The View From 1776
Tuesday, December 23, 2008
Read James Grant’s overview of the disaster engineered by the Federal government’s massive deficit spending and the Federal Reserve’s accommodative creation of fiat currency to fund it.
Fiat money and unrestrained Federal deficit spending have militated, in the aggregate, to eliminate personal savings, the only stable basis for the capital investment that creates new jobs and raises a nation’s standard of living.
Government spending largely creates unproductive, paper-shuffling jobs, strangling regulations, and mounting inflation. It is inflation which has left America’s middle class with stagnant incomes and diminished expectations for the future.
Every period of history, well documented since the Roman Empire, demonstrates that no political society can inflate its way to prosperity. But Helicopter Ben Bernanke is still trying it.
In a Wall Street Journal feature article, financial analyst Jim Grant sketches the nature and origin of our financial crash: Is the Medicine Worse Than the Illness?
It’s worth noting that Mr. Grant has been predicting the current denouement for the past few years. Among other phenomena, he observed several years ago that the accelerating dollar volume of home equity (2nd mortgage) loans was tracking the rising dollar amounts of imports from China.
Inflation with fiat currency facilitates spending, but not production. Which is why we have looked increasingly to imports from overseas for our money’s worth, and business has been impelled to outsource production to other nations.
A few quotations:
The Fed, watching this preventable accident unfold, rushes to the scene too late. Not only did Bernanke et al. not see it coming, but they actually egged the man higher. You will recall the ultra-low interest rates of the early 2000s. The Fed imposed them to speed recovery from an earlier accident, this one involving a man up on a stepladder reaching for technology stocks.
The underlying cause of these mishaps is the dollar and the central bank that manipulates it. In ages past, it was so simple. A central banker had one job only, and that was to assure that the currency under his care was exchangeable into gold at the lawfully stipulated rate.
The times were hard in the 1870s and, for that matter, again in the 1890s, but Americans repeatedly spurned the Populist cries for a dollar you didn’t have to dig out of the ground but could rather print up by the job lot. “If the Government can create money,” as a hard-money propagandist put it in an 1892 broadside entitled “Cheap Money,” “why should not it create all that everybody wants? Why should anybody work for a living?” And—in a most prescient rhetorical question—he went on to ask, “Why should we have any limit put to the volume of our currency?”
A couple of panics later, the Federal Reserve came along—the year was 1913…
Elihu Root, Republican senator from New York, thought he smelled a rat. Anticipating the credit inflations of the future and recalling the disturbances of the past, Mr. Root attacked the [Federal Reserve enactment] bill in this fashion: “Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community.
“Bankers are not free from it,” Mr. Root went on. “They are human. The members of the Federal Reserve board will not be free of it. They are human….Everyone is making money. Everyone is growing rich. It goes up and up, the margin between costs and sales continually growing smaller as a result of the operation of inevitable laws, until finally someone whose judgment was bad, someone whose capacity for business was small, breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure.
“That, sir,” Mr. Root concluded, “is no dream. That is the history of every movement of inflation since the world’s business began, and it is the history of many a period in our own country. That is what happened to greater or less degree before the panic of 1837, of 1857, of 1873, of 1893 and of 1907. The precise formula which the students of economic movements have evolved to describe the reason for the crash following the universal process is that when credit exceeds the legitimate demands of the country the currency becomes suspected and gold leaves the country.”
Little did Mr. Root suspect that the dollar would lose its gold backing altogether—that, starting in 1971, there would be nothing behind it more than the good intentions of the U.S. government and (somewhat more substantively) the demonstrated strength of the U.S. economy. Still less could he have guessed that the world would nonetheless fall in love with that uncollateralized piece of paper or—even more astoundingly—that the United States would enjoy so great a reservoir of good will that it would be allowed to borrow its way to a net international investment position of minus $2.44 trillion ($17.64 trillion of foreign assets held by Americans vs. $20.08 trillion of American assets held by foreigners). “It goes up and up,” Mr. Root said of the inflationary cycle, but just how high he could not have dreamt.