Posted on 09/19/2008 4:01:14 PM PDT by Rodm
The economy doesn't grow sustainably on loose money, it grows with long term investment. By lowering taxes Reagan created lots of extra long term investment money. What loose money does is easy to see from the past few years: asset bubbles, not growth. $5-6 in new debt (public + private) for each dollar in new GDP. It's all in the Z1 report: www.federalreserve.gov/releases/z1/Current/z1.pdf
The economy will grow sustainably on neutral money.
I lived through that. I actually went to college through that, so I wasn’t a real worker bee. But I remember being taught Friedman’s economic philosophy, and I think for a long time it shaped my thinking. I remember watching all the monetary targets updated week by week, to see how the “economy” was doing.
I don’t really remember much about that time. I remember paying 15.5% for a second mortgage, and having some fixed rate investments paying 12%.
Later, I remember thinking that dumping all my money into 30-year-treasuries in 1980 would have been an excellent long-term investment strategy. But I had no money in 1980.
True, but that means neutral credit, not $5 or $6 in new credit for every $1 in GDP. The problem now is credit contraction, but fighting it with lower rates and loose credit will only make the ultimate contraction worse.
You should quit while you're ahead.
We're together on that one. Most people who've looked into it agree that the second 'dip' of the 'double-dip' back to back recessions we had in the early '80's was best referred to as the "Volker recession" as it was he who goosed interest when it wasn't needed.
Great article. The more I learn about President Reagan, the more I appreciate how well he did in spite of his advisers!
I meant to reply to you in post #27. Thank you for the ping.
You are mistaking Paul Volcker with his predecessors, Arthur Burns and G. William Miller, who’s policies created the stagflation of the late 70’s. One can certainly condemn Volcker for the stupidity of supporting Obama, but he did a pretty darn good job at the Fed when he took over around 1980. He jump started the economy by triggering two recessions that got inflation under control and then reshaped monetary policy in a way that has helped provide the long period of prosperity and low inflation we have enjoyed for nearly 30 years.
Good luck with this argument. The number of folks here who don't understand the difference between "credit" extended for consumption and the diversion of resources to the production of capital (investment) is approaching about 99.99% of the FR audience. Pity. Adam Smith understood the whole problem very well. Even less do they understand the difference between money and productive activity it seems.
A friend of mine who is purportedly right of center thought that Volcker was the only good thing that happened in the Carter Administration.
I responded once that the best thing I can tell that happened during that administration was the day it ended.
Thanks for the link. Do you know the page?
You're right about Volcker causing two recessions, one major, but that's all he did. He didn't end stagflation, Reagan did.
This is as old as the concept of money itself.
I think most of your analysis is correct with regards to economic stagnation. For example, if you slap on wage and price controls you distort the operation of the market. Inflation however is an effect of money supply and expectations. In the 70’s the Fed became overly concerned with solving headline economic issues and alternated between speeding up the economy to deal with unemployment and then slowing it down to deal with inflation. Theory at the time, (the Phillips curve), suggested that you could not have both low inflation and low unemployment. One source I read said some thought that to break out of this cycle and achieve both goals would require a 10 year recession on the scale of the “Great Depression”. In any case the Fed’s schizophrenic policy resulted in economic turmoil and high inflation expectations which coupled with the inept Carter Presidency produced that joyful period of stagflation.
Under Volcker, the Fed began to concentrate on controlling core inflation and they became more transparent and predictable in their decisions, all of which altered the expectations regarding inflation and which, in my not so humble opinion, took care of the “flation” part of stagflation.
While all this was going on the greatest President of the 20th century was pursuing a fiscal policy that transformed the US economy and produced the longest period of prosperity in history.
I sure that there is a lot to criticize about Volcker because he certainly made mistakes as Fed Chairman. However, he should get credit where it is due, and he did create fundamental and positive changes in US monetary policy and contributed significantly to economic revival in the Reagan years.
Agreed on both points.
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Even democrats like JFK understood the benefits of tax cuts and how they can stimulate and expand the economy. “Tax cuts for the rich” is just class warfare rhetoric that democrats have been able to use successfully to gain power unfortunately.
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