A few weeks ago I linked an article Michael Lewis wrote about Steve Eisman, an investor who recognized the growing housing bubble early in the decade and beat the market as it disintegrated. In the article, Lewis mentioned a man named Jim Grant of Grant Publishing who regularly comments on interest rates and the general market. Mr. Grant wrote a stunning article for Saturday's (my birthday!) WSJ in which he rails against the fiat money system, the U.S. government's response to our financial crisis, and the chronic short-termism of U.S. politicians.
In commenting on attitudes towards inflationary policy in our country's history, Mr. Grant quotes Elihu Root, an early 1900s Republican senator from New York who opposed the initial creation of the Federal Reserve.
Mr. Root attacked the [Federal Reserve] 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."
...
"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."
Economics truly is the dismal science. Over the past century, hard sciences have come so far in providing new innovations for humanity, yet the same argument over the economic theory of credit expansion exists today as it did in 1913 when the Fed was created. Today the Fed and the Treasury fight fire after fire using the same tools that created our massive economy-wide bubble: credit.
Recall my post regarding Walker Todd's reflections on Fed policy. Mr. Grant brings up the same point:
Since Labor Day, the Fed's assets have zoomed to $2.31 trillion from $905.7 billion.
He goes on to echo my oft-repeated objection to blaming the free markets and nebulous "greed" for the housing crisis:
The public has been slow to anger in this costliest and scariest of post World War II financial crises. Wall Street and the debt ratings agencies have come in for well-deserved castigation. But pointing fingers rarely find the Federal Reserve, whose low, low interest rates helped to set house prices levitating in the first place.
Reflecting on the ability of the U.S. to continue funding deficits by issuing treasuries to foreign central banks, Grant points out the Fed's announced policy of debasing the dollar to save our massively leveraged economy:
If the Fed is going to create boatloads of depreciating, non-yielding dollar bills, who will absorb them? Who will finance the Obama administration's looming titanic fiscal deficits? Who will finance America's annual surplus of consumption over production (after 25 more or less continuous years, almost a national trait)? Inflation is a kind of governmentally sanctioned white-collar crime. Every crime needs a dupe. Now that the Fed has announced its plan to deceive, where will it find its victims?
Read the article and see what you think.
