Will Bernanke save the dollar like Volcker did?
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). Americaâ€™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, â€śVolcker returned from the annual IMF meetings in Belgrade in early October â€świth 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.â€ť
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 â€” 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.