Ignoring problems rarely solves them. You need to deal with them—not just the effects, but the underlying causes, or else they usually get worse.
In the developed world and especially the US, and even in China, our economic challenges are rapidly approaching that point. Things that would have been easily fixed a decade ago, or even five years ago, will soon be unsolvable by conventional means.
Central bankers are the ones to blame. In a sense, they are far more powerful and dangerous than the elected ones[1].
Hint: It’s nowhere good. And when you combine it with the fiscal shenanigans, it’s far worse.
Fixing Their Own Mistakes
Central banks weren’t always as responsibly irresponsible.
Walter Bagehot, one of the early editors of The Economist, wrote what came to be called Bagehot’s Dictum for central banks: As the lender of last resort, during a financial or liquidity crisis, the central bank should lend freely, at a high interest rate, on good securities.
The Federal Reserve came about as a theoretical antidote to even-worse occasional panics and bank failures. Clearly, it had a spotty record through 1945, as there were many mistakes made in the ‘20s and especially the ‘30s. The loose monetary policy coupled with fiscal incontinence of the ‘70s gave us an inflationary crisis.
Paul Volcker’s recent passing (RIP) reminds us of perhaps the Fed’s finest hour, stamping out the inflation that threatened the livelihood of millions. However, Volcker had to do that only because of past mistakes.
History’s Loosest Monetary Policy
Beginning with Greenspan, we have now had 30+ years of ever-looser monetary policy accompanied by lower rates. This created a series of asset bubbles whose demises wreaked economic...