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Did Paul Volcker 'Save' A System That Was Simply Not Worth Saving?
Submitted by Bill Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),
Disappearing Growth
Investors are regaining their calm. A few weeks ago, it looked as though the end of the world had begun. We are talking, of course, about the world in which credit, stocks, and central bank reputations only go up.

Fated to eventually become a house of ill repute: the Mariner Eccles building (Fed board HQ)
Photo credit: AgnosticPreachersKid
But after a big fright in August, investors recovered their relaxed madness. They concluded that there was nothing to worry about. They may be right. You never know. But our guess is that the end of the world has already begun… and they just can’t face it.
The SPX, monthly – a proxy for the seemingly never-ending asset bubble. What if the end of the party is already here and people have just not noticed yet? – click to enlarge.
Since the end of World War II, credit has been expanding in the U.S. At first, it was a healthy expansion. Young, middle-class families took out mortgages and ran up bills on “charge cards,” such as Diners Club and American Express.
Then, in the late 1950s, came the first credit cards. This was accompanied by large increases in consumer credit. Until the 1970s, all was well, because wages were rising, too. And with so much new technology coming online, people believed their wages could only increase.
Debt was no problem – neither for the nation nor for households. We would “grow our way out of it.” But a strange – and as yet not fully understood – new trend began in the 1970s. After accounting for inflation, incomes for most Americans dramatically tapered off.
Total credit market debt, federal debt and GDP – a non-problem on its way to becoming an intractable problem … – click to enlarge.
The economy was slowing, too, after taking the effects of inflation into account. At first, this was thought to be temporary – a fluke, perhaps caused by the 1973 oil crisis. But the trend toward lower economic growth continued. Decade after decade, the trend in GDP growth was down. In most parts of the U.S., GDP per person peaked in the 1970s or 1980s.
Remarkably, the average American working man earns less today than he did a half century ago (again, accounting for changes in consumer price inflation). That is not the same as saying that a person with a good job earns less today than he did in the 1960s.
According to Census Bureau figures, the average inflation-adjusted wage for Americans in the top 5% of earners is up by more than 75% since 1967. Women earn a lot more, too.
But good jobs have become scarce. The labor participation rates – the number of people who have jobs or are looking for jobs as a percentage of the people who are of working age – is at its lowest level since 1977.
Labor force participation rate – at its lowest level since 1977. Something is clearly amiss – click to enlarge.
Debt Goes Sour
But although economic growth and most people’s incomes slipped, debt (the flip side of credit) kept growing. This was Stage II – the unhealthy phase of the credit expansion. No longer backed by broad-based wage increases, debt was expanding beyond the capacity of the economy – and borrowers – to repay it.
Now we were asking for trouble. You may be wondering how this was possible. Why would lenders extend credit to people who couldn’t pay back? The answer: The fix was in.
In 1971, President Nixon dramatically transformed the global monetary system. Under the previous Bretton Woods system, the dollar was backed by gold. And the major global currencies traded at fixed rates to the dollar… and by extension to gold.
This meant a nation couldn’t get too far into debt… especially when it came to its trading partners. Trade surplus nations – which amassed dollars in return for net exports to the U.S. – could ask to redeem their dollars in gold. This caused gold to leave the overspending nation and flow to the creditor nation.
That’s how the U.S. got so much gold in the first place. France and Britain spent more than they could afford on World War I. The U.S. sold them food, weapons, and fuel… and demanded gold in repayment. But by the 1960s, the shoe was on the other foot.
The U.S. started spending money on both “guns and butter” – a Great Society at home and a war in Vietnam. Much of the spending to fund the war in Vietnam ended up as dollars in the hands of Vietnamese branches of French banks.
French president de Gaulle warns of the dollar-centric monetary system that was leading to enormous debt growth and would one day lead to an uncontrollable crisis. He started coming for his gold shortly thereafter, ultimately exposing the fact that dollars were no longer fully backed by gold.
And when, in 1965, president Charles de Gaulle sent the French navy across the Atlantic to pick up $150 million worth of gold in exchange for dollars, it was greeted like a long-lost relative at the reading of the will.
Finally, with gold being airlifted from Fort Knox to meet foreign demands for payment, rather than honor Washington’s promise to convert dollars to gold, Nixon panicked and defaulted. Henceforth, anyone holding dollars was on his own …
Nixon announces that the US will default on the gold exchange standard by “temporarily” suspending gold convertibility, while raising tariffs concurrently. Essentially he was telling a whole bunch of lies in the process, while proudly parading his appalling economic ignorance. This was called the “Nixon shock”. We’re not sure if people were more shocked about the lies or the ignorance, but surely many people must have wondered if it was April 1 instead of early August.
“Tall Paul” Takes Over
It all would have gone bad very fast. By April 1980, the annual rate of consumer price inflation was running at almost 15%. Gold soared as high as $800 an ounce. It looked as though Nixon’s new fiat money system would go off the rails soon – as all previous experiments with paper money had.
Instead, in 1979, President Carter appointed Paul Volcker as Fed chairman. Volcker stepped in front of the runaway train and commanded it to halt. And it did. By January 1981, “Tall Paul” jacked up the federal funds rate – the key lending rate in the economy – not to 2%… or 4%… or even 8%. He set it at 19% – and placed the train squarely on the tracks again.
We remember the howls of discontent. Volcker was “stifling the economy,” said the politicians. He was “killing jobs,” said the newspapers. He was causing “the worst downturn since the Great Depression,” said the economists. But Volcker didn’t budge. And when Ronald Reagan entered the White House in 1981, he backed Volcker.

Paul Volcker applied tough medicine for about two years, but by the time he became Fed chairman, US true money supply growth had already been declining sharply for two years running. In other words, the main driver of price inflation was already in retreat when he entered the scene. Later, in 1982, he produced the biggest one year surge in the broad money supply aggregate TMS-2 that had been seen since the war, a feat never again repeated. While he fended off assorted yammering politicians in the first two years of his chairmanship, it is a good bet this was actually a mock battle to pull the wool over the eyes of the hoi-polloi. We won’t be able to shake his firmly cemented reputation as an “inflation fighter”, but it is not nearly as deserved as is commonly assumed. Plus, as Bill Bonner notes below, in the best case he saved a system simply not worth saving.
Photo credit: John Duricka / AP
Volcker announced his intention to squeeze inflation out of the system soon after he became Fed chairman. Bonds – which do well when inflation is low – should have rallied. Investors should have raced to lock in roughly 10% yield available on the 10-year Treasury note. Instead, bonds price fell… and bond yields rose.
Then, as now, people were not aware – or were not willing to believe – that a major change had occurred. It wasn’t until 1982 that the bond market turned; finally, investors realized that it was a new world. Volcker saved the system. Bond yields – and interest rates – have been coming down ever since.
Too bad he didn’t save a better system. Not many men can resist the appeal of free money. Americans proved they were no better at it than others. Falling interest rates and the paper dollar gave them a way to impoverish themselves – by spending money they hadn’t earned.
They took the opportunity offered to them. They borrowed and spent… and drove the entire world forward at a furious pace. But now that stage is over.
The “stability” of the “scientific monetary policy” in one stark image.
Investors only realized in late 1981/early 1982 that the era of rising CPI inflation had ended – a reaction delayed by nearly two years. Something similar could well be happening now – an era is ending, they just don’t know it yet – click to enlarge.
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Yeah, maybe, but don't you miss those 22% mortgage rates?
Mister we could use a double digit man like Volcker again
Didn't need no welfare state
Everybody pulled his weight
Gee our old K-car ran great
Those were the days!
K-cars were the worst lemons of all the lemons ever manufactured in the history of car manufacturing. My brother bought one used and had it in to the mechanic about 35 times before he junked it. When it backfired after a carb repair it sounded like a real gunshot every time, and it would take about a minute to blast every time the ignition switch was turned off. For the entire time my brother had that car he was giving the mechanics all of his income. The K-car was a mechanic's dream come true.
Yep, we are definitely in need of a hard-ass tough-love economist in charge again.
Fuck the wussy Krugmans, Bernankes, Yellens, etc., we are saddled with now...
Trying their best to protect Obozo and his pitiful legacy.
Volcker won't save anyting.
Architect of paper money and ultimate collapse:
http://www.safehaven.com/article/35156/golden-yuan-world-reserve-currenc...
No one has the NADs nowadays to do do what he did.
Bunch of big hat coyboys is what we have nowadays. All hat no cattle...
A fan of borrowing are you?
high interest rates = cheaper housing. Ceteris Paribus
So yes. I miss high interest rates.
The worst mistake Carter made was appointing Volcker to head the Fed. Volcker was and is a deranged idiot who took sadistic glee back then in wrecking the U.S. economy. The "oil shock" of 1973 and the military overspending on the Vietnam War boosted inflation. What Volcker did was to raise the cost of credit across the board, so that credit cards no longer had a maximum 12% interest rate and mortgage rates went to 20% plus points. The United States economy never recovered from Volcker's lunatic increase in the cost of borrowed money. The value of the dollar went through the roof, you could get a 22% interest rate on your passbook bank savings account or, at a bank in Texas, a lower rate plus a free shotgun if you deposited enough for a fixed period of time. The Savings Bank of New York, the first bank to use savings passbooks around 1819, did not survive Volcker's incompetent reign.
I was in a toy manufacturing business on Cook Street, Brooklyn, in 1983 where the owner showed me a telegram he had just received from a customer in France. The telegram told him to cancel all their toy orders, that the dollar was so expensive that his French customers would be losing money trying to sell these dollar denominated toys in France for francs. That scenario did not just happen in Brooklyn. By boosting the value of the dollar to all time highs, in one fell swoop, Volcker wrecked a good chunk of the manufacturing base in the USA that depended on exports.
I believe your perspective on Volcker, but I must say that even my father liked Volcker as did most of Volcker's peers. I'm still debating whether Volcker is as innocent regarding the calamity we all find ourselves in today due to his involvement with the architecture in the past. He is a notable man in the financial world IMHO, but these dudes in central banking have no idea what damage they cause by their so-called interventions. Greenspan was way worse than Volcker too.
When you get a ticket for speeding do you blame the cop or man up and take the responsibility for your own actions?
The same thing applies here.
Last time I got a ticket I WAS speeding, doing about 75 in a 55 mph zone in the middle of the desert.
Most of my family was touring Germany and I was feeding the livestock at my dad's. Step-brother had been shot by a .45, point blank, over a poker game. We were heading back to the hospital 100 miles away to check on him after feeding the animals.
Pulled over, cop came up, wife and I are too busy talking about him and basically ignore the cop. He says I clocked you at 95 MPH.
To wife: I don't have a fucking clue how to get in touch with them to tell them. Wife: Call his sister, maybe she knows a way.
To cop: I said fine, give me the ticket, I gotta go. Got my fine and shit mailed to me. Nearly $700 total.
Went to court. Hardcase judge. First thing going on is shit that had already happened. You violated my orders, you're jail. You didn't do traffic school you're going to jail. This kind of shit.
Then he started to have those with fresh tickets stand and argue. No success, fine announced.
Then he gets to me. We know each other. He calls me by my first name "OldPhart" what are you doing here.
Everyone's head turns to look at me.
I got a ticket.
What for?
Speeding.
Were you speeding?
Yes, sir, but not this damned fast!
Ok, fine's $100. Pay the clerk outside. (lowest fine levied by a factor of $100's)
Yes, sir, thank you.
Hey, don't speed no more, next time it'll be $200.
I've become a courtroom celebrity. People are standing up to see who I am (basically a nobody).
Pay the clerk. Haven't had a speeding ticket since.
I remember that one of the first industries, as in almost every manufacturer, to go bust and pretty much disappear was the textile manufacturers. We suddenly had lenins and fabrics, paper thin and with all the strength of toilet paper, showing up in clothing that would rip at the slightest touch (and no, back then I was more than normally fit), I once raised my arm to wave at my wife at DisneyWorld (where we worked) and the sleeve did this Incredible Hulk rip. A couple girls nearby started giggling, meantime I'm baffled at how the sleeve was so shredded. I had big arms, but not that big.
yup, and worse.
BABY WHAT YOU WANT ME TO - Jimmy Reed
https://www.youtube.com/watch?v=cEkepygs_bM
.
the future cannot repay todays debts...trav7777
fuck USURY
The west made the USSR go bankrupt by going bankrupt themselves.
Mutually Assured Destructiin
Mutually Assured Debtstruction.
Muddy Waters - Got My Mojo Workin'
https://www.youtube.com/watch?v=8hEYwk0bypY
https://www.youtube.com/watch?v=xhFbNwMY_qg
Dire Straights - 'Money for Nothing'
https://www.youtube.com/watch?v=lAD6Obi7Cag
l.
ove it.
.
Jef Lee Johnson - A Vaulx Jazz Live (2009)
https://www.youtube.com/watch?v=cA8Gqc7l-cA
.
for now, the world still turnin'.
"Free money" is the only kind of money that exists.
That phrase sets up a morality tale, that somehow, if you squeeze money out of a person by selling them aluminum siding, for example, you have 'earned' it.
But that person had to get the money from somewhere. And all money ultimately comes from government issuance. When the government runs a deficit, we have a private surplus, when the government runs a surplus, its because they create a private deficit. This graph makes it clear.
So my question to the audience at home is: Would you prefer that the government lower its spending, in order to prevent the flow of 'free money' into the economy, or would you prefer the government to create more money, and filter it to useful projects?
Free Money has a price
The government should pass away into oblivion like the barbarous relic it is.
And while we're at it, take your Chartalist magic money tree theory someplace where the natives are stupid enough to believe in unlimited printing. Say, Zimbabwe.
Root61
Zimbabwe is an interesting place:
Currency has been crap for 10-15 years if not more, but so what? It still exists, life goes on, you can holiday there if you wish (go shoot lions or something).
So, how bad does it get when a country gets completely barking mad? Well, not so bad, at least, that's how it appears. No revolution, no general riots or strikes or mass die-offs - nothing. OK, I do not want to be there, but others are, and seem ~OK.
So if the US goes barking mad, so what?
Did you see the conditions of people who tried to survive that economic horror? I mean the people who were at no fault? The grandparents and the children who could not eat? The ones who barely got to eat because another family member slaved all day to buy them enough bread just to make it to the next day? The 85 year old living in house with only a partial roof, having to bike for many miles to earn enough to get a can of anything to eat? I don't think many people survived when it took 3grams of gold to get enough bread for the day, and they had to go find and dig it by hand every day. If they were supporting other family members it was 3grams * number of family members. Point being, the process you are talking about is not without real human suffering, and yes, in some cases death.
...and the magic monry tree folks are in the house! Welcome! Now to answer your very compelling question: I'd prefer we reduce government spending and at the same time, increase existing money stock into useful projects. Two things. Please cite the link to the list of the government's useful projects. I'm pretty sure the list, among other cronyist projects includes paying for $100 hammers and bombs. You do mean useful projects like that, right? The ones they already fund, right? Second, try to find the accounting identity that says more government debt = crowding out of private investment. Hint: it won't be in your Keynes General Theory. Finally Mr. Magic Money Tree, if the government runs a surplus, they return the money to the people they took it from and private deficit solved!
The Walking Dead and American Horror Story have nothing on reality.
The system was worth saving*** before the election of Ronald 'Turd Bomb' Reagan
*** just barely
Moron .. You have no clue about Reagan .. His aim was to end the FED .. End the CIA .. End the IRS .. Bring GHWB and other cronies down .. He will do it. He is dead, but his plan is still in play ..
https://app.box.com/s/hfgvcqg7gqh7i27at6sv53ywu87lwarp (Read Me First)
"His plan is still in play."
Don't make me laugh, I'm going to a funeral. The funeral of the United States of America
Starving the Beast. Giving the National Debt escape velocity. Reagan's plan. All the same, n'cest pas?
Where's the National Debt now, birdbrain? Pushing $20 trillion. So when does Reagan's Plan kick in, if you'll forgive me asking such a rude question?
When is the beast starved? At $30 trillion? $40 trillion? $50 trillion?
Or is Reagan's Plan just the TURD IN THE PUNCH BOWL OF AMERICA?
Daintily sipped out crystal punch bowl cups by brain dead conservatives, some fortunate enough to get a flake of Reagan's turd in their cup.
OR IS THE PUNCH IN THE PUNCH BOWL JUST KOOL AID THAT ONLY CONSERVATIVES WANT TO DRINK?
Kindly link to the appropriate article that you believe is relevant.
Did Raygun ever say he was going to end the fed? What the fuck are you talking about?
denton
So you left the s/ off your comment and I thought you were serious.
Imagine, Reagan wanted to end the CIA and he appointed his campaign chairman William Casey to be its director, about whom there is some question whether or not he ordered a CIA operative to blow Chernobyl.
You fooled me. My bad.
But I was very glad to read this:
When I learned on the news 25 years ago that Russia was shedding its communist past, I immediately thought that Washington had paid them off to do so.
And when Ambassador Strauss would not present his credentials (and cashier's check) until the so called coup was defeated, I knew that there had been a genormous payoff.
The $40 billion you mention would certainly bestow a nice largess on all the worthy and loyal communist apparatchiks who would be displaced until things got back on track.
The notion that Gorby only got $10 billion and that was for himself and the final payment of $30 billion was stretched out for 25 to years to the reign of Putin is beyond laughable.
But thank you for reinforcing my idea that the Cold War wasn't won.
THE US SIMPLY PAID THE ENEMY TO LEAVE THE BATTLEFIELD.
Oh no..not another history lesson from Bill Bonner...so what else is new?
I got my first mortgage as a young guy at a cool 10.5%.
Cost of the house? $12,000
My first house had a 10% mortgage, cost was $19k, Panama City, Florida.
Paul was just another lackey pulling his 30 pieces of silver before bailing out to let another eager fiscal Judas take the helm.
Same as it ever was. What's yours is theirs - first a bit, then a lot, then, everything, until the people revoilt, burn down the ivory towers, and the whole mess plays out all over again.
Maybe evolution will outstrip the longevity of the money changers, and destroy them for once and for all.
I ain't gonna hold my breath waiting for the miracle, though.
Borrowed all that people can borrow. Debt saturation is a debt based system.
Already kids just born are in debt big time.
PROJECT NIRP
FED rate will not rise. Too much leverage and debt. Nothing new there. Needs NIRP to keep the ponzi going. Agreed. At a certain negative rate, however, a socioeconomic cataclysm will manifest. People will rush to paper. Banks close. Only plausible scenario. You lose. Haircut. Bail-ins.
Another problem. US debt securities. If the yield across the board turns negative, who will buy? The FED will have to buy to keep the ponzi going. So the FED piles negative yielding debt securities onto its balance sheet. Operation - Hug the Tar Baby. Spiral of death. Meltdown. Can not continue into perpetuity!
QE4 and beyond, NIRP, these are the signs of something worse to come. That is hyperinflation.This mad science experiment, as far as my limited knowledge can forsee, will end cash and kill USD hegemony.
A geopolitical turning point, not seen since WWII, is approaching; and the death of cash is looking imminent. Gold will likely be made illegal. Been done before.
Once cash is dead, you can't take your 'money' out of the bank. You will have no recourse. What value is gold if it is illegal, and you are being carted off to a FEMA camp for political dissidence?
The only real solution is high fatty acids. Relish your food as you never know which meal will be your last.
If interest rates went back to 10%, the cost of houses would be back to 15k for a decent house.
Sadly, that will never be allowed to happen, because another decrease in house and asset prices would bankrupt the system. You know it, and I know it.
So, it will not be allowed. Ever. They are taking this Titanic all the way to the iceberg, and will then play it by ear. Sadly, a lot of people will be fleeced, but not the bankers and their friends. I'm hoping they are wrong this time around.
come on, he did not save the system, he emptied Ford Knox
No, a fiat 'system' wherein central planners like Volcker and Greenspan and their ilk tamper with interest rates was not worth saving - unless one is a member of criminal central banker crowd. For the rest of us, well we are just further down the road to serfdom.
Oh, and thanks for the 30 year bond bubble, shithead - its over now.
We have had 45 years of INFLATION in all ASSETS and we are begining to roll over into DEFLATION. CASH and CREDIT is used as money and given that credit is borrowed from the future, we now have to reconcile all the accumulated debt. That all spells a deflationary spiral. The Fed cannot print its way out of this mess. Defaults are coming, its a matter of time. "Cash is trash" mantra will change to "Cash is King".
To the headline- not only did Volcker save a system that was not worth saving, he 'saved' a system that was designed to fail at its' outset. P<P+I
Volcker did what he was told to do. Everything was getting out of hand too fast, it would have been obvious who the agents of The Great Red Dragon were. For something that started over 300 years ago, the goal "to own the earth in fee-simple" could not be abandoned for sake of a few financial sociopaths. Take a look at all the mergers and consolidations that have taken place since Volcker. Ownership has been placed in fewer and fewer hands over this time, and it hasn't stopped yet. Sucks!
I like that last graph but I would like to see the total debt superimposed on the right vertical axis so you could see the exponential increase of cummulative debt over the steady decline in interest rates.
The present sytem is so bad that Volker action is no longer possible. This is like a skyscraper made of paper and the only possible future is a massive crash and starting over. There is no alternative, no policy, only preparing for the crash and getting ready for a new beginning and almost no one even sees this. They expect some organization to fix it and will be extremely dissapointed as the Fed keeps lying about it. It will be like lemmings following the fed over the cliff
Volcker saved the petrodollar's inflationary spiral fed on Saud's black gold revenues recycling and Ronnie Reagan --along with Maggie's offshored City farm-- spawned REAGANOMICS; the FIRE asset steroid injected stawks and penny (junk) bonds pumping now in the hands of Amerika's "best and brightest" --the Gordon Gekkos--that never stopped giving to the Hubristic rise of OLIGARCHY America; which under the Bush Mantra spawned "massive military supremacy/shock n awe" NWO and then under Clinton spawned the "outsourced" SQUID controlled debasement of first world production--and Oligarchy's profligate profit machine all fed on Reserve's hegemonial shadow banking debt--now latched on to Chindia "cheap labour arbitration" mantra.The credit pump moved to EM !
From that moment onwards "our money your problem" had become the NOOSE thAt WOULD stifle steroid pumped WS's FIRE economy all based on Chindia's slave labour and FED's fiat debt.
Now its all coming apart...Well, Reaganomics...you've had your kicks!
The Wolves of WS are now wallowing in Unicorn land!
Don't blame Volcker; blame Nixon's ramp up of fiat profligacy (Friedman's floating rates legacy) and then blame the hubris of the Reaganomics era which went into another paradigm--"the sky's the limit; we are exceptional" fantasty world hubris-- debasing the fundaments of prudential capitalism to the point where risk is now BLIND to return as truth is suffocated by systemic lying; all to protect the POWER construct. ...The sun never sets on our empire!...
I'm glad I read this summary, falak pema. Volcker has been redeemed somewhat by the slant you take. I trust your opinion on all things Economics.
It was worth saving to the Satanists.