The Volcker Legacy By: Gabriel PotterMBA, AIFA® 2019.12.10

Former Federal Reserve Chairman, Paul Volcker, passed away at age 92 yesterday.  Economists and professors will assuredly debate the intricacies of his policy decisions – that’s just what academics do – but for the rest of us, Paul Volcker will be remembered chiefly for one thing – fighting inflation.

A little history first: “Stagflation” – a period continuous price inflation, high unemployment and weak demand - was the defining portmanteau of the 1970’s US economy in a single word.  Paul Volcker reasoned that you can’t always create growth from nothing, but you most assuredly can attack price inflation if you’re willing to bear the consequences.  When prices kept climbing out of control, Volcker kept rising interest rates and limiting debt in the economy in a brutal strike on inflation.  Under Paul Volcker’s direction, the Federal Reserve kept ratcheting up rates until interest rates eventually hit 20%, greatly impeding the ability of the borrowers to gain financing for projects and purchases.  The US economy contracted sharply through 1981 and 1982.  Still, when all was said and done, 1970’s era inflation was over, and price increases have remained relatively stable (around 2%-3%) for a full generation.  Other unforeseen consequences include a generational cycle of bond strength as the multi-decade decline of interest rates supported existing bond prices for years.

These days, inflation is almost completely ignored and disregarded as a threat to national economic well-being.  The long respite we’ve been collecting came from the debt paid in 1981.  With low borrowing costs, miniscule interest rates, and huge deficit overhangs, inflation is a situation which will eventually come back around to demonstrate its peril, but no teeth for the present. 

 

 

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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