The Digest #162

Published on August 31, 2023

Volcker on Inflation Targeting

The narrative from the Federal Reserve is that the two percent inflation target is intact and officials are dedicated to moving toward that goal. However, lately it seems like there have been efforts to move the Overton window toward a higher target.

On August 20, Jason Furman argued in favor of a three percent target on the opinion pages of the Wall Street Journal. Two days later, Nick Timiraos, perhaps the reporter with the best sources inside the Eccles building, wrote a news article about how hard the Fed should “squeeze” to achieve the two percent target. A few days later, the Fed’s annual symposium at Jackson Hole kicked off. 

I couldn’t help but think of what Paul Volcker had to say about inflation targeting in his book, Keeping At It: The Quest for Sound Money and Good Governmentwhich he published in 2018, a year before his death at the age of 92. I recently read the book and highly recommend it. Here is an excerpt from an op-ed that was based on the book:

A 2 percent target, or limit, was not in my textbooks years ago. I know of no theoretical justification. It’s difficult to be both a target and a limit at the same time. And a 2 percent inflation rate, successfully maintained, would mean the price level doubles in little more than a generation.

I do know some practical facts. No price index can capture, down to a tenth or a quarter of a percent, the real change in consumer prices. The variety of goods and services, the shifts in demand, the subtle changes in pricing and quality are too complex to calculate precisely from month to month or year to year. Moreover, as an economy grows or slows, there is a tendency for prices to change, a little more up in periods of economic expansion, maybe a little down as the economy slows or recedes, but not sideways year after year.

Yet, as I write, with economic growth rising and the unemployment rate near historic lows, concerns are being voiced that consumer prices are growing too slowly — just because they’re a quarter percent or so below the 2 percent target! Could that be a signal to “ease” monetary policy, or at least to delay restraint, even with the economy at full employment?

Certainly, that would be nonsense. How did central bankers fall into the trap of assigning such weight to tiny changes in a single statistic, with all of its inherent weakness?

— Paul Volcker, October 25, 2018

As Paul Volcker alluded to five years ago, the Federal Reserve spent several years debating whether inflation was “too low” and how to bring about a higher cost of living for Americans. In 2017, Janet Yellen went so far as to say that her only regret as Fed Chair was her failure to achieve what she falsely claims is the Fed’s mandate.

The reality is that the Federal Reserve has a price stability mandate and Congress has never authorized the Fed to destroy two percent (or any other percent) of the value of the dollar annually. As I wrote a few months ago, the Humphrey Hawkins Act of 1978 is quite clear about what price stability actually means. 

If Jason Furman wants to argue that inflation should run at three percent annually, the place to do so is before the appropriate Congressional committee in the context of amending the Humphrey Hawkins Act of 1978. Instead, policy debates over inflation occur in resorts like Jackson Hole that no ordinary American could ever hope to visit.

The media is entirely absent when it comes to even asking Fed officials whether Congress has a role to play in this debate. Fed reporters need to start behaving like reporters rather than serving as mouthpieces for unnamed Fed sources who wish to launch trial balloons in the media to measure market reactions.


Toys for Billionaires: Sports Franchises as Trophy Assets! by Aswath Damodaran, August 25, 2023. The photo of Steve Ballmer at a Clippers game is great. A huge part of ownership is not about economics. “The time is ripe now to talk about how professional sports, in its many variations around the world, has blown a financial gasket, as you see teams sold for prices that seem out of sync with their financial fundamentals and players signed on contracts that equate to the GDP of a small country.” (Musings on Markets)

Insurers Offer Businesses a Hedge for Weather by Richard Vanderford, August 26, 2023. “Parametric insurance, as it is called, remains a niche product, though it functions in a relatively straightforward way: It pays out when certain conditions, or parameters, are met. Standard-issue insurance might cover flood damage or hail, but a parametric policy is tied directly to a weather event, paying, for example, if wind speed at a specific location gets above a certain level, or floodwaters reach a predetermined height. The data usually come from third parties, such as government weather agencies.” (WSJ)

Rediscovering Berkshire Hathaway’s 1985 Annual Meeting by Kingswell, August 29, 2023. “I recently stumbled upon an Omaha World-Herald story written about Berkshire’s 1985 annual meeting. It’s certainly not perfect — some of Warren Buffett’s answers are paraphrased by the author rather than quoting him directly — but it’s the most information about this lost annual meeting that I’ve ever seen gathered together in one place.” (Kingswell)

I Hate Guidance by Ian Cassel, August 31, 2023. I agree with everything in this article about short term guidance. As for the longer term, this seems like a workable approach: “If a company feels compelled ‘to do something’ provide a three year goal.  It’s important that it’s a genuine goal, and not an embellished one to sell investors. I think if it’s done with sincerity it can be a great tool for management teams and allows them to get off of the quarterly and annual guidance treadmill.” (MicroCapClub)

The Curious Case of Big Tech by Abdullah Al Rezwan, August 26, 2023. This is an interesting look back at the valuations of large technology companies ten years ago and how fast they have grown. “In aggregate, Big Tech was worth $1.1 Tn at the end of 2012.  Over the last ten years (2013-2022), Big Tech collectively generated $2.3 Tn Operating Cash Flow (OCF), slightly more than double their aggregate market cap ten years ago! To say it differently, Big Tech was a form of deep value investing that was deeply underappreciated even though they are all widely followed companies at that time!” (MBI Deep Dives)

Our Politicized Corporate Governance System Needs an Overhaul by Lawrence Cunningham, August 29, 2023. “As I made clear in my testimony before Congress in July, the shareholder proposal process must be reformed to reflect the interests of everyday investors and stop subsidizing those with ulterior motives. This starts by restoring the traditional view that corporations are businesses building shareholder value, not political institutions shaping civic society—they’re supposed to put profits before politics.” (Bloomberg Law)

Wise Words on Value Investing, August 30, 2023. This is a collection of quotations from value investors preceded by a discussion of how many of the most successful investors have been influenced by both Ben Graham and Phil Fisher. (Novel Investor)

Only the Passionate Survive by Nick Maggiulli, August 29, 2023. A good reminder for writers on the hazards of writing for algorithms rather than on topics of genuine interest. “Writing for search engines is soul-killing work. Why? The reason is simple—I’m not writing about what I want to write about, but what other people want to read about. I’m writing to get more pageviews (i.e. money) and not because I’m particularly interested in how to save for a house or how much you need in your emergency fund.” (Of Dollars and Data)

How to keep a writer’s notebook by Katherine May, August 25, 2023. I enjoyed this perspective on how writers can maintain and use notebooks. For what it’s worth, my notebooks are the exact opposite — very organized and legible! “In my view, a good notebook should be at best partially legible – that’s what creates its mystique. It should actively repel the casual viewer, and exude a feral air that unsettles intruders. It should be a disorderly space, defiant of bourgeois convention; a rowdy heath instead of a tidy garden. Its dark magic lies in a series of collisions, the juxtaposition of thoughts that, in any ordinary space, would not go together. The result should be an unruly object, defying polite society.” (The Clearing)

Galen and Medicine, August 30, 2023. This is an interesting excerpt from a book about Galen, a Greek physician who lived from 129 to 210 and crossed paths with Marcus Aurelius. Although most of his conclusions regarding the functions of organs in the human body proved to be mistaken, he was the first to come up with the practice of measuring a patient’s pulse: “Galen came up with the practice of feeling his patient’s pulse — something that doctors still do. He wrote a treatise on how the pulse — slow or fast, strong or faint, regular or irregular — could be useful in diagnosing disease, even though he had no idea about the circulation of the blood.” (Delancey Place)


Teledyne — 1967 Annual Report, August 28, 2023. 45 minutes. Although this podcast focuses mostly on Teledyne’s 1967 annual report, there is also quite a bit of discussion about the founding of the business by Henry Singleton in 1960 and the overall record of this remarkable conglomerate. Both Warren Buffett and Charlie Munger hold Henry Singleton’s capital allocation record in very high regard. (10-K Podcast)

Founders #318: Alistair Urquhart, August 27, 2023. 52 minutes. This is a riveting story of survival by a British soldier who was sent to Singapore in 1939 at the age of nineteen. He was soon captured by the Japanese and subjected to horrible treatment by his captors for three and a half years. Miraculously, he survived to tell his story. This reminded me of E.B. Sledge’s book, With the Old Breed, which I mentioned in my reading list for the first quarter. E.B. Sledge was never taken prisoner but he bore witness to the cruelty and fanaticism of the Japanese during World War II. (Founders)

Vinay Prasad on Cancer Screening, August 28, 2023. 1 hour, 14 minutes. This podcast is a useful counterpoint to advocates of cancer screening and aggressive preventative interventions. While many of Vinay Prasad’s cautions are worth considering, I think that they are most applicable to individuals who are already in poor health with limited life expectancy and could be harmed by aggressive interventions. I personally am psychologically equipped to know my complete health status and make sound decisions for myself based on the risks and benefits. (Econ Talk)

Marie Lake, Sierra Nevada Mountains, September 4, 2013

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The Digest #162