Dana Blankenhorn

Is the Volcker Precedent Wrong?

Fed chairman Jerome Powell is basing his anti-inflation fight on the success of Paul Volcker from 1979-1984.

The myth is Volcker sent interest rates higher than that era’s inflation, but the resulting recession set the stage for decades of growth to come.

What if it’s wrong?

I had already begun my reporting career in 1979. Volcker’s policy did cause pain. But interest rates didn’t start falling until the 1980s, and the Fed wasn’t the only cause.

The other cause was the State Department. In 1981 the Reagan Administration quietly negotiated an alliance with the Saud family based on a simple premise. They would sell oil in dollars and pump a lot of it. We would extend to them our military protection, specifically against Iran.

That alliance has held firm from that day to this. It held firm through the Gulf War. It held through 9/11, even though the attack was committed mainly by Saudi nationals and inspired by the son of a Saudi billionaire. It held through the disaster of Iraq.

It was this alliance that sent inflation down in the early 1980s, not Volcker’s Fed. Oil went from over $125/barrel to $80 in Reagan’s first term. Texas’ economy was crushed, but everyone else prospered. It was morning in America.

Our present inflation is also based on resources. Oil costs spiked from $80/barrel last September to over $115 in May. They’ve since fallen back to $80. The fall came about because we’re no longer in an economic era defined by resources.

The Three Big Challenges Boiled Into One

Nearly three years ago, after attending the Heidelberg Laureate Forum honoring great mathematicians and computer experts, I wrote a three part series on the big technologies of this decade:

• The End of Oil 
• The Machine Internet 
• DNA as a Programming Language 

This is a good time to revisit the trends. A recession is also the best time to start a new tech company. Incumbents are faltering and you get a clean sheet of paper to write the future on.

Junk Tech

Imagination is in a constant competition with Moore’s Law.

Imagination often loses.

Moore’s Law makes many things possible. Not all these things are worth doing.

I call things that aren’t worth doing junk tech.

Bitcoin is junk tech. Web3 is junk tech. Blockchain is junk tech. So is the “metaverse,” in the sense that we should all live in a virtual world rather than the real one.

Good applications can come from junk. The home shopping service I supported in 1984 became an Electronic Data Interchange (EDI) format. The map CD-ROM I worked on in 1989 became a format for geographic data. Creating lemonade from lemons is always a great opportunity.

The Last Dance for Oil and Gas

Oil prices have been falling in recent weeks, and analysts have been telling investors to “buy the dip.”

They’re wrong.

The current “energy crisis” is a short-term phenomenon, caused by Russia’s invasion and falling production. Few people seem to comprehend that the falling production has a cause. The cause is a clear understanding that renewable energy prices are coming down. 

The new buzzword is “grid parity.” The definition is that solar and wind energy equal the cost of fossil fuel energy, without subsidy. That doesn’t just require panels and turbines. It also requires storage, so power levels can be boosted and lowered at will.

An Oilpatch Memo

President Biden’s move to cut gasoline taxes is doomed to failure.

That’s not because Congress won’t like it, or that it will take money from infrastructure. It’s because price is how we ration short supplies. No one has suggested an alternative rationing mechanism.

My family has done its bit for conservation. We bought a Toyota hybrid. We keep the thermostat at 77 during the summer. Except for our recent vacation, we’re not driving much because we’re working from home.

Privileged people can do this. Those without privilege, or those who think they’re without it but are, have a harder time. Poor people who live far from work get chewed up by inflation at times like these. Middle class folks who’ve bought giant pick-ups, boat trailers and homes in the exurbs are also hurting. There’s rising anger on both sides. Conventional wisdom says Republicans benefit as the “out” party.

I don’t want this to be about politics, however. I’m a finance reporter.

We are at War

The simplest explanation for this year’s events is one we don’t want to admit.

We are at war.

We are at war with Vladimir Putin’s Russia.

We were in a state of Cold War with Russia for years. Trump was part of it. Brexit was part of it. Putin subverted democratic processes, subverted the Internet, and subverted markets long before his invasion of Ukraine.

The invasion made this a hot war.

There is no alternative to Ukraine’s complete victory. Anything that leaves Putin in power only means we’re going to be here again. He isn’t like Hitler. Putin IS Hitler. It no longer matters that he has nuclear weapons. He may use them if we retreat, he may use them if we advance. We can’t limit our response to his threats. Putin’s victory would destroy humanity in any case, wrecking the climate in a global conflict of all-against-all.

It's time to go all-in.

Buy Tech Today

You now have the best opportunity in 13 years to buy technology stocks.

Amazon is now selling for just over three times its annual sales. Paypal is in the toilet. Nvidia is priced below where it was after it split 4:1. Chinese stocks are down for the count.

Now is the time to get in. Here’s why.

The reason tech fell is inflation. Rising prices lead to rising interest rates. Money costs money. That means growth and even earnings are discounted.

But tech can whip inflation now. Tech has been whipping inflation for over 40 years. Wall Street thinks Paul Volcker did it by raising interest rates in the late 1970s.

It was tech.

Boomers Win Again

A lot of folks are complaining about the U.S. economy right now, but there’s one group that has no right to kick.

Baby Boomers. My people.

I was born in 1955. That was the center of the Baby Boom for males. My dear wife was born two years later, its center for females.

Like other Boomers we’ve had our share of problems. Housing was even more unaffordable when we bought our place in 1984 than it is today. The interest rate on our mortgage was 12%. We’ve lived through three stock market collapses, and dozens of mini-crashes. We’ve had to constantly adjust as Moore’s Law eliminated jobs. Even white collar workers were not safe.

Now, after a decade of free money, money costs money again. It’s happening just in time.

OPIC

My one fault with the Biden Administration so far has been its leniency toward its enemies.

Republicans aren’t the loyal opposition anymore. Vladimir Putin isn’t just an adversary. Those who still support Putin are domestic enemies, and it’s there in the oath of office, that you protect against both foreign AND domestic enemies.

The spike in oil prices may be another opportunity lost.

The opportunity is to create what I call an Organization of Petroleum IMPORTING Countries (OPIC). While the U.S. is nominally an exporter, we are the natural leader of this group, which could include India, Japan, Europe, South America, most of Africa and even China.

The first task of OPIC would be to account for the elimination of Russian supply from the market. Each member would agree to a specified reduction in imports, or an import maximum. Each member government would deal with this shortfall however it saw fit. But if no one breaks the agreement, then you can go toe-to-toe with OPEC in the oil markets, searching for price stability.

Saudi Arabia and other OPEC members want price stability. They like price spikes, but they know they’re a short-term thing. Over time, over the next 10 years, they know that their net production will rise, while demand will fall. The Sun shines, the wind blows, rivers, and tides, roll, we live on a molten rock, and there’s also efficiency. Today’s cars, trucks, appliances, and computers all use much less energy than they did before. The increase in time between charges for your phones is all due to their becoming more efficient. The batteries are the same.

I Know Things Look Bleak Now But…

I didn’t think Vladimir Putin was stupid enough to invade Ukraine.

I was wrong.

He’s just that stupid.

While most of the Internet (and all of Ukraine) is either fighting or cowering in fear right now, I want to offer some reasons for hope.