The reason for the dangerously high growth rates of Fed credit is what might be termed the inflation confirmation fallacy.
The effect of this unfortunate assumption was the introduction of inflation rate management into the Fed's remit, tool kit and vocabulary.
To be sure, Paul Volcker was exceedingly cautious on the matter of accommodating the embedded inflation and bringing down the rate of price increase in a deliberate manner, but he was also a sound money man at bottom.
He was willing to accommodate existing inflation to only a limited degree and was ready to risk a recessionary contraction if that was required to break the back of financial speculation and the extant spiral of wage/price/cost inflation that had become embedded during the 1970s.
In any event, the Y/Y inflation rate bottomed at 1.91% in February 1987 and that very month Howard Baker became chief of staff at the White House.
As is evident by the chart below, Volcker's partial victory over inflation was short-circuited after mid-1983.
He invented the spurious argument that residual inflation at 2-3% was good enough, when the actual requirement was to purge the inflationary cost structure that was already embedded in the US economy owing to the inflation spree of the 1970s.
No comments:
Post a Comment