Will Bernanke save the dollar like Volcker did?

October 9, 2009

David Goldman over at the Inner Workings blog, notes a key anniversary:

Inflation had crossed into double digits after four years of mismanagement by the Carter administration. The gold price was rising (and about to hit an all-time record when the Soviet Union invaded Afghanistan the following Christmas). America’s international position had collapsed; the European elites believed that America would lose the Cold War; America was in deep recession even while inflation soar. Volcker had no choice but to raise the federal funds rate to 15%. The dollar stabilized but the US economy went into free fall.

The San Francisco Fed reported, “Volcker returned from the annual IMF meetings in Belgrade in early October “with his ears still resonating with strongly stated European recommendations for stern action to stem severe dollar weakness on exchange markets. Volcker decided to call a special meeting of the FOMC, a meeting that was not publicly announced, to be held on Saturday, October 6.”

Are we due for a repeat of the Oct. 6 tightening? Not a chance for the time being. No-one wants it, least of all the Chinese — which is why they continue to buy US Treasury debt, albeit at a much reduced rate. But unless the Obama administration finds some way to stop monetizing debt, something like this has to happen.

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