Englund

 The current debt crisis closely resembles the archetypal wave of developing-country sovereign defaults that began in Mexico in 1982, when, like today, abundant, cheap debt financing came to a sudden stop, and sharp hikes in global interest rates caused the cost of servicing accumulated debt stocks to spike. The International Monetary Fund currently classifies 39 low-income countries – all but four in Africa – as being in actual or potential “debt distress.”  And this tally does not even include some of the most dramatic cases, such as Sri Lanka and Pakistan, whose per capita incomes rank them just above the poorest category. Harnoys-Vannier and Cohen identify two new features of this otherwise unchanging landscape. The first concerns the scale and growth rate of sovereign debt. Excluding China, low- to upper-middle-income countries’ external obligations increased by 65% – reaching a combined $6.4 trillion – in the ten-year period ending in 2021. The current approach to develo...

The lags between tighter monetary policy and lower inflation are not well understood. Central banks may have to cause more pain than they currently anticipate. Everyone can agree on one thing about the past year. It has revealed quite how little economists understand inflation, including both what causes it and what causes it to persist. It is likely, therefore, that economists will also struggle to predict when inflation will cool. Optimists hope that prices will once again take people by surprise, with their rise slowing sooner than expected.  But it seems more likely that inflation will prove stubborn even as the economy slows. That will leave policymakers with a grim choice: to squeeze the economy tighter and tighter, or to let prices spiral. The Economist 15 November 2022 https://www.economist.com/finance-and-economics/2022/11/15/even-a-global-recession-may-not-crush-inflation What If the Fed Has to Take Rates Up to 6%? When the Fed began raising rates in March, markets were p...

The 90-year-old former leader of the Federal Reserve started his book with a self-deprecating joke about a wise old parrot known as “the chairman,” and insisted the title should be The Wise Old Parrot Speaks. Understandably, the publisher’s marketing staff wasn’t keen on that.  Volcker traveled to a conference in Belgrade, where he watched Burns give a speech titled “The Anguish of Central Banking” declaring that central banks couldn’t adopt the tough policies necessary to fight inflation because of social and political opposition.  Volcker returned to Washington intent on proving Burns wrong. Volcker had clearly come around to seeing monetarism as a potentially useful tool.  Its main downside—that it tied policymakers’ hands—could be an upside if it served to assure the markets that the Fed wouldn’t, indeed couldn’t, back down. The Fed was forced to make a brief U-turn, easing access to money and credit, before resuming its inflation fight in the autumn of 1980. In mid-1...

Contrary to the belief of most central bankers, there is no definitive model that works: “monetary theory . . . does not provide central bankers with decision rules that are at once firm and dependable”, as Burns put it. We might know that “excessive creation of money” will cause inflation, for example, but this knowledge “stops short of mathematical precision”. The result? Surprises and mistakes at “every stage of the process of making monetary policy”. In the audience in Belgrade sat Paul Volcker A few years later Volcker gave a talk titled “The Triumph of Central Banking?” No wonder today’s central bankers all want history to remember them as a Volcker not a Burns. But note the question mark in his title.  Merryn Somerset Webb FT 23 September 2022 https://www.ft.com/content/ac786b9e-be5a-4b8a-87b0-bc020a28f5c5 The writer is editor-in-chief of Money Week Powell Burns Volcker https://englundmacro.blogspot.com/2022/06/powell-burns-volcker.html If you have only been in markets for, ...

 ... when the inflation-adjusted numbers tell a more dire story  Wall Street doesn’t care about real results so why should they?  Corrected for inflation, real wages have declined  Since March 2021, nominal retail sales have risen 6.9% but are down 4.1% in real terms. Dow Jones, in nominal terms, oscillated around the 1,000 level from the late 1960s to the late 1970s, in real terms it plunged 73.1% from January 1966 to July 1982. The 5% increase in S&P 500 earnings that Wall Street analysts forecast for 2022, as reported by S&P Global, will amount to a real decline.  My earlier forecast of a 40% total drop in the S&P 500 from the early January peak is still relevant.   Gary Shilling Bloomberg 2 september 2022  https://www.bloomberg.com/opinion/articles/2022-09-02/wall-street-is-in-denial-over-the-real-economy Gary Shilling is author, most recently, of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Defla...

Federal Reserve Chairman Jerome Powell is raising interest rates at the fastest pace since the 1980s. That has been easy so far because rates are low and the economy has been strong. The hardest part lies ahead.  Just as it proved difficult for the Fed last year to tell when to start raising rates, it is tough to know when to stop. What happens, for example, if the economy begins slowing sharply but inflation stays too high? The day after Lehman Brothers collapsed in 2008, with the financial crisis spiraling out of control, Fed officials declined to cut rates out of concern about inflation, which oil prices had pushed up. Mr. Kohn urged the Fed to consider a “second Volcker moment” that doesn’t rate as much attention as Mr. Volcker’s famous declaration of war on inflation. That was when Mr. Volcker decided in the summer of 1982 to abandon his policy-setting framework, which called for continued rate increases that fall. By then, rate increases were touching off a fierce debt crisis...

 Arthur Burns Federal chair from 1970‒1978.   Burns made a rather dramatic (at least looking at it now) mea culpa speech in September 1979.  “Economic life is subject to all sorts of surprises and disturbances—business recessions, labor unrest, foreign troubles, monopolistic shocks, elections, and governmental upsets. One or another such development, especially a business recession, could readily overwhelm and topple a gradualist timetable for curbing inflation. That has happened in the past and it may happen again.” Here’s a chart of the federal funds rate in Volcker’s first term. Note those near-vertical lines. These 50‒75 basis point moves people now consider “aggressive” are mild in comparison. The Volcker Fed had multiple hikes of 100 bps or more. Volcker rewarded Jimmy Carter’s appointment by giving him an immediate recession going into 1980. Then they took fed funds 1,000 points higher in the second half of 1980, helping cost Carter the election and welcoming ...

With US inflation close to a 40-year high, the Federal Reserve chair knows what he needs to do.  Volcker raised US interest rates to unheard-of levels in 1980-81 Using the political cover provided by the 1978 Humphrey-Hawkins Act, which formalized the Fed’s price-stability mandate, and drawing operational support from a shift to targeting the money supply, Volcker increased its benchmark federal funds rate from 10.5% in July 1979 to 17.6% in April 1980. Volcker then reversed course during an ill-advised but short-lived experiment with credit controls in the spring of 1980, before resuming a monetary-policy tightening that eventually pushed the funds rate to a monthly peak of 19.1% in June 1981.  Only then did the fever of double-digit inflation break.   By late 1982, with the US in deep recession, annual headline CPI inflation had slipped below 4%, and the Fed started to reduce the benchmark policy rate.  Powell’s problem is all the more evident when viewed through t...

A more nuanced review of Mr. Volcker’s government life shows he was less austere and more pragmatic than his reputation—and his own memory, suggest. In fact, he regularly bent or rewrote the rules to cope with the chaos enveloping the world. Mr. Volcker, then undersecretary of the U.S. Treasury, was tasked by President Richard Nixon with closing the gold window. Upon assuming the Fed chairmanship in 1979, Mr. Volcker sought creative ways to defeat inflation, and decided to target the money supply. That led to wild gyrations in interest rates and two recessions in short order that devastated the economy. In 1982, he began slashing rates even though inflation was still in high single digits. He feared high rates were destabilizing the world-financial system. Throughout 1982 he became increasingly worried Mexico would default, imperiling the dozens of big U.S. banks that had lent to it.  Mr. Volcker worried that if Continental Illinois failed, depositors would flee other big banks in ...

 For many of today’s leading policymakers and economists, the 1970s inflation and the discontent it caused are hard to forget Among this group, former Fed Chairman Paul Volcker is regarded as a brave public servant—the one person who had the will to break that inflation through a series of politically unpopular rate hikes that induced a recession.  Total nonfarm payrolls stand at 148 million, 5 million below the 153 million before the pandemic. Fed that for years missed its employment goals or underestimated how strong the labor market could get without triggering sustained inflation. Pulling a Volcker now might entail ignoring politicians, Ph.D. economists, and various editorial boards who all want a fast turn to inflation-fighting mode.  Joe Weisenthal https://www.bloomberg.com/news/articles/2021-11-19/fed-s-powell-fights-high-inflation-in-his-1970-s-paul-volcker-moment Volcker startade sedelpressarna, inte Greenspan. Gavyn Davies 6 april 2014  https://englundmacro...

Nicholas Wapshott’s book, Samuelson Friedman: The Battle Over the Free Market. Friedman’s victory was ambiguous. Though Paul Volcker’s interest rate hike in 1979 put a stop to inflation in the US, Friedman disowned the experiment. The shock therapy that Volcker administered was not monetarism as Friedman envisioned it.  To mark Friedman’s 90th birthday in 2002, Ben Bernanke paid tribute to him and Schwartz. Referring to the Fed’s baneful role in the Great Depression, he remarked: “You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.” In 2008 Bernanke and his colleagues let Lehman Brothers fail. The result was to drive the world to the brink of the greatest financial crisis since the 1930s. Adam Tooze FT 14 October 2021 https://www.ft.com/content/b04dd8d1-75bd-4aaa-bf60-36ad73faac93 Kaletsky menar att det var Paul Volcker som ledde återgången till "demand management". https://englundmacro.blogspot.com/2018/01/kaletsky-menar-att-det-var-paul-volck...

the result was a severe double-dip recession in the United States and a debt crisis and lost decade for Latin America.  But now that global debt ratios are almost three times higher than in the early 1970s, any anti-inflationary policy would lead to a depression, rather than a severe recession. Nouriel Roubin MarketWatch 1 July 2021 https://www.marketwatch.com/story/the-looming-stagflationary-debt-crisis-will-deliver-a-one-two-punch-to-markets-and-economies-11625078897 Remember: the Volcker shock triggered the Latin American debt crisis https://englundmacro.blogspot.com/2021/06/remember-volcker-shock-triggered-latin.html

US federal deficits of 16.7 per cent of GDP this fiscal year and 7.8 per cent next year.  Meanwhile, most members of the Federal Reserve’s board expect interest rates to stay near zero even until the end of 2023.  By the time the economy finally reaches the point when the Fed starts to tighten, it will be smoking hot (at “maximum employment”) and, inevitably, getting hotter. That is what happened in the 1970s. Remember: the Volcker shock triggered the Latin American debt crisis. This time, there is much more debt around almost everywhere. A severe monetary tightening would create even more devastation than then. Martin Wolf 8 June 2021 https://www.ft.com/content/6f23cf87-0e66-4b6b-bf36-8c73f1bfbd9d Kaletsky menar att det var Paul Volcker som ledde återgången till "demand management". - In the United States, the return to demand management began as early as the summer of 1982, when a three-year recession and the bankruptcy of the Mexican government persuaded the Fed that its e...

The new framework for US monetary policy announced at the Jackson Hole symposium in August is a watershed event, for both the practice of macroeconomic policy, and the theory that lies behind it. In the Federal Reserve Reform Act of 1977, following a period of “stagflation”, the US Congress gave the Fed three main objectives: maximum employment, stable prices and moderate long-term interest rates, in that order.  In the early 1980s, Paul Volcker crucially interpreted that mandate to place the greatest emphasis on stable prices. He broke the back of double-digit inflation but at the expense of increasing unemployment to above 10 per cent. Gavyn Davies FT 6 September 2020 www.ft.com/content/facfe2cf-c78e-4085-882e-fdac59f1329d Stagflation Volcker startade sedelpressarna, inte Greenspan. Englund 2014 Why did he do that? Because the high US interest rates also started the LatinAmerica Debt Crisis. https://www.internetional.se/re82bok.htm

USA:s tidigare centralbankschef Paul Volcker är mest känd för att ha blivit tillsatt av Ronald Reagan för att få ner inflationen, vilket lyckades genom en hård åtsramning med recession som följd. Det ryktet kvarlever med märklig kraft. Men Kaletsky menar att det var Paul Volcker som ledde återgången till "demand management". - In the United States, the return to demand management began as early as the summer of 1982, when a three-year recession and the bankruptcy of the Mexican government persuaded the Fed that its experiment with monetarism had gone too far. Då sänktes räntan Läs mer här

Gavyn Davies skriver den 6 april 2014 att  The IMF says that the main reason for the drop in real rates in the 1980s and 1990s is obvious: the easing in monetary policy that occurred after the 1979-82 Volcker tightening. Men Volcker gjorde inte bara det. Han satte också fart på sedelpressarna. Det var Volcker, inte Greenspan, som började. Det datum som angavs som utgångspunkt för uppgången på börsen i New York var den 12 augusti 1982. Vad var det då, frågar man sig, som hände fredagen den 13 augusti, som satte fart på världens aktiebörser.  Jo, det som hände den dagen var att Mexiko förklarade att man inte längre kunde betala sin utlandsskulder.  Det var /den dåvarande/ skuldkrisens födelsedag.  Hur kunde det få fart på börsen, kanske någon frågar sig. Paniken stod på lur, sammanbrott hotade västvärldens banksystem.  Den amerikanske centralbankschefen Paul Volcker agerade snabbt, fixade fram några kortfristiga miljarder dollar från konto...