Volcker's Announcement of Anti-Inflation Measures | Hacker News Reader

Volcker's Announcement of Anti-Inflation Measures

federalreservehistory.org

22 pointsneom51 comments

I wonder if such perseverance is possible today in what seems like a time of more intense politics, and with the presence of social media potentially making everyone see the bad side of things only.

It was a moment from the Fed (and government in general) where they favored long term prosperity at the expense of near term possible recession. I think we need a little more of that, not necessarily in what central banks do, but governments in general.

I don't think so, and I believe that it is related to the reasons you state, but a little more cynical. Corporate America has a very, very strong grip on politics now. For an eye-opening example, go fine graphs of the number of laws in the US that have been passed correlated to whether it had wide national voter support vs wide corporate support. It is even stronger than the 70s in my opinion. No matter who is in office, I believe they would put unbearable political/financial pressure on them to use their power to make the "bleeding" stop. Just look at right now. We are still at one of the lowest Fed rates we ever had, but since it is not 0%, you have corporate lobbyists and financial news outlets speaking as if our country can not bear these "out of control" rates.

I was in the USA in high school when Carter appointed Volker, knowing that it would likely cost him reelection. The things you mention were worse then, not better:

> I wonder if such perseverance is possible today in what seems like a time of more intense politics, and with the presence of social media potentially making everyone see the bad side of things only.

People are more politically engaged today than back then. The US was just quieting down from a period of mass demonstrations, political assassinations and kidnapping, and the like. Conspiracy theories were rife, spread by local newspapers and such. It was pretty fucked up. The decade before the president had had to made a push just to make sure everybody had indoor plumbing!

> It was a moment from the Fed (and government in general) where they favored long term prosperity at the expense of near term possible recession.

To highly simplify, the problem was that indeed the government (LBJ and Nixon both) had borrowed heavily to both invest long term (infrastructure) and short term (war) which had worked well from the 40s to mid 60s (due to demographics and preconditions) but overshot as the age profile of the population changed. So it wasn’t that they were jerks (well, both LBJ and Nixon were), they just didn’t recognize that life had changed. At least that jerk LBJ was legitimately trying to do good.

But people weren’t sure what to do, and were afraid of hard choices (as we all are). Carter broke the back of inflation by deregulating and hiring Volker. Nobody enjoyed going through that.

Then Reagan showed up, got the benefit, and went back to “don’t worry, be happy” which has led to the current mess.

But it’s much much better now in many ways. People have forgotten how much hard work that was and yes, things are politically riskier now, but on the other fronts better, if still far from perfect.

It seems we are in a similar situation today (though not exactly the same as unemployment is generally low). At some point, it seems fairly obvious that high rates will start causing inflation as the cost of borrowing money is a factor of production for many goods and services. As much as I like earning fat interest on my savings, rates probably need to come down quite a bit (though not back to zero, which causes it’s own problems).

Erdogan, is that you? (For background, Turkey’s President Erdogan believes that high rates cause inflation, and up until recently has been trying to keep rates very low to control Turkey’s massive inflation. It didn’t work).

If you are a business and need to borrow money to fund production or expansion, it costs a lot more to borrow that money than it did two years ago. That means your cost of production is higher and you will seek to raise prices. I’m not saying that’s the only reason inflation remains high (greed-flation, shrink-flation, etc. are also factors), but it seems reasonable that this is having an effect.

This is kinda the point, though.

Higher rates mean that it's more costly to expand with debt, encouraging people and businesses to take on less debt, and thus at the margin, decreasing prices.

Mind you, higher rates don't appear to have done much for housing prices in a bunch of markets (e.g. the US, Ireland and Israel) so clearly the lags are longer than I was expecting, at least.

The relationship between interest and inflation is probably not as simple as people and experts seem to think. It's non-linear, involves hysteresis and also time delays. It's probably not possible to model.

I don't think it's possible to model using simple equations. Given much much better data (which is a total pipe dream), you could probably do much better than the relatively simple models in use today.

Maybe model the past, but not predict the future.

High rates don’t impact people without mortgages. There are lots of people who bought in ages ago and move their equity between homes. At least according to the WSJ and others, there seems to be a decent chunk of investor-owned real estate. Someone probably has a study comparing real estate in countries that restrict ownership by investors to see how much this distorts prices.

Because in the US and Ireland financing for housing collapsed on 2008 and never recovered (so there are no more small and medium sized residential developers in most of the US).

In Israel's case there's literally no space (it's the same size and population as the Bay Area)

> Because in the US and Ireland financing for housing collapsed on 2008 and never recovered

Honestly, I can't speak confidently to the US here, but the Irish building rates were entirely unsustainable before 2008. Like, a fifth of national output was construction, which was definitely way too high.

The lag before construction started again (without the small builders getting bank financing) probably does explain some of the issue.

Usually major building projects (eg. Toll Brothers type tract housing) are financed 7-10 years before the first sale. After 2008-12 happened, the entire financing industry for residential real estate collapsed, so large builders either switched to commercial or folded.

> but the Irish building rates were entirely unsustainable before 2008. Like, a fifth of national output was construction, which was definitely way too high.

Lotta corruption too on the Anglo Irish side by not doing due dilligence into connected developers like Bernard McNamara

> Lotta corruption too on the Anglo Irish side by not doing due dilligence into connected developers like Bernard McNamara

Like, the whole nationalisation of Anglo is why I'm paying shed loads of taxes for crummy services, and you can trace basically half the problems of modern ireland back to that decision. Screw FF.

Yeah, but people need to eat, get to work, etc. At some point businesses have to borrow replace aging equipment, etc. You need some base level investment in productive capacity to simply maintain that capacity. At some point it seems higher interest rates will make this investment more expensive.

Yes, and that's the entire point of manipulating interest rates to impact the economy. It's supposed to make things slow down.

Note that I'm not sure this is a good way of managing an economy, but it appears to be what much of the Western world does right now.

And record near 0% rates have led to the richer becoming richer and poorer becoming poorer.

The problem is, the people best suited to exploit near 0% are the wealthy who can take out absolutely massive loans, buy up companies, real estate and more, and jack prices. Which all leads to inflation ~~.

It's a death spiral.

This is how I see it. Current rates aren't high, they just seem high because of the free money that's been available since the 2008 crash. I always thought that we kicked the can down the road for too long and we would pay for it. So far, I think we're still kicking. Who knows, maybe the country's top economists have something going for them and the pullback won't be a crash.

I have hard time believing current rates are unusually high. They might be slightly above ideal.

Extreme wealth has a net negative impact on economy. Both because of direct impact but also politicians trying to please them with tax incentives and what not. Plus the insanity of a single person can disrupt a whole sector.

High rates also incentivizes your customers to save now and buy later, slowing sales activity and growth. This increases pressure to control costs. Trying to engineer a soft landing is hard. It’s like trying to perform a moon landing. There are so many variables: changing demographics, shifting energy production, global macroeconomic events. Time will tell in the end.

Except in the moon landing I think they had more useful controls, not just a single lever to be moved up or down.

I understand why it would increase the cost versus when interest rates are low, but I don't see why high interest rates should cause continuing inflation?

If the rate stays steady it should not drive continuing inflation. Increasing interest rates only effecting shaky businesses. If a business has sufficient cash flow interest rates will have a small effect.

What about that business's customers who don't always have sufficient cash flow?

What about them? Sounds like the customer should think through their issues before making purchasing decisions. Do you have something specific in mind?

> If you are a business and need to borrow money to fund production or expansion, it costs a lot more to borrow that money than it did two years ago.

Yes, and so the hurdle rate to break even is that much higher, a higher needed-ROI discourages economic activity as it is much harder to get that ROI, and slower economic activity will hopefully reduce inflation.

> That means your cost of production is higher and you will seek to raise prices.

Or discourage you from expanding, which can have knock-on effects of slower economic activity (hiring fewer works so less competition on labour wages, building few plants so not spending on construction, etc).

Business do not expand for the sake of expanding regardless of external factors: they expand to increase revenues on which they earn a profit on. If the cost of expansion is high(er), and so a larger margin is needed, then the business may forgo expansion if they can't get that margin.

If you know can sell something for 10% over the raw material cost, and your production costs add 5%, then the cost of capital being 2% or 6% is the different between a 3% profit or a 1% loss.

You're ignoring an alternative - you simply reduce borrowing as much as possible, even if that sacrifices expansion.

Hence why high interest rates suppress economic growth.

I think the cost of borrowing to purchase goods for production could have a one time hit to prices. The production cycle should price in the new cost of borrowing on the next round.

Is that what you think happened? It's not the most technically detailed article, but that is not what happened.

I wish the article touched on "Reaganomics". I would like a similar article with a discussion of Volcker's policy and the Treasury Secretaries actions.

I tried to write to them with your request, their contact form only allows you to send a questions with 255 characters, hah... worked out to around 30 words.

Wow!

Thank you I hope something comes of it

I have never viewed "Reaganomics" favorably but I wonder if the intransigence of Volcker was the resistance that "Reaganomics" needed to fly...

Except Volcker's interest rate hikes (far outstripping rate hikes recently) brought down inflation. If your model is that high interest rates beget inflation, then it is necessarily incomplete since it doesn't explain Volcker's success.

In fact, most empirical observation indicates the exact opposite.

The fact that unemployment is low signals that we are not grappling inflation properly. You can't limit inflation without reducing employment rates. Those two go hand in hand.

There is a school of thought that the goal of increasing rates is just to control employment rates. It's just a indirect/crude way to do it, and unfortunately, the most effective way the fed has at its disposal.

This is my view as well, high interest rates fuel inflation just because people want higher profit for the risk than they could get if they just rested their money in a bank deposit.

Not at all. In a debt-based economy, rising rates put downwards pressures on capital distributors, since they have to get more than the fed rate back on any investment/loan. Higher rates -> reduced money supply -> increased unemployment -> reduced demand => lower inflation.

While lower rates -> reduced unemployment -> increases market demand -> raised prices = increased inflation

Inflation far outpaces whatever "fat interest" rates you have on your savings. You need to hold real assets, not fiat currency.

Far outpaces? https://www.treasurydirect.gov/marketable-securities/tips/

That's theatrics. Everyone on Wall Street and Main Street knows the true cost of living — housing, gas, and grocery prices — has increased dramatically more than any Fed-anointed number with the word "inflation" near it.

Certainly not for everyone. If you have a fixed mortgage, and are careful what you buy, you can live like its 2019.

I was at the grocery store a week ago and everything in my basket was reasonably priced for 2019: pork, bread, bananas, carrots and potatoes. Is it a coincidence I happened to buy only things that didn't experience inflation? Heck no. Avoid name brands.

https://www.officialdata.org/Pork/price-inflation/2019-to-20...

https://www.in2013dollars.com/Fresh-vegetables/price-inflati...

https://www.in2013dollars.com/Bread/price-inflation/2019-to-...

Also if you "have a fixed mortgage" you probably have a fixed mortgage that was locked in at drastically lower rates than current market rates, which is the most advantageous position possible

Yes, name brand bread has gone up in price. So don't buy name brand bread.

That doesn't seem likely

"The cure for high prices is... high prices."

Strange to see this on the front page. I guess everyone is mad at Powell's doveish language yesterday.

I don't know why we're surprised. The fed has been consistently wrong since Covid. Now they're trying to help the gov fund itself by keeping rates low in coordination with the treasury(or it sure seems like that). Also, it's an election year, and probably no one at the fed wants the orange man elected.

Powell keeps talking out of both sides of his mouth. Endless statements about how much inflation hurts poor people(i.e. most Americans, who own very little inflation linked assets), yet they're followed by inaction or outright dovishness, like yesterday's statement ruling out further hikes(what happened to data dependency?).

> Endless statements about how much inflation hurts poor people(i.e. most Americans, who own very little inflation linked assets)

It's not about owning assets, it's about being able to afford food, fuel, housing, medicine, and basic savings.

Most Americans live paycheck-to-paycheck because our financial industry decided 45 years ago that it'd be awesome to have Americans pay interest on everyday purchases instead of just major purchases like their home, car, or business startup capital. Since this has also coincided with stagnant wages, that interest can't go much higher without the masses getting pissed off, and over the last 15 years, "pissed off" has escalated into mass demonstrations (Occupy Wall Street) and riots (2020, 2021).

At some point we're going to have to accept that you can't just direct the value created by an economy to equities indefinitely. You have to return an increasing amount of value to labor so that standards of living continue to rise. Raising interest rates won't do that.

> It's not about owning assets, it's about being able to afford food, fuel, housing, medicine, and basic savings.

I'm sure you can appreciate that inflation hurts everyone, but that asset owners receive a benefit, or at least stand to gain some wealth, as an effect of inflation. This means inflation hurts the poor much more.

I don't agree that it is better to let inflation run rampant with lower rates in an attempt to help poor people. What would help is better regulation, de-"financialization" of the economy, higher progressive taxes, higher capital gains taxes, etc. You don't give up on inflation, you fight it while using the government to level the playing field.

I don't know that the Fed got it all wrong; recently they've been doing a pretty decent job balancing fighting inflation and not causing a recession.

Inflation was allowed to run well above target for over a year and still continues to run hot. They are failing to do their jobs and effectively punishing low incomers and non-asset holders.

Reply on news.ycombinator.com