Read an interesting article written last month at Reno Gazette-Journal. The article discusses the current day Fed, and how it differs greatly from the golden era when the Fed Chairman was Paul Volcker.
The author, Robert Barone suggests it will take similar Fed action to what led to a huge slash in inflation, followed by a huge crash in a recession. They’re talking about 1980, and I remember it well. At the time, my father was complaining about gas hitting $1.30 / gallon.
Oh, to have those halcyon days back. Now, we have the opposite: radical concern for deflation.
Inflation: Head in the Sand
In 1979 and 1980, when the Consumer Price Index was rising at a double-digit rate (1979 = 13.9%; 1980 = 11.8%), the then-newly appointed Fed Chairman Paul Volcker, killed inflation by raising interest rates to unseen levels. (The effective Fed Funds rate was more than 19% in the summer of 1981). While a severe recession ensued, the death of inflation ushered in a golden age for America, and from June 1982 to August 2000, the S&P500 rose at an average annual rate of 15.7%.
The way CPI was constructed in 1980 is very different from the way it is formed today. John Williams of ShadowStats has calculated that if the 1980 CPI construction were still in use today, then we would have officially seen a rate of inflation of 8.9% in 2010, 10.7% in 2011, 9.7% in 2012, and 9.1% in 2013.
But today, near double-digit rates of inflation (using the same calculation method) are ignored, and the Fed tells us that deflation is a bigger threat.
America's middle class suffers from a falling real wage rate because the inflation measures are so biased to the downside and cost of living wage increases are nowhere near what is needed to preserve the purchasing power of the wage earner.
I suspect that we wouldn't be having the debate about the minimum wage or the strikes against the fast-food industry if the official CPI in 2010, '11, '12 and '13 had shown John Williams' results.
Today, policy makers worry about deflation coming from a long-term downtrend in population growth. But they ignore the real threat of economic stagnation coming from the bogus inflation numbers which reduce the purchasing power of the wage earner, and they ignore the potential for inflation, which comes from out of control money printing policies.
This Fed clearly isn't your father's Fed. I suspect that, before this is over, we will need another Paul Volcker.