Paul Volcker
On Fox Business Channel there was an interview with Paul Volcker, presently the chair of the Presidents Economic Recovery Advisory Panel. Volcker has a long and storied history and is generally well respected. Though personally, the only thing I really like about his history is that under Reagan he killed the horrific inflation rate inherited from the Carter years.
Particularly annoying to me was his actions in ending our use of a gold standard. The inflation we have had since then that has taken a loaf of bread from $0.10 to $3.50 in my life time comes directly from that change.
From the wiki:
In 1952 he joined the staff of the Federal Reserve Bank of New York as a full-time economist. He left that position in 1957 to become a financial economist with the Chase Manhattan Bank. In 1962 he joined the U.S. Treasury Department as director of financial analysis, and in 1963 he became deputy under-secretary for monetary affairs. He returned to Chase Manhattan Bank as vice president and director of planning in 1965.
From 1969 to 1974 Mr. Volcker served as under-secretary of the Treasury for international monetary affairs. He played an important role in the decisions leading to the U.S. suspension of gold convertibility in 1971, which resulted in the collapse of the Bretton Woods system.
Which then let the “spend first think later” policies of Johnson, Nixon, Carter, and others drive inflation up to near 14%. Reagan kept him on and at least he got to deal with cleaning up some of the mess he helped to create in the first place.
(And yes, Johnson was before we dropped the gold standard, it was his excessive spending on the Vietnam War coming home to roost that started applying the pressures, but that took years to fully manifest and lead to the ‘problems’ later. Ending with Nixon dropping gold convertibility as the French started a run on the Gold Window.)
The federal funds rate, which had averaged 11.2% in 1979, was raised by Volcker to a peak of 20% in June 1981. The prime rate rose to 21.5% in 1981 as well.
Volcker’s Fed elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of the high interest rates on the construction and farming sectors, culminating in indebted farmers driving their tractors onto C Street NW and blockading the Eccles Building.
Nobel laureate Joseph Stiglitz said about him in an interview:
Paul Volcker, the previous Fed Chairman known for keeping inflation under control, was fired because the Reagan administration didn’t believe he was an adequate de-regulator.
OK, “controversial” but also at least cleaned up some of the mess in the end.
Now this democrat is not working under a republican but rather under a more radical democrat. And what does he want to do?
Raise taxes.
The rationale is that we have to deal with the deficits. But where are the giant shortfalls coming from? From the excess spending that the administration is doing in the first place.
When asked what to tax, Volcker lead with the statement that we had ‘warming at least partly from human actions’ as a paraphrase. So he’s all for taxes on “warming” as I read those tea leaves. Second on the list? Fuel. He feels we need to get ‘energy independence’ via taxing rather than via making more fuel.
He sees no reason we can’t have the fuel prices for gasoline and Diesel be twice as high as now, since it doesn’t cause economic collapse in Europe or Canada (just more efficient transportation systems). Finally, he felt we need to ‘rely less on income tax and more on consumption taxes like a VAT’. Notice that does NOT say “no income tax”. It says “keep the income tax, but don’t rely on it. Add a VAT like sales tax for the deficit”.
Ok… THIS is the Shining Light of our presidential advisors?
Well, if we ALREADY HAD a national electrified rail system run on nuclear power raising the rates on gasoline and Diesel might not be all that bad. Given that we have a vehicle inventory that takes about 15 years to turn over: Is it really a Bright Idea to increase the cost of all Rail, Ship, Trucking, Aviation, and Automobile travel by double for a decade? (and who knows what after that…)
In a recession when folks are already unable to make their mortgage, is it really a Bright Idea to add a European like 10%-20% sales tax on all the things that folks can just barely buy today? That will really “stimulate” something, but economic growth is not it… And if we wait until recovery is underway, it will sure take the power out of it. (“Stop in its newly electrified tracks” comes to mind…)
Then, on top of those, penalizing our industrial base with a carbon tax is going to improve our business investment and growth environment exactly how?
We already have businesses not hiring or investing in new plant and equipment due to the expectation of higher taxes from the Bush Tax Cuts expiring. On TOP of that he wants to add a carbon tax, doubling fuel costs, and a VAT?
Would any sane business manager invest and hire in the face of that?
I’d be packing up any capital not already out of the country and heading to Hong Kong on the next flight, or Sao Paulo on the next cruise ship ;-)
My Opinion?
I think Mr. Volcker ought to retire gracefully from the scene while he still has the sheen from whiping inflation as his reputation. Folks don’t look past that to the point when he destroyed the stability of the dollar. If he now adds to his list of ‘accomplishments’ the taxes he advocates, and the essential destruction of the whole economy with it, folks just might notice that the only really big good thing on his resume was following orders from Ronald Reagan to crush inflation and return to something like sound money.
I do find it interesting that we’re getting away from “Tax and Spend” (guess politicians got tired of being roasted on that one). Now we have a whole new way of thinking. Like the kid begging clemency for murdering his parents because now he’s an orphan. Now it’s “Spend first, then tax to reduce the deficit”…
Musings from the Chiefio 
From my point of view Paul Volker has been the Darf Vadar of the evil empire. He destroys economies where ever he shows up. High taxes, tight and expensive money are his solution to all financial problems. The bankers and very large speculators ( Soros et al) get very rich and standard of living for normal people gets cut in half as the wealth gets transfered to the bankers and rulers. pg
It’s been argued that abandonment of the gold standard was a direct cause of the oil price increases and the rise of OPEC in the early 1070s, and hence the source of much of the political trouble between the US and Middle Eastern countries. This is an example of the Law of Unintended Consequences writ large and demonstration that governments make more problems than they solve.
I’d place it as a minor cause. OPEC was already well on it’s way. We were way overspending our budget (Johnson was escalating the Viet Nam war full tilt AND promoting the progressive social program agenda).
Then there were a couple of wars in the Middle East (’67 war, for example) where we took the side of Israel… (and there had been minor oil embargos during these times)
So through that, the USA was starting to suck down Middle East oil and the Arabs were feeling both hurt by our backing Israel and flush with a bit of new cash (as prices HAD risen some) and power.
So on top of that we did the abandonment of the gold standard.
In Arab countries, gold has a high value / meaning. The dollar had been “as good as gold” and now it wasn’t. Further, in Muslim countries honesty is very important. And we were ‘dishonest’ in that we were no longer honoring our promise to redeem our fiat currency in gold. That would be seen as an immorality on our part.
So I’d say the ‘trigger’ might have been related, but was more likely the ongoing Arab / Israeli wars and our “side” in it. A desire to conduct economic war against us. Perhaps given a ‘green light’ by our willingness to use economics against them; but not driven by it.
The more proximal cause was the Yom Kippur war and our support for Israel:
http://www.infoplease.com/ce6/history/A0935693.html
Notice that date: Oct 6, 1973
http://en.wikipedia.org/wiki/1973_oil_crisis#Arab_oil_embargo
So a few days later we get the price hikes in an attempt to pursued us not to help Israel, we go ahead a couple of weeks later, they escalate to a full blown embargo… and the rest, as they say, is history.
The larger impact of going off the gold standard was probably more consequence than cause.
As the OPEC countries held lots of dollars, in large part what was done was to let the oil price hike work into inflation. Net; they got much less gain than the dollar price would have seemed. A boatload of economists were dispatched to explain to them that they could raise the price and all that would happen is that their investments would lose value… thus the relative lack of such actions since.
One of the few good things from leaving the gold standard was this ability to tell OPEC we would print whatever sized paper they wanted for their oil…
Did you see cdn/usd, Chiefio?
Looks like my ‘chart-guess’ was off by degree, not direction. Unfortunately I wasn’t able to axx internet to swap at 98, but it seems locked at a peak – and I expect that to last past xmas – unless it does break thru the ceiling, in which case I can’t guess at a limit.
La Migra had 2 chauffeurs escort me to the usa (just like Cheech & Chong movie – only they were 3 days early)
I will probably be busy with real life, buying a new house, etc – and if I never show up again I’d like to say it’s been a joy.
However, any employee of the state is a parasite.
There are some things a human being should never do. Parasites are evil. You won’t like to hear that, I know. Nevertheless, it is true. There is no excuse.
Ciao, bello.
Well, by definition Parasites are evil, so we agree on that. It’s in deciding what is a parasite where (when?) we differ… And I find that the State Employee who rounds up murderers and keeps them from killing me to be of more a ‘commensal’ nature… though when they give me a speeding ticket I can see your point ;-)
I expect the Loony to eventually reach parity with USD, but it will wobble a lot on the way. Canada has what China wants to buy, we are printing paper. The result is clear, just the when that is unclear. (Unless, of course, Canada joins us in lunacy).
Bon Chance!
(I hear Costa Rica is nice this time of year …)
“Now this democrat is not working under a republican but rather under a more radical democrat. And what does he want to do?
Raise taxes.
The rationale is that we have to deal with the deficits. But where are the giant shortfalls coming from? From the excess spending that the administration is doing in the first place.”
Indeed!!
The “recovery” is simply an artifact of increased Govt spending, the more we are recovering, the more impoverished and dependent on Govt we are becoming.
http://globaleconomicanalysis.blogspot.com/2010/09/why-statistical-recovery-feels-bad.html