#volcker shock

[thelonguepuree]

This chain of bubbles and busts [in the global economy] began in Latin America in the late 70s. An influx of recycled petro-dollars (stimulated by sub-zero real interest rates on the dollar) generated a whole series of risky financial innovations (including the infamous “adjustable rate loan”), which all collapsed when the Volcker shock brought interest rates back up. It was recycled surplus dollars from Japan that saved the US economy from the subsequent deflation and enabled Reagan’s redoubled Keynesian spending programmes. Yet the US thanked Japan for its kindness by devaluing the dollar relative to the Yen in the Plaza Accords of 1985, sending the Japanese economy into a[n] asset-price bubble of even greater proportions, which finally collapsed in 1991. This in its turn set off a series of bubbles in the East Asian economies, to which Japan had exported its manufacturing capacity (in order to get around an appreciating Yen). These economies, as well as other Latin American economies that had pegged their currencies to the dollar, then imploded as a delayed result of the dollar revaluation in the reverse Plaza Accords of 1995. Yet this merely shifted the bubble back to the US, as the US stock market bonanza created by the appreciating dollar gave way to the dot-com bubble. In 2001 the latter turned over into a housing bubble, when US corporate demand for debt proved to be an insufficient sink for global surplus dollars. If the last two bubbles were largely restricted to the United States (although the housing bubble also extended its reach to Europe), it is because due to its size and seniorage privileges it is now the only economy able to withstand the influx of these surplus dollars for any sustained time period. If we place this phenomenon in the context of the story of deindustrialisation and stagnation described above, it becomes plausible to envisage it as a game of musical chairs in which the spread of productive capacity across the world, compounded by rising productivity, continually aggravates global overcapacity. Excess capacity is then only kept in motion by a continual process that shifts the burden of this excess on to one inflated economy after another. These latter are only able to absorb the surplus by running up debt on the basis of excessively low short term interest rates and the fictitious wealth this generates, and as soon as interest rates begin to rise and the speculative fever abates the bubbles must all inevitably collapse — one after another. Many have called this phenomenon “financialisation”, an ambiguous term suggesting the increasing dominance of financial capital over industrial or commercial capital. But the “rise of finance” stories, in all their forms, obscure both the sources of financial capital, and the reasons for its continued growth as a sector even as finance finds it increasingly difficult to maintain its rate of return. For the former, we must look not only at the pool of surplus dollars, which we have already described, but also the fact that stagnation in non-financial sectors has increasingly shifted investment demand into IPO’s [initial public offerings], mergers and buy-outs, which generate fees and dividends for financial companies. As for the latter, the dearth of productive investment opportunities, combined with an expansive monetary policy, kept both short and long-term interest rates abnormally low, which compelled finance to take on greater and greater risk in order to make the same returns on investment. This rising level of risk (finance’s measure of falling profitability) is in turn masked by more and more complex financial “innovations”, requiring periodic bailouts by state governments when they break down. Unprecedented weakness of growth in the high-GDP countries over the 1997-2009 period, zero-growth in household income and employment over the whole cycle, the almost complete reliance on construction and household debt to maintain GDP — all are testament to the inability of surplus capital in its financial form to recombine with surplus labour and give rise to dynamic patterns of expanded reproduction.40 The bubbles of mid-19th century Europe generated national rail systems. Even the Japanese bubble of the 1980s left behind new productive capacity that has never been fully utilized. By contrast the two US-centred bubbles of the past decades generated only a glut of telecommunication wires in an increasingly wireless world and vast tracts of economically and ecologically unsustainable housing. The “Greenspan put” — the stimulation of “a boom within the bubble” — was a failure. It merely demonstrated the diminishing returns of injecting more debt into an already over-indebted system.

Endnotes 2, “Misery and Debt: On the Logic and History of Surplus Populations and Surplus Capital” (April 2010)

[kenyatta]

At the height (or nadir) of the Volcker Shock, benchmark interest rates were over 20 percent—and worse if you had bad credit. The exorbitant cost of borrowing put tens of thousands of firms out of business, and led to twenty-two months of negative growth. In December 1982, unemployment was at 10.8 percent—closer to 20 percent if you include workers who wanted jobs but had stopped looking, and underemployed workers who could not find steady full-time work. In absolute terms, twelve million Americans were unemployed that month, plus another thirteen million “discouraged” and underemployed. The nation’s industrial belt was the hardest hit. Ninety percent of job losses occurred in mining, construction, and manufacturing. It was costly for businesses to pay their debts and borrow money to invest, while a strong dollar made American exports even less competitive internationally. In places like Flint, Michigan and Youngstown, Ohio, more than one in five workers was unemployed. In Akron, the commercial blood bank reduced the prices it would pay by 20 percent due to the glut of laid-off tireworkers lining up to bleed. In the area around Pittsburgh, suicide rates and alcoholism soared, while residents competed for spots in homeless shelters. The unemployment rates for African-Americans were worse, peaking in early 1983 at 21.2 percent (up from around 12 percent—already a crisis—in 1979). [...] The point of all this misery was to halt the rise of inflation, which had become a problem during the Vietnam War and hit a monthly peak of almost 15 percent in April 1980. The cycle went like this: If prices were high today, people would expect them to be higher tomorrow. Businesses would raise their own prices to keep up, while workers would demand higher wages to preserve the real value of their income. People considering a purchase would tend to buy immediately, while their money was still worth something and before the shortages appeared. Volcker was convinced that altering expectations would take a demonstration of determination that no one could miss. Contracting the money supply—and hiking the interest rate—makes it harder to borrow for investment or consumption, harder to pay off existing debts, and more profitable to save money. All of this reduces aggregate demand and leads to a fall in price levels, as well as a rise in unemployment. [...] Call this the necessary byproduct view: defeating inflation is the number one priority, and any action to put people back to work would raise inflationary expectations. Growth and full employment could be pursued once inflation was licked. But there was more to it than that. Even after prices stabilized, full employment would not mean what it once had. As late as 1986, unemployment was still 6.6 percent, the Reagan boom notwithstanding. This was the practical embodiment of Milton Friedman’s idea that there was a natural rate of unemployment, and attempts to go below it would always cause inflation (for this reason, the concept is known as NAIRU or non-accelerating inflation rate of unemployment). The logic here is plain: there need to be millions of unemployed workers for the economy to work as it should. Central bankers like Volcker can decide how much employment is too much because they are insulated from domestic democratic politics. The world beyond the United States had even less say in the matter, but it suffered more. The interest rate shock was the trigger for a worldwide recession. It also touched off a debt crisis across Latin America, where governments found the cost of paying dollar-denominated loans soaring at the same time that the global contraction was lowering the prices they received for their primary source of foreign currency, commodity exports. Events like these helped deliver the coup de grâce to the ambitious third world politics of the 1970s, exemplified by the call for a New International Economic Order, which had been sustained by a global commodity boom. The tremolo of debt crises across Mexico, Brazil, Zambia, and other countries—and the lost decade that followed—was the overture for IMF structural adjustment, subsequently introduced across the Global South.

Tim Barker - Other People’s Blood: On Paul Volcker

[alanshemper]

Jimmy Carter, 1924-2024

As an individual, Jimmy Carter stood as a rebuke to our venal and heartless political class. As a politician, his private virtues proved to

Even if you find Carter’s anti-political self-presentation admirable — “I owe nothing to special interest groups” — it was disingenuous. H‌e did not shun all constituencies with the same rigor. Carter’‌s first vault beyond Georgia politics came when he was invited to join the Trilateral Commission, a private group founded by Chase Bank’s David Rockefeller. Carter reportedly studied the Commission’s reports “like a bible,” ‌He‌ appointed many Trilateralists, including Volcker, to key positions. To his admirers, the Volcker appointment exemplifies Mr. Carter’s noble detachment from interest group pressures: ‌h‌e was brave enough to engineer an unpopular recession. But as Eizenstat once stated bluntly, “Volcker was selected because he was the candidate of Wall Street.” Can a decision made in accordance with the wishes of the most powerful people in the country really be described as political courage?