‘Bring Back Volcker’

I doubt seriously that prominent investors actually care about inflation vis-à-vis Fed policy.

And why should they?

Investors tend to be well-off. Prominent investors are well-off almost by definition. And the “K-shaped” inflation math shows the richer you are, the less you spend on the things for which prices are increasing the most (figure below).

The irony, then, is that the people who spend their days obsessing over the Fed’s forthcoming battle with the inflation dragon are the people for whom inflation matters the least.

What matters to investors is the impact of the Fed’s inflation-fighting policies on the assets they hold, not whether the Fed is or isn’t successful in getting milk prices back down to some reasonable level. (I paid almost $6 for a gallon on Wednesday evening.)

If you’re “merely” rich, you’re probably deeply concerned about the prospect of a steep decline in equities. I spoke to someone this week who’s down $30,000 this month, for example. She wasn’t panicking, but she wasn’t enamored with the situation either. For regular people, the idea of losing $30,000 (even if it’s just on paper) in three weeks is unfathomable.

But if you’re actually rich (“wealthy,” as it were), you really don’t care about any of this. Or, if you do, it’s because of the impact it might have on your firm, not because it makes any difference to you personally. If you’re worth, say, $250 million, you can’t conceptualize of $3 or $6 any better than the shopper who’s concerned about a 100% increase in the price of milk can conceptualize of a quarter-billion. And $30,000 is what you spent on Hermès.com last night while shopping for belts, boots and ties.

So, what do you do when that’s you? Well, you develop a kind of perverse fascination with minor calamities that manifests in thought experiments about engineering bear markets and recessions. And then you share them with the public, in webinars and Zoom meetings.

Take John Waldron, for example. During a virtual chat with the New Jersey State Investment Council Wednesday, Waldron questioned the Fed’s independence, on the way to suggesting “we might need to bring back Paul Volcker.”

That’ll be difficult to pull off. Getting ahold of Volcker will be challenging at this stage, but in lieu of a seance, Waldron casually advised (The White House?) to get “somebody that would be willing to… stay the course without regard to exactly what’s going on in the markets.”

Asked if he’s confident the Fed has the gumption to shrink the balance sheet, Waldron was dubious. “I’m not entirely convinced the Fed has the will to do it,” he said. But they should. Because, as Waldron knows just as well as anyone else who’s rich, “central bank policy has exacerbated inequality.”

Waldron received restricted stock worth some $20 million last year in a one-time bonus Goldman explained by reference to “the rapidly increasing war for talent.”

Meanwhile, Bridgewater co-CIO Greg Jensen, net worth bunches, told Bloomberg in a Zoom call that the Fed may need to let stocks fall another 20%. “Some decline in asset prices is not a bad thing from the Fed’s perspective, so they’re going to let it happen,” he said, adding that “at these levels, it would take a much bigger move to get the ‘Fed put’ into the money.”

This is all well and good, and as I never tire of reminding readers, I’ve talked (and thought) more in the last five years about inequality and the extent to which Fed policy has exacerbated it, than most of these people have in their entire lives. I’m also the first to admit that I’m on the “right” side of this equation, where that means I too benefit from monetary largesse.

But I do think it’s important for regular folks to understand that “going Volcker” (so to speak) would have real consequences, for real people. And just like the John Waldrons and Greg Jensens of the world will never have to worry about the price of milk, neither would their personal circumstances be materially different in the event the Fed engineered a deep recession.

For the rich, nothing ever matters. Which is why, generally speaking, you can’t take anything they say very seriously.

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10 thoughts on “‘Bring Back Volcker’

  1. WIth 7% inflation is seems a little crazy that the Fed is still buying bonds and waiting another month to raise the Fed Funds rate by just 25 basis points. They probably care more about keeping the front end of the yield curve abnormally steep for as long as they can so that the banks can squeeze out extra tens of billions of dollars of profits, rather than what normal people have to pay for rents or food.

    1. Great point, inflation has been the main headline for 4 months and they seem inclined to allow the poor to suffer longer to give the rich plenty of time to monetize these moves. Meanwhile Biden gets all the blame for US inflation (hell probably global inflation too) even though it is not tangibly in his control to impact monetary policy. I will say this, if the Fed doesn’t leverage this opportunity to raise rates as much as they can during this tightening cycle, I expect we’re headed to negative rates when they have to insert the stimulus IV again.

  2. You clearly don’t buy grass-fed. That’s the good stuff. It’s $10-$12/gallon out by me. Luckily, I live in Amish country, so I can get it straight from the farm for about $8.50/gal. If you’re into raw grass-fed, you can find that as low as $6.50/gal.

    While I haven’t gone full-hermit like you, if I were, this would be the perfect place. Latitude, altitude, and location relative to the coast and the Appalachians makes for minimal impact from the effects of climate change, and there’s locally grow almost everything you could ever want to eat (sorry avocados). Plus housing prices & cost of living are still below the national average.

    1. That sounds like a great place to live. I’m seriously considering a move at some point (a couple of years, maybe) to somewhere that can’t be washed away in a hurricane. I’ve been (extremely) lucky for six straight years, but that luck will run out. I’ll get a storm here eventually. And I’m becoming less and less amenable to that over time as storms get worse and worse. 30 years ago, you could (almost) always “ride it out.” Now, though, I’m not so sure.

  3. It’s convenient that as soon as the Fed’s asset purchases stop, rates begin increasing — if you’re a banker, the govt dollars simply arrive in an envelope with a slightly different DC return address (interest payments instead of price support). I appreciate your frequent reminders that the tap never really turns off for those with assets, the question is always how many crumbs should be tossed to the workers.

    It’s good to be a banker.

  4. The alternative of a Volker sounds good in theory. I remember back to that time. The cure almost killed the patient. In no way shape or form are we even close to the situation we had back then. And the economy has far more leverage, and is demographically far different than it was in 1980. If the Fed shrinks their balance sheet, there is a serious risk that the US Treasury market will seize up again. The dealer community no longer provides a liqudity buffer due to the Volker rule (talk about the law of unintended consequences!). The Fed would be super smart to leave the size of the balance sheet alone and let the economy grow into it. Sure they could let MBS roll off and maybe even shorten the duration of it over time. But don’t mess with liquidity. Raise rates more if you need to do it. In fact, not that long ago many were lamenting being at the zero bound anyway. Be smart- flying a plane is a lot easier than flying a helicopter and a lot safer.

  5. H-Man, great comment on how the average Joe gets hammered by inflation and the big fish keep swimming. The Volcker approach worked but it was very painful for both the little fish and the big fish. Not sure we need that type of medicine at this point in time.

    PS: Check out north of Gainesville, Florida. Seasonal changes, no hurricane impacts due to central location, beaches are a 40 minute drive and land is cheap. Then toss in no income tax and a large state university when you want the city life but still has a small town feel.

    1. Great article, and it makes me ponder, as most of your articles do. It seems to me feel more so that a limited UBI rollout is needed for all the reasons mentioned.

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