Capitalism is sabotaged by Inflation. High inflation rates threaten real money. When inflation rates exceed interest rates creditors lose money, if they lend money; debtors profit by borrowing money and repaying it with cheap money; and savers are repulsed from the US bonds yielding 5 percent by realizing a negative ½ percent loss in real money. Transmutation of monetary dross took the form of economic growth and production increases then moved back into liquid or money form and again into greater production. This unending circuit is the essence of capitalism.
In the 1980s, Less Developed Countries were in a buying spree betting tangible assets would outstrip the value of money. Speculation increased in the stock market as more capital went to speculation and productivity investment dropped and the real economic growth became anemic. The chronic dilemma of the central bank was no one knew if the motivating demands for money were the result of rising inflation expectations or desires to increase productivity investing. Arthur Burns blamed inflation sources on the Debts incurred from the Vietnam War, lax monetary policy instead of higher taxes and spending cuts which accelerated dollar devaluation. Between 1972-73 world wide economic boom surged and inflation rose from food and oil price spikes, large budget deficits, and Congress insistent that the Fed control inflation painlessly.
In the 1980s, Market and Inflation monetary policy designed by Volcker failed. Inflation hit 17%, Volcker steamed in anger, tight US money did not mean unavailable credit came from the $4 trillion Euromarket fueling the speculative boom and represented a credit leak across borders. As interest rates went up, depositors switched bank funds into higher yield government securities. Loan money dried up, housing and consumer durable sales felloff. The bank prime rates hit 21.5%, the dollar exchange rate soared 34%; a 10% increase in the dollar exchange represented a 1.5% reduction in inflation; the interest rate rise mean zero inflation.
