We Need A Generation Like Paul Volcker

Jonathan Rochford

Narrow Road Capital

The passing of Paul Volcker this week has seen an outpouring of tributes to “the giant who slayed inflation”. Whilst he is most well known for leading the Federal Reserve during the time when it rebased inflation to the low levels we accept as normal today, many who knew him have also commented on his humility and integrity. These characteristics combined with his tenacity allowed him to put the US through a necessary but painful recession to kill off the scourge of high inflation.

Whilst almost everyone today acknowledges the wisdom of his actions, at the time there was substantial political and social pressure put on him to relent. The road to low inflation involved almost doubling the overnight interest rate to 20%. He and the interest rate hikes were directly blamed for the recession of the early 1980s when unemployment topped 10%. Volcker showed he was willing to do whatever it took to break inflation; his single-mindedness ultimately broke the pervasive belief that high inflation would persist.

There’s a strong parallel with what Paul Volcker did in the 1980s with what is required today. Whilst Volcker’s challenge was to convince businesses and workers that the Federal Reserve would take tough actions to break inflation, the challenge today is for central banks to convince politicians and the public that excessive monetary stimulus is an evil that must be defeated. Ultra-low interest rates and quantitative easing have produced asset price bubbles, zombie companies, low productivity and malinvestment. Through their attempts to temporarily forestall a recession, central banks have created the necessary preconditions for a long and deep recession.

Whilst there are small signs that central banks are starting to acknowledge the error of their ways, the substantial destruction of the independence of central banks is another hurdle in the way of reform. Volcker was upfront about what needed to be done to defeat inflation and was appointed by Jimmy Carter to do that. Ronald Reagan reappointed him even though many blamed Volcker for the recession that marked much of Reagan’s first term. Amongst the current crop of short term orientated politicians, who would be brave enough to appoint a central bank head who promised to prioritise long term financial stability and economic welfare?

Even greater than the legacy of breaking high inflation, Volcker left a legacy of doing what was right even though it was unpopular. Governments around the world have leant on monetary policy to fix their ills, rather than undertaking productivity reforms, tax reform and government spending reforms. The global economic outlook includes high levels of government, corporate and consumer debt, as well as extensive unfunded pension promises. To resolve these issues, we’ll need a generation like Paul Volcker willing to confront the public and the political class with the inevitable and painful changes that lie ahead.

Jonathan Rochford
Portfolio Manager
Narrow Road Capital

Narrow Road Capital is a credit manager with a track record of higher returns and lower fees on Australian credit investments. Clients include institutions, not for profits and family offices.

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