Commentary
It’s become fashionable recently to invoke the memory of the late Paul Volcker, with consumer prices rising at their fastest rate since he ostensibly vanquished the double-digit price inflation of his watch. Saddled himself with the political mess he inherited from a tanking U.S. dollar and soaring prices, former President Jimmy Carter finally appointed Volcker as Fed Chairman in the summer of 1979 to do something about all this.
Volcker proceeded to raise interest rates to previously unthought-of levels as we moved into the early 80s; and at the expense of a severe recession in 1981–82. But the consumer price inflation surge was all but ended.
By the time the late President Ronald Reagan appointed him for a second term as Fed Chairman, Volcker (the two of them above in the Oval Office) was already well into his “second act” at the helm of the central bank. And it was a Volcker whose policies by then could not have been more different than were those of the same man Carter appointed four years prior.
Whereas the inflation of the money supply in the 1970s (thanks first to former President Nixon and his disastrous Fed Chairman Arthur Burns) led to a weaker dollar, soaring prices and the rest, under Volcker starting in the summer of 1982 (not coincidentally, when the bear market in stocks bottomed) money growth REALLY began to explode. Annual federal budget deficits of $40 billion or so under Carter that were downright scandalous were multiplied by several times under Reagan.
“Reaganomics” as it came to be called is, at best, remembered only incompletely; as is Volcker’s legacy. Yes, The Gipper pushed some sensible and wealth-creating policies via his tax cuts, reduced regulations, etc. But truth be told, the big, overwhelming reason for the “prosperity” of the 1980s—not to mention the great bull market in stocks that began with the Dow Jones Industrials at a low of 1776 in August 1982—was an unprecedented explosion in DEBT.
Volcker’s true legacy is that—in the final 60 percent or so of his time at the helm of the Fed—he inaugurated the complete reordering of our monetary system and economy.
In short, the “organic economy” of the past has been done away with, replaced by the creation of growing amounts of debt and an explosion in money growth. The “wealth effect” of the follow-on soaring asset prices (stocks, real estate, and what-have-you) is what has increasingly driven consumption and other “growth.” Yet that has come at the price of more extreme boom-and-bust cycles: asset bubbles from the regimen first created by Volcker become unsustainable, followed by occasional deflationary crashes.
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