Originally from WeChat public account: 智 本社 （zhibenshe0-1） , author: SD, original title: “Paul Volcker’s legacy | how to deal with stagflation crisis? “, Photo by Sharon McCutcheon, Unsplash
“The greatest Federal Reserve Chairman in American history”, “Chinese friend” (Zhu Rongji) , Paul Volcker Finished his glorious, tenacious and lonely life.
Walk has done two major things in his long public career and changed the landscape of the world today:
1. In the Nixon era, Volcker was commissioned in a crisis, and as the Deputy Minister of Finance, he personally ended the Bretton Woods system and pushed the world into the era of credit currency.
2. During the Carter and Reagan era, Volcker was once again in danger. As the chairman of the Federal Reserve, he used the wolf and wolf medicine to fight inflation and rescue the United States from the stagnation quagmire. .
Recalling Volcker’s life, he left a lot of precious heritage to the world:
He left a manual for the Federal Reserve and the World Bank;
He has left the world with practical experience on how to fight inflation and how to deal with the crisis of stagflation;
He also set a benchmark for world public officials to adhere to the currency gate and the principles of justice.
Nowadays, the world has become more complex and changeable due to heroes. The global economic recession, the rise of currency easing, the rising of debt, the rise of local inflation, and the stagnation of “gray swans” are looming.
What should we do in the future?
To pay tribute to Paul Volcker in this old text, to regain the legacy and to teach future generations.
Inflation is not terrible; economic recession is not the end of the world. But stagflation is the most difficult economic disaster. The so-called stagflation, economic stagnation or recession, business closures, massive unemployment, and inflation continue to rise simultaneously. The stagflation crisis means market failures and dilemmas in economic policy.
If the economy is in recession or stagnation, it may be possible to adjust demand in the short term and expand fiscal investment to increase investment demand to stimulate economic recovery. In the long run, the market also has the function of self-regulation and repair. If inflation is the only factor, it may be possible to tighten the currency in the short term, reduce the size of the currency, and reduce inflation.
If economic stagnation and inflation occur at the same time, the market fails for a short period of time, and economic policy will be difficult. If you expand currency or finance to stimulate economic recovery and employment growth, inflation will worsen; Inflation will lead to further economic recession and increase unemployment.
Former Federal Reserve Chairman Ben Bernanke once said: “The Great Depression is the holy grail of macroeconomics that economists have yet to reach.” Then, stagflation should be the silver cup of macroeconomics. But whether the Great Depression or stagflation is a “cup” for the national economy and the people.
Hundreds of economic crises have broken out in modern human history, but there are very few cases of sustained economic depression, notably the Great Depression of the 1930s and the Japanese economic depression of the 1990s. There have also been some hyperinflation in the history of various countries, such as Germany after World War I, China during World War II, and now Venezuela.
The history of the stagflation crisis is relatively rare. Typical is the continued stagflation crisis in the United States in the 1970s. The crisis has caused the United States to fall into a quagmire of about ten years. (longer than the Great Depression) , Japan, Britain and Western countries Be troubled by this. At that time, the United States gathered a group of the most prominent economists, and they could not do anything about stagflation. The three presidents, Nixon, Ford and Carter, tried various economic policies, but all failed.
Before the Great Depression, the economic crisis generally originated from market failures and imbalances between supply and demand. However, after the emergence of Keynesianism, the economic crisis, especially this unprecedented stagflation crisis, was considered to be caused by human intervention, that is, the tumors accumulated by the long-term Keynesian economic policy accumulation, leading to the simultaneous stagnation of economic and inflation.
At this time, Paul Volcker was ordered to use the courage to confront the world, use a highly austerity monetary policy to suppress the inflation tiger, and help the United States escape the stagnation crisis.
Stones from other mountains can be seen and reflected; it is better to take precautions to make up for the dead sheep.
Based on the US stagflation crisis in the 1970s, this article explores strategies to deal with the stagflation crisis in combination with currency theory and Volcker’s governance experience.
Price: the last bastion of the economy
Employment: The Last Straw for the People
The currency tide struck, hitting the property market and stock market, and then overturning the last bastion of the economy-living prices; the economic recession continued, spreading to consumption and investment, and then crushed the last straw of the people-the public Employment.
So high prices, high unemployment, economic recession, and the stagflation crisis broke out.
After the Second World War, the economies of the United States and Western countries experienced sustained high growth, and Japan and Germany recovered rapidly. Under the Bretton Woods system, the international exchange rate is relatively stable, and in the 20 years after World War II, western countries have basically not experienced a large-scale economic crisis.
However, in the early 1970s, the “grey rhino” of the US dollar began to run forward. Paul Walker, then the Federal Treasury’s undersecretary of currency, submitted a report to President Nixon to amend the Bretton Woods system.
In 1971, the price of gold rose sharply, and the pressure on the depreciation of the US dollar increased. In order to seize the initiative, Nixon decided to close the gold exchange window after the Camp David meeting, which was historically called “the first Nixon shock.” This shock led to the breaking of fixed exchange rates and rigid payments, and a major restructuring of the world financial and monetary system. This fundamental change has affected today’s world structure and China-US relations.
In the same year, Arthur Raffer, the budget official of the Federal Treasury Department, made a pessimistic forecast for the national production index. Laffer’s remarks set off a storm in the financial circles of Washington and Wall Street. However, at that time, mainstream economists did not agree with Laffer’s point of view, and bullishness advocates generally overwhelming bearishness.
At a podium at the University of Chicago ’s Department of Economics, the leader of the Keynesian camp and the world ’s top economist, Paul Samuelson, used “Why everyone laughs”Fer” is a mocking title, which responds to Laffer’s pessimistic speech and market impetuousness.
However, the economic trend of that year shows that Laffer is right. However, what happened in the next two years is estimated to be far beyond Laffer’s expectations.
In October 1973, the Fourth Middle East War broke out. In order to crack down on Israel, the Organization of the Petroleum Exporting Countries announced an oil embargo and suspended exports, causing a surge in international oil prices and the first oil crisis. International crude oil prices rose from less than $ 3 per barrel in early 1973 to about $ 12 at the end of the year.
The outbreak of the first oil crisis led to a sharp rise in prices in the United States and Western countries, which led to sharp inflation. At the same time, the economy fell sharply and unemployment rose sharply. Since 1973, the United States has experienced a situation of low growth, high unemployment and high inflation.
From 1972 to 1973, eggs rose by 49%. After the price of “pull eggs”, birds, birds, cattle, sheep, pigs, and other birds and beasts “flew together.” Fueled by the oil crisis, the overall price of meat rose by 25%. The American people shouted “Beef Free, Egg Free”.
Inflation rate remained at 3.27% in 1972, rose to 6.16% under the influence of the oil crisis in 1973, and reached 9.2% in 1974. In 1973, the overall unemployment rate in the United States remained below 5%, rising by two points by the end of 1974, and remained above 8% by 1975. GDP grew at a rate of 5.64% in 1973, fell to -0.52% in the second year and -0.2% in the third year.
At that time, people like to use the “economic discomfort index” created by CEA chairman Arthur Okun under the Johnson administration to measure macroeconomic conditions. Aokun imitates the weather temperature and humidity to indicate the comfort index, and combines the inflation rate with the unemployment rate to produce an “economic discomfort index”. This index rose from 6 at the beginning to 18 at the beginning of the stagflation. People teased that this was no longer “uncomfortable” and then renamed it “the pain index”.
When stagflation first occurred, both American politicians and mainstream economists thought it was a short-term phenomenon. The general view is that the rapid rise in international oil prices has created inflation, dampened domestic investment, and led to a short-term economic recession.
However, after the oil crisis, international oil prices have gradually declined, but US inflation has intensified, and the unemployment rate and economic growth have fallen sharply. At this time, the United States realized that the stagflation crisis was not caused by simple external factors, but the concentrated outbreak of chronic ills and chronic illnesses accumulated in the US economy.
Monetary founder Milton Friedman said, “CurrencyInflation is everywhere and always a monetary phenomenon. “This sentence breaks the clairvoyance, pointing directly at the Keynesian economic stimulus policy implemented by the US government for a long time. The currency has been oversupply and the market has been in decline, laying a hidden danger for economic stagnation and inflation.
During the Great Depression, classicalism fell to the altar and Keynesianism rose. Roosevelt took over the White House by virtue of the New Deal. Since then, the government has begun to intervene in the economy. During World War II, the national economy was fully armed and the Western government’s control of the economy reached its peak. After World War II, Keynesianism occupied absolute dominance, and the United States has long implemented Keynesian policies to regulate the economy.
However, because of the liquidity trap, Keynes did not trust monetary policy. He advocated that fiscal policy should be used to stimulate the increase in investment demand by borrowing money from society. Later, Hansen and Samuelson, the founders of the neoclassical comprehensive school, advocated camera choice and shared use of monetary and fiscal policies, but they still focused more on fiscal policy.
According to the Fed’s decentralization mechanism, the federal government cannot fully control the Fed. Each president can only appoint up to two Fed directors. The president has the right to appoint the Fed chairman and directors but not the right to withdraw. The Federal Reserve is independent of any government agency or individual.
The Fed and the White House Treasury are actually two separate lines. No one, including the President, can determine both fiscal and monetary policies. The so-called Keynesian policy rests more on fiscal policies that the government can control.
However, if there is no coordination of currency issuance, fiscal expansion will easily increase interest rates, thereby increasing government deficits. The Keynesians at the time actually emphasized fiscal budget balance and were extremely worried about government deficits, which is very different from our understanding of Keynesism today.
So, in the fifty to sixty years, the strength of the Keynesian economic policy implemented by the federal government was still limited, the fiscal budget remained relatively benign, and the currency scale and US dollar foreign exchange remained relatively stable.
However, in 1965, President Johnson of the United States proposed an ambitious “big society” plan, and tried to increase the budget and taxes. From 1965 to 1969, federal spending increased by a total of 55 percent and an annual increase of 11 percent, compared with an annual increase of only 2 percent in the three years before that. President Johnson tried to get the Fed to pay for the Treasury, but he was not sure at first. After all, according to federal law, the Fed chairman would not obey him.
This year, Fed Chairman Martin raised US dollar interest rates, which runs counter to President Johnson’s plan. So Johnson went to Martin and explained to him why the Fed was doing what the president ordered.
Surprisingly, Martin went back and did exactly the same, significantly lowering the federal funds rate, which led to a rapid rise in inflation. During his tenure, the federal funds rate barely outperformed rising inflation.
From 1960 to 1965, the US inflation rate remained low at less than 1.6%. But since 1966, the inflation rate has risen sharply: it soared to 3.01% in 1966, fell back to 2.78% in 1967, and rebounded to 4.27% in 1968, after which it was above 5% for the next two years. At the same time, currency expansion led to a rapid depreciation of the US dollar, which eventually defeated the Bretton Woods system.
Later, Fed history expert and economist Alan H. Melzer revealed the old man of Martin, who has presided over the Fed since 1951. With his academic personality, he revealed a plausible “fact”: Martin has always considered the Fed to be the internal department of the federal government and the executor of the government’s will.
“The Fed must find ways to subsidize the budget deficit. Congress and the executive set a budget. The Fed becomes the agent of Congress. He (Martin) believes that there can be no way to subsidize the deficit without significantly raising interest rates,” Melzer said.
Johnson’s “big society” and the Vietnam War have greatly dragged down government budgets. Taxes have gradually increased, marginal returns have diminished, economic vitality has fallen, and hidden dangers of inflation have gradually brewed the stagnation crisis of the 1970s.
The stagflation crisis of the 1970s was a new type of economic disaster at the time. The cause is mainly the government’s human intervention in the economy, which is manifested by the excessive expansion of finances and currencies, and economic regulation.
After the stagflation crisis broke out, the Nixon administration still used the past thinking to try to adjust the economy with Keynesian policies: monetary expansion policy and artificial price control. This is undoubtedly fueling the fire.
President Nixon is a fan of Keynesianism. He once said: “I am a Keynesian financially now.”
Nixon is good at politics and diplomacy, weaker than economy and currency, but he is surrounded by a group of bureaucrats who are good at economic policy. Arthur Burns, President Nixon’s economic problem. He was the chairman of President Eisenhower’s Economic Committee, a teacher of Greenspan and Friedman, and had a great influence on Nixon’s economic policy.
From 1970Initially, Burns served as chairman of the Federal Reserve. Because of his relationship with Nixon, he was considered the “most contemporary politician” of a Fed chairman who was too obedient to Washington’s political needs.
Facing the stagflation crisis, President Nixon and Burns jointly chose to reduce the unemployment rate through the depreciation of the US dollar and stimulate economic growth. In fact, in 1971, Nixon announced the closure of the gold exchange window, which has caused the dollar to depreciate significantly. When the exchange rate is floating, the US dollar depreciates sharply, and domestic inflation risks increase.
After the US dollar was decoupled from gold, the US government and Middle East countries signed an international oil settlement agreement, designating the US dollar as the only currency for international oil settlement. This is what we call petrol dollars. However, after the outbreak of the oil crisis, the sharp rise in oil prices is equivalent to a sharp depreciation of the US dollar. This is the direct cause of the rapid rise in US inflation.
The Nixon administration tried to use economic expansion and the devaluation of the US dollar to stimulate economic recovery and reduce unemployment. However, currency depreciation will exacerbate inflation. The Nixon administration took a second approach-controlling prices. The Federal Reserve is responsible for stimulating economic growth, and the federal government is responsible for freezing prices and suppressing inflation. This fit may seem like the best of both worlds, but it turned out to be counterproductive.
The long-term implementation of Keynesian policies can easily lead policymakers to interfere with the economy blindly, and develop the inertia of “man is better than heaven”. The randomness and arrogance of human intervention gradually replaced the necessity and rigor of the rule of law.
At that time, a Texas farmer drowned 40,000 chickens alive in a pond, and national television audiences were stunned. The reason was that poultry prices were not high enough at the time to get subsidies. In 1973, half the sky housewife launched a week-long national campaign against meat.
The Nixon administration has spent the entire year freezing food prices, obstructing union wage increases, criticizing Arabs for being insatiable, and calling on people to reduce oil purchases. But these efforts ultimately failed, and the stagflation crisis got deeper and deeper.
The price of living is the last bastion of the national economy. Under the expansionary monetary policy, the currency tide has hit the property market and the stock market, causing asset bubbles, and the impact on the consumer market has led to the overall distortion of market prices, a sharp depreciation of the currency, and a full-blown economy.
Mass employment is the last straw in national life. The economic recession has caused companies to shrink and reduce investment. Due to wage stickiness, companies tend to directly lay off employees rather than reduce wages, which may lead to a sharp rise in unemployment.
Undercurrent surging under the currency, internal heat gathering, and the price of oil, fruits, food or a commodity rising sharply, it is easy to ignite the fire of prices, fully ignite inflation, and deepen the fight.