The View From 1776
Monday, October 20, 2008
People have too much confidence in the infallibility of intellectuals to manage the economy.
Read Jim Grant’s op-ed piece in the Wall Street Journal.
But it wasn’t the vigilance of monetary policy that facilitated the construction of the tree house of leverage that is falling down on our heads today. On the contrary: Artificially low interest rates, imposed by the Federal Reserve itself, were one cause of the trouble. America’s privileged place in the monetary world was—oddly enough—another. No gold standard checked the emission of new dollar bills during the quarter-century on which the central bankers so pride themselves. And partly because there was no external check on monetary expansion, debt grew much faster than the income with which to service it. Since 1983, debt has expanded by 8.9% a year, GDP by 5.9%. The disparity in growth rates may not look like much, but it generated a powerful result over time. Over the 25 years, total debt—private and public, financial and non-financial—has risen by $45.1 trillion, GDP by only $10.9 trillion.