–How Paul Volcker depleted his legacy in 5 minutes

Mitchell’s laws:
●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor,
which leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.


I’ve liked Paul Volcker. He cured the inflation of 1979 through 1983, by raising interest rates (which increased the demand for dollar-denominated securities, thereby increasing the value of the dollar.)

[Aside: This is an area of disagreement between Monetary Sovereignty and MMT, which claims high interest rates increase business costs, thereby forcing prices up – an inflationary effect. MS agrees this is true, but claims the increased reward for owning dollars has a much greater, anti-inflationary effect.

The dueling claims are discussed in more detail at: Preventing and Curing Inflation: Modern Monetary Theory vs. Monetary Sovereignty]

I also like the “Volcker Rule, part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. The Rule limits bank speculation on investments that risk customer deposits, and don’t benefit customers. (I’d prefer that all banks be federally owned. The Volcker Rule is a short step in the right direction.)

But, even a well-respected Fed Chairman can go astray when discussing basic economics. The September issue of MONEY magazine, contained an interview with Volcker, relevant excerpts of which are:

Question: Which vision on how to fix the U.S. economy makes more sense to you: the Paul Ryan plan of tax cuts for the wealthy and deep bites into federal spending, or Simpson-Bowles [the presidential commission that offered a major deficit-reduction plan by increasing some taxes and cutting spending], which increases taxes for the wealthy with far less dramatic reductions in federal expenditures?

Volcker: Well if you’re just aiming for a balanced budget—it would be extremely difficult to achieve without some significant reform in the entitlement area. We’ve also got to take some look at the defense area, where expenditures are so large relative to the rest of the world that there might be some room for savings. But on top of that, you’re going to need some additional revenues. It’s not possible right now, but we need a real structural reform in our tax system if we’re going to approach equilibrium between spending and taxation. In addition, we’ve got great budget pressure on state and local governments.

Sadly, Volcker discusses how to achieve a balanced federal budget, rather than saying (as he should have): “If you’re talking about balancing the federal budget, that is a sure path to recession or depression. Balancing the budget requires spending decreases and/or tax increases.

But, Federal Spending + Non-federal spending – Net Imports = GDP. Spending decreases reduce the 1st term in that equation and tax increases reduce the 2nd term. So together, they reduce GDP.” Volcker should understand this basic truth of economics.

Question: So what would you do on taxes?

Volcker: To put it bluntly, we have to move more toward a consumption tax. There are different ways you could do that, but that’s what we ought to be doing.

Because lower income people spend a greater percentage of income on consumption than do higher income people, Volcker’s recommended tax would increase the gap between the rich and the not-so-rich. Hard to believe Volcker doesn’t realize this.

Question: Would you get rid of the Bush tax cuts?

Volcker: In the short run, you’ve got to deal with your income taxes. You can do that either by repealing the Bush tax cuts, at least for some people, or by rearranging the exemptions and loopholes, all those things people talk about adopting, something along the lines of Simpson-Bowles.

Every income tax increase reduces the “Non-federal spending” part of the GDP equation, thereby leading us to recession. Simpson-Bowles is a guaranteed plan for recession or depression.

How has Obama done in handling the economic recovery?

Volcker: Everybody thinks it would be nice if the administration were more effective in promoting a balanced package on taxes and spending. The problem is that the political system has been so ideologically divided, and the congressional situation is such that it’s been hard to get any degree of consensus on any sensible program.

Yet another Volcker claim that a disastrous balanced budget would be beneficial.

Question: Do you think that some version of Simpson-Bowles or Rivlin-Domenici [another bipartisan panel putting forth a deficit-reduction plan] is the best we can do?

Volcker: Yes, absolutely. I wish Mr. Obama would do it today. Those two approaches have the essentials. Neither has the kind of tax restructuring that I envision, though Rivlin-Domenici had a little bit of it. Ironically, the easiest thing to do, politically and otherwise, is Social Security reform. Such reform would be important as an example of what we can do in the medium and longer run.

“Social Security reform” is a code phrase meaning: “Cut benefits and/or increase taxes, because the government can’t afford to pay for Social Security.” Cutting benefits and/or increasing taxes punishes the lower income people, thereby increasing the gap. It also would lead to recession.

Further, the government, being Monetarily Sovereign, and having the unlimited ability to pay any size bills at any time, could afford to pay all Social Security benefits, even without FICA.

Question: Is the Federal Reserve Bank living up to its charter of maintaining price stability and promoting full employment?

Volcker: I’ll be radical and say this dual mandate confuses the issue. The most important thing the Federal Reserve can do over time is maintain price stability. Obviously when you’re in the midst of a recession to start they can maintain price stability and provide a lot of stimulus at the same time.

I agree, completely. The primary job of the Fed is to prevent and cure inflation. Stimulating the economy is the job of Congress and the President. Sadly, the politicians have abdicated their economic responsibilities, so have tossed the hot potato to the Fed, which is ill equipped for the job.

In short, Volcker was a good Fed Chairman, but a lousy economist.

Hmmm . . . Is that even possible?

Rodger Malcolm Mitchell
Monetary Sovereignty


Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports


3 thoughts on “–How Paul Volcker depleted his legacy in 5 minutes

  1. Rodger….You never talk about how we’d change if all here knew the Fed could near-infinitely enrich any state, locality, corp, family, or anyone, anywhere here, anytime. You like to ‘Theory Wallow’ and thus avoid the nitty-gritty day-to-day real effects of a ‘sky’s the limit U.S. Fed world. How would North American work/non-work behavior change knowing full well our Fed could cover any state, local, corp, or citizen run-ups?

    Rodger, openmindedly talk about the likely behavioral effects of what you propose and perhaps why it hasn’t been embraced by the intelligensia


    1. Although the federal government has the unlimited power to create dollars, there is a limit: Inflation. There is a point beyond which even interest rate increases would not prevent inflation. We are nowhere near that point.

      I never have proposed unlimited money creation. Right after my signature (above) you’ll see the “Nine Steps to Prosperity. That’s what I propose. What do you think of them?

      It hasn’t been embraced by the wealthy (Are they the “intelligensia”?) because it would reduce the income gap. The rich want the gap between rich and poor expanded.


  2. Zero understanding of sovereign debt and government deficits, top to bottom, or at least you would have to believe that, Rodger. These people are not fools-just 100% bought and paid for by the power elite. Wouldn’t it be interesting if these folks “acted” and actually did “print” quadrillions (I guess it would have to be way more than the $65 TRILLION “printed” by the Treasury last year as listed on the USDT website) in hopes that a giant inflation would occur and then of course claim, “See, we told you so!”


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