Larry Summers Won’t Burn in Effigy
Today we’ll discuss the prospects for gold, silver and oil.
But first, let’s discuss Richard Nixon.
That is, after he lost the election for governor of California in 1962, he remarked to the assembled news reporters, “You won’t have Nixon to kick around anymore.” Of course, we all know what happened with Mr. Nixon in later years.
(Heck, speaking of gold, Nixon took the U.S. off the gold standard in 1971. And it was on Nixon’s watch that oil prices quadrupled in 1973. But I digress….)
Nixon’s so-called “last press conference” came to mind last week as I saw news that former Treasury secretary and presidential economic adviser Larry Summers… umm… “withdrew” his name from consideration to be the next chairman of the Federal Reserve. He won’t succeed the current Fed ramrod, Ben Shalom Bernanke. Yes, indeed. Larry Summers withdrew his name. I read it on the Internet, so it must be true.
Did Summers walk? Or was he “helped” in making his decision? Or just plain pushed? Whatever happened, I’ll bet Summers thought long and hard about whether or not to plunge into that Fed briar patch with his monetary weed whacker. His designated role would have been that of the central bank “fall guy.”
That is, the duty Summers won’t seek is similar to the mission of Paul Volcker back in the late 1970s and early 1980s. Volcker was the Fed head in an era of raging inflation and economic stagnation. Volcker gritted his teeth and raised interest rates to nosebleed levels, which smashed inflation down — and tore the guts out of an already weak economy.
In an alternative universe, today Summers would have had the unpleasant duty of scaling back on Bernanke’s still-raging $85 billion per month program of quantitative easing (QE). Hey, somebody has to fall on that monetary hand grenade sooner or later. But I guess it’ll be later. And the perp will not be Larry Summers.
Evidently, big shots within the Obama administration and the Senate noticed that our grand U.S. economy is less robust than they would like. Plus, we have looming budget battles and political dogfights over taxes and spending. Add in the approaching storm of Obamacare — a job-killing, economy-wrecking tsunami already flooding across the land, from what I can see (long story). So the issue for the Fed becomes whether to throttle QE just now or let the Fed’s money spigot run.
Politically, it’s risky to scale back on QE. Or to paraphrase that old line about cancer, there are more people living off it than dying from it.
So apparently, policy honchos within the Obama administration told Bernanke to keep the Fed’s signature easy-money programs in place for a while longer. How much longer? Well… through this fall, at least. Then we move into 2014, when the U.S. will hold elections for the entire House and one-third of the Senate. So politically, this is a no-brainer, and QE should last awhile longer.
Getting back to Larry Summers, I suspect he knows what happened to Paul Volcker back in the 1980s, when the guy battled America’s inflation problem in a post-Vietnam, oil-shocked economy.
In terms of monetary policy, Volcker did what he needed to do. Volcker raised interest rates. He raised them high!
I lived through it. It was good to be a saver or lender, but I also recall that Volcker’s high interest rates sure stung if you were the borrower. Ugh. I once signed up for a 16% rate on a used car loan — a beat-up Dodge Omni, no less! I still cringe at the thought.
In the larger picture, Volcker was much hated in many quarters. In the Midwest at the time, the steel and auto industries were contracting due to rising global competition. (It’s where the term “Rust Belt” originated.) Volcker’s high interest rates made things worse, leading to more plant and mill closings and attendant layoffs. People rioted in the streets against Volcker and burned him in effigy. As things unfolded, Volcker required personal protection due to death threats.
I’ll add this for perspective, though. Back then, the world was in the depths of the Cold War. The West faced a very real and dangerous nuclear threat from the former Soviet Union, which set the overall political tone. Absent that, I doubt that either President Jimmy Carter or even President Ronald Reagan would have gutted it out with Volcker’s high interest rates, even to halt inflation and save the dollar.
In other words, no matter how bad things were with Volcker’s high interest rates, the politicians could rationalize it all and think it was better than losing out in the Cold War to the evil commies, if not getting nuked. These days, we lack that comforting choice of alternatives.
Thus, Larry Summers ought to breathe sighs of relief at missing out on receiving rivers of unadulterated hatred from entire populations across the now wired-in world, which lacks the former military motivations of the Cold War era. Really, today those flash mobs of “Occupy This or That” can track you down in a heartbeat.
So Summers will avoid the fate of personal vilification and destruction that’s otherwise primed and aimed at whoever takes the dirty job of draining a trillion dollars per year of fake Fed liquidity out of the global economy.
Indeed, global markets were setting up to sell off at merely the hint of Summers at the helm of the Good Ship Fed. And then? No more Summers. Last week, Bernanke announced more QE. And the markets firmed up — as did gold prices.
Also, as per the touching custom of Kabuki theater that is modern Washington, D.C., President Obama graciously accepted the Summers withdrawal. Heck, Mr. President even offered kind words for Mr. Summers’ many years of national service. Now we can only wonder about what might have been with Summers running the Fed. What might he have accomplished? Scaling back QE? We’ll never know.
Then again… let’s not overly romanticize Larry Summers. It’s not as if he’s a “doomed son of heroes” out of the tale of Ossian, riding toward the steel.
When I think of Larry Summers, I look back to his tenure as president of Harvard, where he left a mixed legacy. For instance, he initiated a long-overdue crackdown on grade inflation — sort of a “QE of grades,” if you will. Bravo!
Summers also encouraged several academically challenged Harvard faculty members to seek other opportunities. I won’t mention names, but the matter is not exactly a state secret. Again, bravissimo to Summers!
But then Summers oversaw the loss of $2 billion of Harvard endowment funds due to bad interest rate swaps, a subject on which he’s supposed to be an expert — or at least the smartest guy in the room.
On that last matter, consider that Harvard’s undergraduate tuition is about $50,000 per year, per student. So Summers losing $2 billion is equivalent to burning a year’s take from 40,000 students. But there are only about 6,000 undergraduate students on campus in any given year. Thus, one could say that Summers broke Harvard’s enrollment bank — zeroed the account — for almost seven entire years of operations. Ouch.
Of course, Harvard continues to function, as one might expect of an enduring institution that dates back to 1636. And the U.S. will likely endure as well — QE or no — considering our resilient national history since 1776.
No matter who runs the Fed, though — and it won’t be Larry Summers — I think we’re in for a rough ride for a while. At least for now, we won’t have Summers to kick around.
What’s the takeaway here? QE, QE and more QE. The Fed is propping up Wall Street, so to speak, while the “real” economy languishes. It’s investable for stock pickers. And buy physical gold. Buy physical silver. Hold oil. The dollar will live through another time of troubles. That’s where this is heading.
Ed. Note: The U.S. debt load is getting heavier. And the shoulders of the American public cannot prop it up forever. Eventually, it will buckle under the weight of its own unfunded liabilities and global debt obligations. And when it does, we hope you are prepared. That is why we publish The Daily Resource Hunter — to make sure you’re prepared for whatever happens. Sign up for FREE today, and start learning exactly what you can do to protect your wealth no matter what happens.
This article originally appeared at The Daily Resource Hunter