The Reagan ‐​Volcker Years in Retrospect

Alan ReynoldsRichard Vigilante, an old friend from the Reagan years, reminds us of another old friend John Rutledge who worked with Larry Kudlow, Dave Stockman and me onthe 1981 presidential transition team. I  asked Stockman to invite Rutledge because I admired his writings about rational expectations and markets but also because he was a wizard with a rare DOS laptop (I did not buy a PC until 1982).Later that year, December 14, Rutledge wrote “Why Interest Rates Will Fall in 1982” forThe Wall Street Journal. That is the article Vigilante recalls as “the most prescient prediction by an economist that I have ever read.” Arguably true, but it turned out being more prescient for 1983 than 1982. The fact thatlower tax rates were not phased ‐​in until 1983–84, rather than 1982 as Kemp ‐​Kasten bill planned, was one big glitch in the timing. A prolonged inverted yield curves from the Volcker Fed was another.Rutledge argued that “major changes in interest rates are usually caused by changes m how the public wants to hold its net worth. The point of this article is that the drop in inflation in the last 18 months is forcing households to restructure their wealth in a way that will force reductions in interest rates.” T hat is, lower inflation would make it less attractive to hold tangible assets like (houses and gold) hoping to sell them later for a capital gain and more attractive to hold stocks and bonds. Since a rising bond price means a higher y...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs