4 ms·

Volcker's Announcement of Anti-Inflation Measures

22 points by neom 3y ago

avidphantasm 3y ago
It seems we are in a similar situation today (though not exactly the same as unemployment is generally low). At some point, it seems fairly obvious that high rates will start causing inflation as the cost of borrowing money is a factor of production for many goods and services. As much as I like earning fat interest on my savings, rates probably need to come down quite a bit (though not back to zero, which causes it’s own problems).
- arnorhs 3y ago
  The fact that unemployment is low signals that we are not grappling inflation properly. You can't limit inflation without reducing employment rates. Those two go hand in hand. There is a school of thought that the goal of increasing rates is just to control employment rates. It's just a indirect/crude way to do it, and unfortunately, the most effective way the fed has at its disposal.
- siftrics 3y ago
  Inflation far outpaces whatever "fat interest" rates you have on your savings. You need to hold real assets, not fiat currency.
  - t1pster 3y ago
    Far outpaces? https://www.treasurydirect.gov/marketable-securities/tips/ https://www.treasurydirect.gov/marketable-securities/tips/
    - siftrics 3y ago
      That's theatrics. Everyone on Wall Street and Main Street knows the true cost of living — housing, gas, and grocery prices — has increased dramatically more than any Fed-anointed number with the word "inflation" near it.
      - bryanlarsen 3y ago
        Certainly not for everyone. If you have a fixed mortgage, and are careful what you buy, you can live like its 2019. I was at the grocery store a week ago and everything in my basket was reasonably priced for 2019: pork, bread, bananas, carrots and potatoes. Is it a coincidence I happened to buy only things that didn't experience inflation? Heck no. Avoid name brands.
        spywaregorilla 3y ago
        https://www.officialdata.org/Pork/price-inflation/2019-to-2024?amount=0 https://www.officialdata.org/Pork/price-inflation/2019-to-20... https://www.in2013dollars.com/Fresh-vegetables/price-inflation/2019-to-2024?amount=0.76 https://www.in2013dollars.com/Fresh-vegetables/price-inflati... https://www.in2013dollars.com/Bread/price-inflation/2019-to-2024?amount=0 https://www.in2013dollars.com/Bread/price-inflation/2019-to-... Also if you "have a fixed mortgage" you probably have a fixed mortgage that was locked in at drastically lower rates than current market rates, which is the most advantageous position possible
        bryanlarsen 3y ago
        Yes, name brand bread has gone up in price. So don't buy name brand bread.
        spywaregorilla 3y ago
        That doesn't seem likely
  - deleted 3y ago
    [deleted]
- sgerenser 3y ago
  Erdogan, is that you? (For background, Turkey’s President Erdogan believes that high rates cause inflation, and up until recently has been trying to keep rates very low to control Turkey’s massive inflation. It didn’t work).
  - avidphantasm 3y ago
    If you are a business and need to borrow money to fund production or expansion, it costs a lot more to borrow that money than it did two years ago. That means your cost of production is higher and you will seek to raise prices. I’m not saying that’s the only reason inflation remains high (greed-flation, shrink-flation, etc. are also factors), but it seems reasonable that this is having an effect.
    - foolswisdom 3y ago
      I understand why it would increase the cost versus when interest rates are low, but I don't see why high interest rates should cause continuing inflation?
      - detourdog 3y ago
        If the rate stays steady it should not drive continuing inflation. Increasing interest rates only effecting shaky businesses. If a business has sufficient cash flow interest rates will have a small effect.
        15155 3y ago
        What about that business's customers who don't always have sufficient cash flow?
        detourdog 3y ago
        What about them? Sounds like the customer should think through their issues before making purchasing decisions. Do you have something specific in mind?
- satiated_grue 3y ago
  "The cure for high prices is... high prices."
- justin66 3y ago
  Is that what you think happened? It's not the most technically detailed article, but that is not what happened.
  - detourdog 3y ago
    I wish the article touched on "Reaganomics". I would like a similar article with a discussion of Volcker's policy and the Treasury Secretaries actions.
    - neom 3y ago
      I tried to write to them with your request, their contact form only allows you to send a questions with 255 characters, hah... worked out to around 30 words.
      - detourdog 3y ago
        Wow! Thank you I hope something comes of it I have never viewed "Reaganomics" favorably but I wonder if the intransigence of Volcker was the resistance that "Reaganomics" needed to fly...
- sobellian 3y ago
  Except Volcker's interest rate hikes (far outstripping rate hikes recently) brought down inflation. If your model is that high interest rates beget inflation, then it is necessarily incomplete since it doesn't explain Volcker's success. In fact, most empirical observation indicates the exact opposite.
- bmacho 3y ago
  This is my view as well, high interest rates fuel inflation just because people want higher profit for the risk than they could get if they just rested their money in a bank deposit.
  - arnorhs 3y ago
    Not at all. In a debt-based economy, rising rates put downwards pressures on capital distributors, since they have to get more than the fed rate back on any investment/loan. Higher rates -> reduced money supply -> increased unemployment -> reduced demand => lower inflation. While lower rates -> reduced unemployment -> increases market demand -> raised prices = increased inflation
01100011 3y ago
Strange to see this on the front page. I guess everyone is mad at Powell's doveish language yesterday. I don't know why we're surprised. The fed has been consistently wrong since Covid. Now they're trying to help the gov fund itself by keeping rates low in coordination with the treasury(or it sure seems like that). Also, it's an election year, and probably no one at the fed wants the orange man elected. Powell keeps talking out of both sides of his mouth. Endless statements about how much inflation hurts poor people(i.e. most Americans, who own very little inflation linked assets), yet they're followed by inaction or outright dovishness, like yesterday's statement ruling out further hikes(what happened to data dependency?).
- lenerdenator 3y ago
  > Endless statements about how much inflation hurts poor people(i.e. most Americans, who own very little inflation linked assets) It's not about owning assets, it's about being able to afford food, fuel, housing, medicine, and basic savings. Most Americans live paycheck-to-paycheck because our financial industry decided 45 years ago that it'd be awesome to have Americans pay interest on everyday purchases instead of just major purchases like their home, car, or business startup capital. Since this has also coincided with stagnant wages, that interest can't go much higher without the masses getting pissed off, and over the last 15 years, "pissed off" has escalated into mass demonstrations (Occupy Wall Street) and riots (2020, 2021). At some point we're going to have to accept that you can't just direct the value created by an economy to equities indefinitely. You have to return an increasing amount of value to labor so that standards of living continue to rise. Raising interest rates won't do that.
  - 01100011 3y ago
    > It's not about owning assets, it's about being able to afford food, fuel, housing, medicine, and basic savings. I'm sure you can appreciate that inflation hurts everyone, but that asset owners receive a benefit, or at least stand to gain some wealth, as an effect of inflation. This means inflation hurts the poor much more. I don't agree that it is better to let inflation run rampant with lower rates in an attempt to help poor people. What would help is better regulation, de-"financialization" of the economy, higher progressive taxes, higher capital gains taxes, etc. You don't give up on inflation, you fight it while using the government to level the playing field.
yousif_123123 3y ago
I wonder if such perseverance is possible today in what seems like a time of more intense politics, and with the presence of social media potentially making everyone see the bad side of things only. It was a moment from the Fed (and government in general) where they favored long term prosperity at the expense of near term possible recession. I think we need a little more of that, not necessarily in what central banks do, but governments in general.
- mhuffman 3y ago
  I don't think so, and I believe that it is related to the reasons you state, but a little more cynical. Corporate America has a very, very strong grip on politics now. For an eye-opening example, go fine graphs of the number of laws in the US that have been passed correlated to whether it had wide national voter support vs wide corporate support. It is even stronger than the 70s in my opinion. No matter who is in office, I believe they would put unbearable political/financial pressure on them to use their power to make the "bleeding" stop. Just look at right now. We are still at one of the lowest Fed rates we ever had, but since it is not 0%, you have corporate lobbyists and financial news outlets speaking as if our country can not bear these "out of control" rates.
- gumby 3y ago
  I was in the USA in high school when Carter appointed Volker, knowing that it would likely cost him reelection. The things you mention were worse then, not better: > I wonder if such perseverance is possible today in what seems like a time of more intense politics, and with the presence of social media potentially making everyone see the bad side of things only. People are more politically engaged today than back then. The US was just quieting down from a period of mass demonstrations, political assassinations and kidnapping, and the like. Conspiracy theories were rife, spread by local newspapers and such. It was pretty fucked up. The decade before the president had had to made a push just to make sure everybody had indoor plumbing! > It was a moment from the Fed (and government in general) where they favored long term prosperity at the expense of near term possible recession. To highly simplify, the problem was that indeed the government (LBJ and Nixon both) had borrowed heavily to both invest long term (infrastructure) and short term (war) which had worked well from the 40s to mid 60s (due to demographics and preconditions) but overshot as the age profile of the population changed. So it wasn’t that they were jerks (well, both LBJ and Nixon were), they just didn’t recognize that life had changed. At least that jerk LBJ was legitimately trying to do good. But people weren’t sure what to do, and were afraid of hard choices (as we all are). Carter broke the back of inflation by deregulating and hiring Volker. Nobody enjoyed going through that. Then Reagan showed up, got the benefit, and went back to “don’t worry, be happy” which has led to the current mess. But it’s much much better now in many ways. People have forgotten how much hard work that was and yes, things are politically riskier now, but on the other fronts better, if still far from perfect.

22 points by neom 3y ago

It seems we are in a similar situation today (though not exactly the same as unemployment is generally low). At some point, it seems fairly obvious that high rates will start causing inflation as the cost of borrowing money is a factor of production for many goods and services. As much as I like earning fat interest on my savings, rates probably need to come down quite a bit (though not back to zero, which causes it’s own problems).

arnorhs 3y ago
The fact that unemployment is low signals that we are not grappling inflation properly. You can't limit inflation without reducing employment rates. Those two go hand in hand. There is a school of thought that the goal of increasing rates is just to control employment rates. It's just a indirect/crude way to do it, and unfortunately, the most effective way the fed has at its disposal.
siftrics 3y ago
Inflation far outpaces whatever "fat interest" rates you have on your savings. You need to hold real assets, not fiat currency.
- t1pster 3y ago
  Far outpaces? https://www.treasurydirect.gov/marketable-securities/tips/ https://www.treasurydirect.gov/marketable-securities/tips/
  - siftrics 3y ago
    That's theatrics. Everyone on Wall Street and Main Street knows the true cost of living — housing, gas, and grocery prices — has increased dramatically more than any Fed-anointed number with the word "inflation" near it.
    - bryanlarsen 3y ago
      Certainly not for everyone. If you have a fixed mortgage, and are careful what you buy, you can live like its 2019. I was at the grocery store a week ago and everything in my basket was reasonably priced for 2019: pork, bread, bananas, carrots and potatoes. Is it a coincidence I happened to buy only things that didn't experience inflation? Heck no. Avoid name brands.
      - spywaregorilla 3y ago
        https://www.officialdata.org/Pork/price-inflation/2019-to-2024?amount=0 https://www.officialdata.org/Pork/price-inflation/2019-to-20... https://www.in2013dollars.com/Fresh-vegetables/price-inflation/2019-to-2024?amount=0.76 https://www.in2013dollars.com/Fresh-vegetables/price-inflati... https://www.in2013dollars.com/Bread/price-inflation/2019-to-2024?amount=0 https://www.in2013dollars.com/Bread/price-inflation/2019-to-... Also if you "have a fixed mortgage" you probably have a fixed mortgage that was locked in at drastically lower rates than current market rates, which is the most advantageous position possible
        bryanlarsen 3y ago
        Yes, name brand bread has gone up in price. So don't buy name brand bread.
        spywaregorilla 3y ago
        That doesn't seem likely
- deleted 3y ago
  [deleted]
sgerenser 3y ago
Erdogan, is that you? (For background, Turkey’s President Erdogan believes that high rates cause inflation, and up until recently has been trying to keep rates very low to control Turkey’s massive inflation. It didn’t work).
- avidphantasm 3y ago
  If you are a business and need to borrow money to fund production or expansion, it costs a lot more to borrow that money than it did two years ago. That means your cost of production is higher and you will seek to raise prices. I’m not saying that’s the only reason inflation remains high (greed-flation, shrink-flation, etc. are also factors), but it seems reasonable that this is having an effect.
  - foolswisdom 3y ago
    I understand why it would increase the cost versus when interest rates are low, but I don't see why high interest rates should cause continuing inflation?
    - detourdog 3y ago
      If the rate stays steady it should not drive continuing inflation. Increasing interest rates only effecting shaky businesses. If a business has sufficient cash flow interest rates will have a small effect.
      - 15155 3y ago
        What about that business's customers who don't always have sufficient cash flow?
        detourdog 3y ago
        What about them? Sounds like the customer should think through their issues before making purchasing decisions. Do you have something specific in mind?
satiated_grue 3y ago
"The cure for high prices is... high prices."
justin66 3y ago
Is that what you think happened? It's not the most technically detailed article, but that is not what happened.
- detourdog 3y ago
  I wish the article touched on "Reaganomics". I would like a similar article with a discussion of Volcker's policy and the Treasury Secretaries actions.
  - neom 3y ago
    I tried to write to them with your request, their contact form only allows you to send a questions with 255 characters, hah... worked out to around 30 words.
    - detourdog 3y ago
      Wow! Thank you I hope something comes of it I have never viewed "Reaganomics" favorably but I wonder if the intransigence of Volcker was the resistance that "Reaganomics" needed to fly...
sobellian 3y ago
Except Volcker's interest rate hikes (far outstripping rate hikes recently) brought down inflation. If your model is that high interest rates beget inflation, then it is necessarily incomplete since it doesn't explain Volcker's success. In fact, most empirical observation indicates the exact opposite.
bmacho 3y ago
This is my view as well, high interest rates fuel inflation just because people want higher profit for the risk than they could get if they just rested their money in a bank deposit.
- arnorhs 3y ago
  Not at all. In a debt-based economy, rising rates put downwards pressures on capital distributors, since they have to get more than the fed rate back on any investment/loan. Higher rates -> reduced money supply -> increased unemployment -> reduced demand => lower inflation. While lower rates -> reduced unemployment -> increases market demand -> raised prices = increased inflation

01100011 3y ago

Strange to see this on the front page. I guess everyone is mad at Powell's doveish language yesterday. I don't know why we're surprised. The fed has been consistently wrong since Covid. Now they're trying to help the gov fund itself by keeping rates low in coordination with the treasury(or it sure seems like that). Also, it's an election year, and probably no one at the fed wants the orange man elected. Powell keeps talking out of both sides of his mouth. Endless statements about how much inflation hurts poor people(i.e. most Americans, who own very little inflation linked assets), yet they're followed by inaction or outright dovishness, like yesterday's statement ruling out further hikes(what happened to data dependency?).

lenerdenator 3y ago
> Endless statements about how much inflation hurts poor people(i.e. most Americans, who own very little inflation linked assets) It's not about owning assets, it's about being able to afford food, fuel, housing, medicine, and basic savings. Most Americans live paycheck-to-paycheck because our financial industry decided 45 years ago that it'd be awesome to have Americans pay interest on everyday purchases instead of just major purchases like their home, car, or business startup capital. Since this has also coincided with stagnant wages, that interest can't go much higher without the masses getting pissed off, and over the last 15 years, "pissed off" has escalated into mass demonstrations (Occupy Wall Street) and riots (2020, 2021). At some point we're going to have to accept that you can't just direct the value created by an economy to equities indefinitely. You have to return an increasing amount of value to labor so that standards of living continue to rise. Raising interest rates won't do that.
- 01100011 3y ago
  > It's not about owning assets, it's about being able to afford food, fuel, housing, medicine, and basic savings. I'm sure you can appreciate that inflation hurts everyone, but that asset owners receive a benefit, or at least stand to gain some wealth, as an effect of inflation. This means inflation hurts the poor much more. I don't agree that it is better to let inflation run rampant with lower rates in an attempt to help poor people. What would help is better regulation, de-"financialization" of the economy, higher progressive taxes, higher capital gains taxes, etc. You don't give up on inflation, you fight it while using the government to level the playing field.

yousif_123123 3y ago

I wonder if such perseverance is possible today in what seems like a time of more intense politics, and with the presence of social media potentially making everyone see the bad side of things only. It was a moment from the Fed (and government in general) where they favored long term prosperity at the expense of near term possible recession. I think we need a little more of that, not necessarily in what central banks do, but governments in general.

mhuffman 3y ago
I don't think so, and I believe that it is related to the reasons you state, but a little more cynical. Corporate America has a very, very strong grip on politics now. For an eye-opening example, go fine graphs of the number of laws in the US that have been passed correlated to whether it had wide national voter support vs wide corporate support. It is even stronger than the 70s in my opinion. No matter who is in office, I believe they would put unbearable political/financial pressure on them to use their power to make the "bleeding" stop. Just look at right now. We are still at one of the lowest Fed rates we ever had, but since it is not 0%, you have corporate lobbyists and financial news outlets speaking as if our country can not bear these "out of control" rates.
gumby 3y ago
I was in the USA in high school when Carter appointed Volker, knowing that it would likely cost him reelection. The things you mention were worse then, not better: > I wonder if such perseverance is possible today in what seems like a time of more intense politics, and with the presence of social media potentially making everyone see the bad side of things only. People are more politically engaged today than back then. The US was just quieting down from a period of mass demonstrations, political assassinations and kidnapping, and the like. Conspiracy theories were rife, spread by local newspapers and such. It was pretty fucked up. The decade before the president had had to made a push just to make sure everybody had indoor plumbing! > It was a moment from the Fed (and government in general) where they favored long term prosperity at the expense of near term possible recession. To highly simplify, the problem was that indeed the government (LBJ and Nixon both) had borrowed heavily to both invest long term (infrastructure) and short term (war) which had worked well from the 40s to mid 60s (due to demographics and preconditions) but overshot as the age profile of the population changed. So it wasn’t that they were jerks (well, both LBJ and Nixon were), they just didn’t recognize that life had changed. At least that jerk LBJ was legitimately trying to do good. But people weren’t sure what to do, and were afraid of hard choices (as we all are). Carter broke the back of inflation by deregulating and hiring Volker. Nobody enjoyed going through that. Then Reagan showed up, got the benefit, and went back to “don’t worry, be happy” which has led to the current mess. But it’s much much better now in many ways. People have forgotten how much hard work that was and yes, things are politically riskier now, but on the other fronts better, if still far from perfect.