Volcker Is a Fascinating Choice for Obama’s Economic Advisor

President-elect announced the formation of the "President's Economic Recovery Advisory Board". The board will be chaired by 81-year-old Paul , who served as the chairman of the Federal Reserve under Presidents Carter and Reagan. is out-of-line with current government actions which are dramatically increasing the money supply. However, in the long-term, may be exactly the

At the end of November, President-elect announced the formation of the "President's Economic Recovery Advisory Board". The board will advise on how to revive the ailing economy. The Board will have a two-year term, at which point will determine whether to continue its existence based on economic circumstances that then exist.

The board will be chaired by 81-year-old Paul served as the chairman of the Federal Reserve from 1979 through 1987, under Presidents Carter and Reagan.

received his Fed chairmanship at a time when inflation was a major problem, and the economy was headed for recession. Inflation (as measured by the CPI) was 13.3% for 1979, but decreased to 3.8% for 1982. realized that inflation was caused by having the money supply grow faster than the real economy created value. dealt with inflation by increasing the federal discount rate to 15%. Although tight money tactics dealt with inflation, it also increased unemployment, which reached 10% in some parts of the country. was aware of the but concluded that inflation was the greater problem.

A Inflation

Currently, the primary accepted means the government is using to stimulate the economy is a dramatic money supply increase. This creates liquidity beyond what is needed to finance the size of the economy. The money supply increase is intentionally being made available to churn assets and increase asset prices.

Many economic experts identify deflation as a current potential problem. While deflation could perhaps occur in the short-term, the long-term problem will instead be inflation. In the short-term, recent dramatic oil and commodity price drops show up as deflation in the and CPI. But, the decline in oil and commodity is better described as a one-time price adjustment that reverses excessive increases occurring over the previous year. Previously, cheap foreign products restrained price increases, but this brake on overall inflation cannot continue once foreign workers obtain more affluence, and the foreign economies face their own high inflation in both wages and prices.

If this holds true, is a fascinating choice for the job of economic. Absent (i) an interest rate policy similar to when was Fed chairman, and (ii) a rapid unwinding of the U.S. investments in the capital markets and other bail-out activities, the U.S. will again reach double-digit inflation before first term is over. At that point, facing a situation similar to when was Fed chairman, will need advice. The advice will not pertain to how to end the recession, but how to break the back of inflation that practically no one is currently even contemplating.

This prediction has plenty of ramifications, but here is the biggest as it pertains to investments. Avoid bonds, unless they are inflation adjusted (like TIPS). Investors who recently fled the stock market and invested in “safe” bonds will not only miss the coming stock market rally, but will also be devastated as inflation takes its toll on their bond investments.

Accounting Connection

has other credentials that allow him to give advice in the accounting arena. Specifically:

1. In 1996, was chosen to chair the committee overseeing the restitution by Swiss banks to Holocaust victims. The far-reaching accounting investigation ultimately uncovered thousands of accounts that probably belonged to victims of Nazi Germany.

2. In 2000, chaired the oversight board that created the International Accounting Standards Board , and then served as head of for two years.

3. In 2002, was brought in to assist Arthur Andersen in the aftermath of the mess. The government’s indictment of Andersen prevented from accomplishing much, but he demonstrated a disdain for those at Andersen who hired him. intended to throw out the existing management and establish a seven-member panel to select a new management team. Under plan, the revamped Andersen would have focused almost exclusively on auditing, and would have eliminated its consulting business.

4. In late 2002, SEC-chairman Harvey Pitt to ask to head the newly created Public Company Accounting Oversight Board. declined the prestigious appointment, citing the time demands of the job.

The outspoken is likely to have the following additional advice for the administration:

1. Accounting standards should be more principles-based accounting approach (meaning what the U.S. currently does not have). would support the movement to replace U.S. generally accepted accounting principles with International Financial Reporting Standards.

2. The large (Big Four) accounting firms should be further restricted from performing consulting services. These large firms are now more aggressively getting into non-audit projects to obtain growth that is no longer coming from projects associated with objects to these additional services being offered by audit firms that help protect the capital markets.

3. If one of the large accounting firms faces a litigation problem that further restricts competition, would probably support what would now be thought as harsh government restrictions on these firms. This government intervention could include the possibility of a forced breakup of one or more of these firms.

4. In the corporate governance area, companies should have chairman and more qualified independent audit committees. These are both consistent with past comments. These corporate governance issues might arise because of U.S. investment in, or bailout of, American companies.

As long as health allows him to remain active, could provide important economic and accounting advice to the new administration in areas that are not currently being contemplated.