The textbooks predict that when you raise interest rates high enough, an economy will sputter, and that’s what happened: The second Volcker recession began in July 1981 and lasted until November 1982.
Still, that made Mr. Volcker’s task easier. There was no longer any reason to doubt that the Fed meant business. Another recession? Bring it on! Anything it took, as long as it stifled inflation. As William L. Silber, the New York University economist, says in “Volcker: The Triumph of Persistence”: “His leadership of the Federal Reserve from 1979 through 1987 revived confidence in the central bank — almost as though he had restored the gold standard — and ushered in a generation of economic stability.”
Trading stocks, bonds and commodities like gold during this volatile period was exciting but excruciating. Countless, supposedly well-informed “experts” recommended buying and selling stocks at the wrong moments. Millions of people lost money.
Short-term gains — and losses — were spectacular. Gold sold for $282.70 an ounce on the day Mr. Volcker took office. It reached $850 five months later, on Jan. 21, 1980 — and wouldn’t flirt with this lofty price again until the financial crisis of 2008, 28 years later. (That history is one of the reasons I’ve stayed away from gold in recent years.)
If you didn’t pay attention to the fact that inflation was eating away at the value of your investments, the numbers were fantastic. Here are some, compiled by the Federal Reserve Bank of St. Louis. Six-month certificates of deposit carried yields of more than 18 percent in March 1980, but mortgage rates were mind-bogglingly high, too, averaging 18.6 percent in October 1981. In August 1981, three-month Treasury bills carried a yield of more than 15 percent and money market funds were much in vogue. But those yields declined to single-digit levels by 1984, when inflation was back under control.
Trading was all a matter of timing, which nobody gets right all of the time.
That’s why I avoid it. Instead, I try to stay humble, accept long-term market returns, and just carry on, despite short-term losses.