China is bound to get hurt along with the rest of the world economy. And instead of being net buyers of our currency, they will become net sellers.

BR said:

"All of the European countries are busy printing too."

That's correct. And you can see this in the charts at the following website:

[Link]

The ecomomy might be tanking

but inflation may be too hot to handle

not a very good scenario for Ben.

Bets are for another rate hike in August

All better prey there are no hurricanes

in the gulf.

Volcker was backing off from tight money in late 1980 and the economy did see 4.4% growth from July 1980 to June 1981. But then Volcker saw that Reagan fiscal fiasco and the works and raised interest rates (maybe by too much). So Chairman Ben inherents the same fiscal fiasco and starts raising interest rates. I see Volcker's point!

V:`We are consuming too much and investing too little,'' said Volcker, who also indicated that higher taxes may be needed to narrow the budget deficit.

Low investment could have something to do with disincentives. Higher taxes? That's some new magical incentive to save and invest?!?

V:``Revenues have gotten too low'' relative to what the government wants to spend, Volcker said.

How about government is spending too much? The recent mid year budget update showed conclusively that this is not a revenue problem.

No, the mid-season budget shows we have a spending AND revenue problem. Those projections should be thrown out the window. Completely contrived.

You could be right about rates, sharky, but there's alot of us property investors / developers / owners here in NYC who think another bump is coming in August - at the least.

Kohn says:
" we will need to take account of any influences on the macroeconomy of the unwinding of the imbalances when that occurs.

Continued strong demand for dollar assets will be CRITICAL to keeping that unwinding smooth and not disruptive. The Federal Reserve can contribute by being sure the public remains confident that the purchasing power of their dollar assets will not erode unexpectedly. As long as inflation expectations remain contained, relatively faster growth of the prices of imported goods for a time would be associated with only a temporary bulge in inflation and would result in a needed change in relative prices."

Volker says:
"Because of U.S. dependence on foreign capital to fund trade and budget gaps, ``it is CRITICAL that we maintain confidence in our currency,'' said Volcker."

Seems like there will be no replay of the consumption "Greenspan put". Fed actors are clearly stating that US rates will have to stay elevated during the coming downturn(recession)

RC: Higher taxes? That's some new magical incentive to save and invest?!?

Raise marginal tax rates on higher incomes while simultaneously allowing aggressive depreciation on capital...

That's higher taxes and lower taxes. No fair. Let's just keep the mariginal rates AND allow agressive depreciation. (A rental I purchased in the 80's qualified for acellerated depreciation on a 17 1/2 yer schedule)

Taxes are so high now that any lowering in any component will probably have a positive effect. The only reason to raise taxes is because there is a demonstrated need. Not since the Kennedy admin has the question of need versus wants been seriously considered. Certainly these last 6 years have shown the new paradigm to be that spending expands to 120% of revenues. Its easy to criticize expensive foreign adventure but hard to apply the same logic to prescription drug coverage.

I've no problem with a shift to consumption taxation but we know how that turns out after fairness is applied. We don't even need to speculate where these ideas end up; Kalifornia.

I'm a little unclear as to incentivizing the wealthy. gobs of cash aren't stuffed in mattresses. Their capital is out there working and avoiding taxes. Raising income rates would either cause more avoidance or direct wealth to idle ventures not agressive investment.

Consumption taxes do indeed "consume" proportionately more of the income of the lower classes, because they generally only have direct income and direct consumption. Shouldn't they receive the same signals from tax policies to consume less and invest more?

Volcker is just stating the obvious. Bernanke will have to raise rates to induce a consumer led recession. Though this will decrease asset prices, which are mispriced and have led to decreased savings due to the "wealth effect", it will ultimately save the dollar and restore some fiscal discipline. Taxes will also have to come up to pay for social security and medicare. There is no getting around the demographics. Our taxes will be higher, but asset prices will be lower, and thus our savings rate will probably end up being higher.