Paul Volcker's View on Inflation Not Right for These Times – Here's Why

As far as we can tell, Volcker’s argument doesn’t really break any new ground nor does it change the fact that he was, in many ways, the most courageous and perhaps best central banker we’ve ever had. (He was the Chairman of the Federal Reserve under Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987, and is widely credited with ending high levels of U.S. inflation during the 1970s and early 1980s.)

There is strong evidence, for example, that the median income of the bottom 70 percent of the population is no higher today than it was at the end of the ‘70s. The fruits of the last 30 years, in other words, have gone almost exclusively to the top 30 percent. What’s striking is that over the past 12 years, census data shows that median income for all households has dropped something on the order of 5 percent and these numbers do not include the disproportionate pain associated with higher prices for basic essentials such as energy, nor do they take into account the difficulty we’re facing in creating solutions for even a modicum of growth.

Last week, another article in the NY Times noted that China is solidifying its near-monopoly on rare earths, and that as a result, even prices for products like compact fluorescent lights have been going up sharply. It’s not clear whether or not such energy-saving fluorescent lights are even worth it anymore, so great have been the increases in the price of rare earths.

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We think the country is at a difficult point, and believe that Charles Evans, President of the Federal Reserve Bank of Chicago and voting member of the Federal Open Market Committee (FOMC), probably does have a point when he asserts that we have to focus on growth and unemployment, and be willing to tolerate somewhat higher inflation over the near term. Volcker obliquely refers to this in his Times Op-Ed piece.

What’s noteworthy here is that it’s one thing when liberal Economist Paul Krugman advocates tolerating some inflation, quite another when it is central banker Charles Evans. We realize the risks but this is a situation better known as a Morton’s Fork, which is a choice between two equally unpleasant alternatives, each road leading to a different sort of hell.

Opting for [no more than] 2 percent inflation virtually cedes control of our world to the Chinese, and virtually assures an ever-declining standard of living for the broad range of the public. On the other hand, letting inflation rise reduces some of our debt burden and may buy us the kind of time we desperately need to catch up.

We can count any number of initiatives akin to the Manhattan Project this country needs to engage in, perhaps in concert with other countries from Europe or even from the developing nations. For example, drilling in ultra-deep water for oil; finding minerals and other vital commodities in hard to find places, such as the bottom of the ocean; and massive research efforts in areas like nano-silver, graphene and other materials.

These are tough times. Inflation could get out of control [but] one point we want to emphasize is that not every instance of inflation – even, in the worst case, hyperinflation – has an unhappy ending. Virtually every member of the Clinton administration involved with Latin American policy in the ‘90s had his or her own experience with hyperinflation in that region. One of those countries, Brazil, which in 1990 alone had an inflation rate of 30,000 percent (shades of the Weimar Republic), has become a world economic leader.

Conclusion

The point we’re stressing here is that inflation could buy us time that we otherwise could not have. If you don’t believe us, again, check not just the price of gasoline, but compact fluorescent light bulbs and anything else having to do with rare earths, which includes [a] panoply of products. You have to wonder how we are going to solve these problems without spending, or how the vast majority of our population is going to tolerate continuous declines in their standard of living…

We’ve been talking about this razor’s edge for more than a decade, arguing that Goldilocks was dead and buried, and sooner or later, we’d have to choose between inflation and deflation. We hope that Charles Evans, who has suggested what might be a slippery slope, rules the day – not out of any enthusiasm for inflation, but just in recognition of the stark choices we face.

A bet on inflation, which may be the most rational policy decision, continues to inform our belief that currencies will continue to be devalued. It therefore follows that gold, which has been in a more than decade-long upturn, along with silver and other precious metals, will remain the best investment you can make to protect yourself and your family…

In closing, we should note that we are not approaching this challenge in political terms, i.e., from some kind of ideologically-driven perspective of a liberal bent, but rather from a pragmatic standpoint of finding the best solution to our terribly serious current circumstances. If someone like Ron Paul or any other free-market advocate can convincingly show us how we could arrive at an effective solution to the problems we face purely through the operation of the private sector and the free market, he would have my vote. We’re concerned with what works for us as Americans, not as proponents of this or that political position.