"Paul Volcker, Wherefore Art Thou?"
by Bill Bonner
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
– Austrian School economist Ludwig von Mises
BALTIMORE, MARYLAND – "The big showdown is coming. The moment of truth… when the Federal Reserve has to lay its cards on the table. This moment, when it comes, will determine the success – or failure – of your investments for many years to come. Will the feds voluntarily abandon their money-printing scheme? Or go on with it… until it results in a “total catastrophe”? Fire or ice? A bang or a whimper? Inflate or Die? We think we know the answer. The feds will keep at it until the whole system blows up. At least, that’s the answer we’ve been giving you for months… maybe years.
Reasonable Outlook: Of course, a lot of people think we are wrong – including some people whose opinions we take seriously. They believe the Fed will eventually do the right thing – raise rates in order to pinch off inflation. After all, the Fed is already talking about “tapering,” pledging to bring its “emergency” measures to an end. And Fed governors are not exceptionally stupid. They know their primary responsibility is to protect the U.S. currency. And if they neglect their duty now… runaway inflation will be even harder, probably impossible, to control later, leading to poverty, crashes, riots, and revolution.
Surely, faced with a nightmare, they’ll wake up and do “whatever it takes” to avoid it. This seems like such a reasonable outlook and expectation, we sometimes wonder why we don’t believe it, too. So let’s look more closely…
Clear Vision: David Stockman, Ronald Reagan’s former budget jefe, is of sound mind and clear vision. He sees the situation, as it has developed thus far, much as we do: The fake money and fake interest rates are ruining the country. He sees, too, that the interests of the moneyed elite – on Wall Street and in Washington – are not the same as those of the ordinary working stiff on Main Street. The former benefit from EZ-money policies. The latter suffer, sooner or later, in the form of higher consumer prices.
But David is much less cynical than we are. He must have a sunnier disposition and more faith in the democratic system. That is, he thinks that when push comes to shove, the feds will do the right thing, if only to hold onto power: In short, in not too many months down the road a desperate White House will have no choice except to welcome in the next Paul Volcker, whoever that might prove to be, in order to douse the inflationary fires and forestall a monumental Democratic wipe-out in the 2022 mid-terms.
Good Politics: David knows a lot more about politics – and finance – than we do. Besides, he has a point we hadn’t fully considered. Politicians are either in office, desperately hoping to stay there… or they’re out of office, trying to get in. If they are in power, they want people to feel good. If they are out, they want them to feel bad. That is why, during the Trump years, the Democrat-leaning press portrayed the COVID-19 virus as an existential threat; it was just good politics.
On Tuesday, we noted that the Democrats may be changing course. They are in power now… They may stand a better chance of remaining in power by putting the voters in a better mood. Instead of making everyone fearful and panicky, as they did during the last two years, they may now want to see COVID-19 “in the rearview mirror.”
Super Power: But the inflation problem is very different from the COVID problem. The latter was caused by nature (apparently)… and there really wasn’t much the authorities could do about it. So, not doing much about it now won’t make much of a difference. Inflation, however, is caused by the government itself, for the purpose of shifting money from the public to the elite. And you can’t make it go away just by ignoring it.
EZ money – printing-press money – is the “super power” of the ruling elite. With it, they can pay for their jackass programs… pay themselves good salaries… fund their pet projects… and reward their donors and supporters… The trouble is, of course, that it leads to price increases. Voters get annoyed. And then, the ruling party is on the spot. It will lose the next election if inflation gets worse…
Monetary Restraint? But what can it do? Here’s David again: "…the Fed has truly painted itself into a corner. On one side is the rock of an egregiously inflated stock market that has the potential to implode like never before if the Fed is forced to move precipitously and unexpectedly into an inflation-fighting mode. On the other is a rapidly accelerating inflationary trend in wholesale and labor markets that will give it no choice except to belatedly lurch toward monetary restraint for the first time in more than a decade."
How likely is that? Probably not very. First, because there is no Volcker. The top candidate to replace Jerome Powell as head of the Federal Reserve is Lael Brainard. She is from the Bernanke-Yellen school, not the Volcker school. She is being considered for the post precisely because she is ready to go along with even more money-printing.
Second, it ain’t 1979 anymore. Then, the U.S. economy could afford a major recession and debt liquidation. Now, it can’t. The Fed’s key lending rate has been below zero for most of the last 11 years. Now, Wall Street… the federal government… households… and businesses – owe $85 trillion. They desperately need super-low rates to stay solvent.
Whatever It Takes: Third, the current inflation rate is, let’s say, 6%. In order to get ahead of it, as Volcker did, the Federal Funds Rate – the interest rate charged to banks on unsecured loans borrowed overnight – would have to go much higher (it’s currently 0.08%). In the late 1970s, consumer price inflation was running at about 13%. In order to stop it, Volcker realized he couldn’t just follow inflation… he had to get ahead of it. So he put the Fed’s key rate at 20%. A similar move today would leave the Federal Funds Rate at about 10%.
Imagine what a 12,400% increase – from 0.08% to 10% – would do to the leveraged traders… the options gamblers… the crypto market… and the millions of zombie businesses and households that rely on cheap finance. And imagine the Fed’s reaction to the inevitable crash. Would it just sit tight, like Volcker, as the stock market sank? In February 1980, Volcker stood stock stiff, as the Dow fell to around the price of a single ounce of gold. If that were to happen today, it would be the equivalent of a 95% wipeout in the stock market.
What Fed… what president… what Congress would allow it? Isn’t it more likely that the Fed’s back would bend… and it would immediately signal that it was ready and willing to provide “whatever it takes” to revive the economy?
No Choice: Fourth, a half-century of fake money and a decade of below-zero lending have softened Americans’ minds… and erased the habits that made them rich. A “Volcker” today would get no respect and no support – neither from the public, nor from the press, politicians, the Deep State, the clergy, economists… or any other influential group.
Fifth, and most important… the elite control the government. The government controls money policy. And the power and wealth of America’s elite rest on a foundation of fake money and fake interest rates. ‘Nuff said.
In short, the Democrats will have no choice. They could not “pull a Volcker”… even if they wanted to. And the country will stay on course for destruction."
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