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Stock Ideas Investors Daily Edge Paul Volcker – My Hero
Stock Ideas Investors Daily Edge Paul Volcker – My Hero 
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| Paul Volcker – My Hero |
| Saturday, 08 November 2008 | ||||||||
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I can't imagine what it must've been like to be Paul Volcker in 1979. He had just been appointed as Fed chairman at the time. He is credited for “slaying the inflation dragon”. But it didn't come easy. At the time, inflation was running in the double-digits. Price controls didn't work. And the debasement of the US Dollar was complicating things to a big degree. The mandate over at the Fed was to target interest rates. Volcker came up with the revolutionary idea – thanks to his interest in Austrian Economics – to target money supply growth, instead. According to Austrian Economics, inflation is defined as an increase in credit and the money supply. Volcker knew that if the U.S. wanted to slay inflation, it had to limit growth to the money supply. But in trying to apply this philosophy, he had to do something the Fed had never done before. He stopped worrying about the Fed Funds rate and instead started limiting the supply of money hitting the economy. During this time, interest rates were more volatile than usual. And since he wasn't trying to control interest rates, they moved very high – peaking at 21.5 percent in December of 1980. You probably remember it. The times were extremely painful. Small businesses simply couldn't borrow money with interest rates at 20 percent. Homebuilders and farmers couldn't make money and thousands of them went bankrupt as the U.S. saw job losses that hadn't been seen since The Great Depression. Paul Volcker was demonized. “Your high on the hit parade for lynching” said Sen. Mark Andrews. According to the Encyclopedia of World Biography, “The cover of a building trade publication carried a "WANTED" poster of Volcker and his Fed colleagues, accusing them of "premeditated and cold-blooded murder of millions of small businesses."
"For eight years, as chairman of the Federal Reserve Board, Paul Volcker was perhaps the second most powerful man in Washington," noted Lawrence Malkin in Time. "There were no doubt times, as he squeezed the money supply and cost people jobs in his battle against double-digit inflation, when he was also one of the most unpopular." It's not as if Paul Volcker enjoyed costing people their jobs. In an interview with PBS Volcker said this... “If you had told me in August of 1979 when I became chairman of the Federal Reserve Board that interest rates, the prime rate would get to 21.5 percent, I probably would have crawled into a hole and cried, I suppose.” Thanks to Paul Volcker's focus on the money supply, inflation dropped from 13.5 percent in 1981 to 3.2 percent in 1983. He had officially ended the inflation that started in the 70's and laid the foundation for more then 20-years of prosperity. And it didn't matter how much pain the cure caused. It didn't matter how unpopular he was. Paul Volcker did what he had to do – for as long as needed – to get inflation under control. You have to respect a man like that. Because he didn't care what anyone thought, he did what he had to do to fix the economy. And thanks to him, we didn't go through the 80's with nasty inflation. Paul Volcker is my hero because of that. I bring up Paul because he's been back in the news lately. He endorsed Barack Obama for President. And rumor has it that he's going to be an important advisor for the 44th President. This gives me hope. Because I know that Paul Volcker's voice will be heard. His focus on inflation should help paint Obama's view of the economy. And in these times, we need a guy like Volcker close to our leadership. Because even though we are seeing deflation today, it won't last too long. The government is starting to pump so much cash into the money supply, that within two years we may begin to see inflation ticking much higher. The only thing that might be able to stop that is a massive global slowdown, which is also quite possible. Just think about it... The government has a $700 billion bailout fund. That's on top of the $540 billion they've dedicated to the short-term paper markets, the $144 billion given to AIG, the $30 billion given to JP Morgan to cover Bear Stearns losses, and the $200 billion to bailout Freddie and Fannie. Let's not forget the $170 billion tax relief package passed earlier this year, and plans for an estimated $300 billion more in stimulus payments to go out by next year. That's over $2 trillion, dear reader. The U.S. Government is expected to borrow over $1 trillion next year, just to fund what's happening. They are doing everything they can to try to fix the problem. And in the process, they are laying the groundwork for another inflationary swell. Everyone bitched and moaned because Alan Greenspan dropped interest rates to one percent and held them there. Right now Bernanke is doing the same damn thing! This makes me wonder, how much longer can the US borrow these sums of money at such a low interest rate? What happens if global growth drops and China is unwilling to lend further? What happens to inflationary pressures if the money supply continues to grow at a brisk pace over the next year? Interest rates could skyrocket, that's what. And if that doesn't happen, either the US goes bankrupt OR our politicians grow a pair and cut back spending. With Paul Volcker advising President Obama, the chance of the right thing being done is huge. Because Paul has demonstrated before that he's willing to take unpopular measures in an effort to right the ship. Hopefully Obama sees it the same way. Regardless of what happens, the next two years are going to be volatile. Precious metals, bonds, and cash are all things you should love right now. They will keep your money very safe. And if you're looking for sectors that will prosper as Obama wields his newfound power, check out this report here. Stay free, Charles
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