American system. Trump would be wise to consider the risk and endure some pain for a similar reward.