'From history, we know that once unmoored, inflation tends toward a cycle of unpredictability and destabilizing volatility that can extend for years and even decades. Burns and Miller have lots of company when it comes to ineffective half-measure responses to escalating price pressures. There are huge longer-term costs associated with failing to employ aggressive measures to quickly contain bursts of inflation. And, importantly, Volcker demonstrated how a focus on money and Credit becomes critical for effective inflation containment.
If there was any doubt, there’s now clarity: Powell is No Volcker. In fairness to Powell, he’s demonstrating typical early-cycle, wishful inflation-fighting timidity. Time will tell if he is viewed as ineffective in thwarting a nascent inflationary spiral, callously grouped with the likes of Burns and Miller.''..August 1979 (the month Paul Volcker replaced him) were ineffective in containing an inflationary spiral. The Iranian revolution, the Iraq/Iran War, and other factors combined for the painful 1979 oil shock.
With inflation deeply ingrained, it took Volcker’s punishing tightening measures to finally quash pricing pressures and inflationary psychology. Rates almost doubled in eight months to 20%. Deflecting political pressure, Volcker radically shifted the Fed’s focus from managing policy interest rates to directly targeting money and Credit.
A Volcker quote from a 1979 Board of Governors meeting days before public announcement of the policy shift:
“I would emphasize that the broad thrust is to bring monetary expansion and credit expansion within the ranges that were established by the Federal Reserve a year ago.” And in a speech three days following the historic Saturday, October 6th announcement: “Those measures were specifically designed to provide added assurance that the money supply and bank credit expansion would be kept under firm control.”Why is this history pertinent? For one, I believe we’re early in a new cycle of elevated inflation risk. General pricing pressures ebb and flow. And as much as we would like to believe the Fed can manage inflation with moderately higher (from a historical perspective) interest rates, they have limited control.
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From history, we know that once unmoored, inflation tends toward a cycle of unpredictability and destabilizing volatility that can extend for years and even decades. Burns and Miller have lots of company when it comes to ineffective half-measure responses to escalating price pressures. There are huge longer-term costs associated with failing to employ aggressive measures to quickly contain bursts of inflation. And, importantly, Volcker demonstrated how a focus on money and Credit becomes critical for effective inflation containment.
If there was any doubt, there’s now clarity: Powell is No Volcker. In fairness to Powell, he’s demonstrating typical early-cycle, wishful inflation-fighting timidity. Time will tell if he is viewed as ineffective in thwarting a nascent inflationary spiral, callously grouped with the likes of Burns and Miller.
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Suffice it to say that these are critical and incredibly complex questions. My view is that markets are broken, and now hopelessly so. Prospects for - and actual - QE have fundamentally altered market perceptions and pricing for Treasuries, and this fundamental market distortion has led to artificially depressed term and risk premiums for fixed-income securities generally – which has fed through to inflated asset prices and speculative Bubbles (i.e. stocks, real estate, etc.) generally.
And, importantly, central bank-induced distortions have unleashed historic borrowing, both in the public and private sectors, along with unprecedented speculative leverage throughout global markets. This has ensured a massive accumulation of debt and financial leveraging that is unsustainable at more normalized (higher) market yields. Essentially, the Fed and global central bankers are these days trapped, a reality that is well-appreciated in the markets. Powell served soothing confirmation.
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Greenspan was the original architect of “asymmetrical” monetary policy. He would raise rates gingerly, not to upset beloved markets. But he would then aggressively slash rates when markets found themselves in trouble. The free-markets advocate was in reality the master market operator. And what made Greenspan’s experimental policymaking so dangerous was that he was tinkering with the markets as the fledgling leveraged speculating community and Wall Street finance were rapidly becoming powerful players throughout the markets, Credit system and economy. He monkeyed with market incentives at the wrong time, with momentous and ongoing consequences.
And as the markets and Credit system became increasingly unstable, policymakers only doubled down with lower rates, bailouts and, later, QE. And let there be no doubt, without the 1994 bond market rescue and the 1995 Mexican bailout, there would not have been the terminal phase excess that culminated with the devastating 1997 Asian Tiger Bubble collapses and the 1998 Russia/LTCM implosion – and subsequent additional bailouts. The Fed and GSEs ensured excessively loose financial conditions through much of the nineties, accommodation that fueled the so-called “tech” Bubble. That bursting Bubble spurred perilous policy asymmetry – and the resulting much more systemic mortgage finance Bubble. And that bust sparked a previously unthinkable $1 TN of QE and years of zero rates.
Bernanke’s inflationist policies coerced savers out of their deposits and into equities and corporate bond ETFs, among other risky things – raising the risk of a disorderly reversal of speculative flows. And he took Greenspan’s asymmetrical approach to a dangerous new level with his 2013 declaration, “If financial conditions were to tighten to the extent that they jeopardized the achievement of our inflation and employment objectives, then we would have to push back against that.”
Understandably, markets interpreted Bernanke’s comment as an overt confirmation of the Fed’s market backstop (“Fed put”) – no market downdrafts tolerated. In one of history’s spectacular speculative Bubbles, the S&P500 surged from 1,600 to almost 3,400 and the Nasdaq Composite from 3,000 to 8,000, in six years, with the more speculative stocks and sectors greatly outperforming. The Bubble was bursting in March 2020, only to be resuscitated by $5 TN of Fed QE, along with unprecedented fiscal deficits. The S&P ended 2021 at 4,766 – though the S&P’s gain paled in comparison to manias in crypto, tech and growth stocks, “meme stocks,” SPACs and such.
Powell Wednesday needed to push back firmly against speculative markets, against the legacies of Greenspan and Bernanke. After printing $5 TN, he should have demonstrated a modicum of policy symmetry by at least leaning against the “echo Bubble.” It was astonishing to see Powell instead throw fuel on a major short squeeze and dangerous market instability.
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Powell’s assertion notwithstanding, financial conditions have loosened dramatically since the Fed’s December 14th meeting. Squeezes loosen conditions, while unleashing self-reinforcing speculative excess and leveraging. Corporate Credit spreads have significantly narrowed. After trading to 1.65 percentage points in October, corporate investment-grade spreads to Treasuries (from Bloomberg) were down to 1.30 on December 14th – and traded Thursday at a nine-month low of 1.15. High-yield spreads also narrowed to almost nine-month lows post-Powell.'
- Doug Noland,
Powell is No Volcker, February 3, 2023
Context (Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'[Thomas Hoenig] has a Dire Warning About Where We’re Headed - '..Household Expense Data .. for 80 Years'The Case for Stagflation: US Composite PMI Shows Wage Pressures Persist, January 24, 2023
(Global Stagflation) - '..Food Inflation Still Stalking the World'(The Taylor rule) - '..Bullard .. Using standards set by Stanford economics professor John Taylor..''..inflationary forces have been unleashed..'(Global Stagflation) - '..societal collapse .. central banks have been “dishonest” in deflecting blame for the price surge from their prolonged use of ultra-loose monetary policy...'(Global Stagflation) - '..Powell’s statement is totally inconsistent with Paul Volcker’s final say on monetary economics..'(Global Stagflation) - 'Spanish Inflation Soars to 10%..' - '..the root cause of the Fed’s policy errors and long record of failed forecasts..'(Banking Reform) - 'Disaster is a strong but appropriate word that applies perfectly to the state of U.S. monetary policy..' - Dr. HuntA Better Definition of Money and Lacy Hunt's Thoughts on When a Recession Will Start, January 23, 2023