Dear Volcker Happy Talkers, How’s the ‘Inflation’ Fight Going?

Before the 1970s currency markets were near non-existent. There was really no reason for them as currencies were concepts, or measures of value. The dollar was defined as 1/35th of a gold ounce, and currencies around the world were pegged to the dollar.

About the gold exchange standard that existed, critics and supporters alike can save their jeers and cheers. That’s not the point of what’s been written so far. The point is that whatever one wants to say about the gold exchange standard, they can’t credibly say that it didn’t foster remarkable currency price stability.

What verifies the above assertion is what’s happened since. Markets exist precisely because there are differing views among market players about what’s ahead. After President Nixon severed the dollar’s link to gold, currency markets formed. Absent the anchor global monies lacked a Polaris as it were, only for currencies to no longer exist as stable measures or concepts of value. What verifies the previous assertion was the subsequent explosion of currency markets. Lacking the stability formerly provided by gold, traders the world over were pulled into facilitator roles meant to bring reason to the chaos wrought by currency price instability. George Gilder notes that currency trading is presently a $10 trillion/day business.

Again, say what you will about gold, but don’t say it didn’t imbue money concepts with remarkable stability. Today it no longer defines currencies, but it still speaks. Gold doesn’t move as much as the currencies in which its value is measured move. Which brings us to the Fed.

A little over a year ago the Fed began raising the Fed funds rate to “fight inflation.” The view inside the central bank is that economic growth causes prices to rise, which is how the Fed defines inflation. Its definition is flawed. To say rising prices cause inflation is like saying wet sidewalks cause rain. Causality is plainly reversed. Inflation is a shrinkage of the monetary measure, at which point it’s useful to return to the Fed’s definition of inflation: rising prices born of too much economic growth. Which means the Fed’s solution to inflation is putting people out of work and bankrupting businesses. Which requires a very slight digression. Please read on.

If you ever want to elicit a contemptuous look from someone wise enough to NOT follow economic policy, explain to them how the Fed defines inflation. They will look at you with sneering disbelief on the way to asking the obvious: why would the Fed want to force people into unemployment? Yes, precisely. It makes no sense. None whatsoever. The very notion!


From there, it’s useful to point out that investment is what powers economic growth, and investment is all about producing more and more at lower and lower costs. Yes, the surest sign of soaring economic growth is falling prices. Neither growth nor its opposite have anything to do with inflation, but the point is worth making.

It is because Fed economists (and economists in general) believe against all data and logic that prosperity causes prices to rise. Sadly, many Republicans believe as Fed officials do.

Let’s call these true believers on the right the Paul Volcker Happy Talkers. Economic growth dominates their thoughts, but on the matter of the Fed, they argue against all empirical realities and reason that the fix for inflation during Ronald Reagan’s time in the White House was engineered by Volcker. The Happy Talkers say that he and Reagan courageously put people out of work and bankrupted businesses as a way of “sweating out” the inflation. Monetarist scolds join this Amen chorus given their view that the fix for inflation is crashing the economy with a reduction in so-called “money supply.”

Oh well, it’s useful to point out Volcker’s scolding, interest rate hiking and “money supply” shrinking approach to inflation actually took place in concert with the dollar hitting all-time lows versus – yes – gold in January of 1980. Then Ronald Reagan, who campaigned on reviving the dollar with a gold exchange definition, won the New Hampshire primary. Markets anticipate only for the dollar’s ascent to begin. And it didn’t stop in notable ways until the 1985 Plaza Accord, when global monetary authorities (including the Reagan Treasury) decided “some further orderly appreciation of the main non-dollar currencies against the dollar is desirable.”

Translated, presidents get the dollar they want. Inflation, or lack of it is a policy choice. The dollar’s exchange value is not part of the Fed’s portfolio, and it never has been. Which means that the Fed’s rate fiddling is not only a non sequitur on the matter of the dollar and inflation, it’s hopelessly backwards on the matter of pushing prices down. Volcker didn’t stop inflation, but Reagan’s policies in favor of a strong dollar (mimicked by Bill Clinton) did. All of which brings us back to the present.

Fed officials, monetarists and Happy Talkers have banded together in order to revive the false ghost of Volcker to fight inflation that, if we’re realistic, is not even inflation. Really, does anyone seriously believe that production could return to its remarkable global symmetry so quickly after the lockdowns that reared their ugly selves in 2020? To say yes to the latter is to misunderstand just how sophisticated the global economy was. We don’t have an “excess demand” problem as the Happy Talkers tell us, simply because there’s no such thing as “excess demand.” What we’re suffering is the bitter fruits of global lockdowns that compromised the staggeringly advanced cooperation among the world’s workers that was wrecked by panicky politicians in 2020.

Except that the Amen triumvirate isn’t bothering to consider the above. Wedded to a false view of inflation either due to policy confusion or baseless nostalgia, they’ve joined hands in the belief that the answer to inflation is putting people out work and bankrupting businesses. And the dollar is flirting with all-time lows versus gold after the latest tip of the cap to Volcker. As the title of this write-up asks, how’s the ‘inflation’ fight going?