February 3, 2020

When you ignore a problem, it rarely goes away and almost never gets solved. You must deal with the underlying issues, not just the symptoms. If you don’t, things can get worse, even unrepairable.

I bring this up because we seem to be at a point in the developed world – certainly in the U.S. and China – that the real issues aren’t being solved and they’re getting worse with time. Things we could’ve solved 10 years ago (or even five) will soon be unsolvable with our standard set of solutions.

There is almost no true willingness to face our issues square in the face, specifically our ever-rising national debt. I feel like no matter what we embrace – crony capitalism or a welfare state – it won’t end well. And the ideological lockdown that’s happening probably means there will be no compromise.

Another issue is central bank policy. As the lender of last resort in a liquidity crisis, the Federal Reserve (and other central banks) should lend liberally at a high interest rate on good securities. After all, the Fed was created as an antidote to panics and bank failures.

It’s had a spotty record in that regard though. Big mistakes were made in the 1920s and 1930s. And loose monetary policy gave us an inflation disaster in the 1970s that nearly cost so many people their jobs.

And since Alan Greenspan’s chairmanship, policy has been increasingly loose and rates historically low. It’s created several asset bubbles, and when they burst, calamity ensues.

Remember the housing crisis? Financial engineering kept rates unnaturally low. When the bubble burst, regulatory failure and a financial system lacking morals caused disaster. The chosen solution – to have the architects of the demise us from it all – did nothing to fix things.

Thus, we needed the Fed then. But after injecting the system with needed capital, it kept rates too low for too long. Another example of not dealing with the real issues!

Coordinated monetary policy is a problem. Unfortunately, it’s been the standard response to fiscal challenges…even the ones caused by coordinated monetary policy. It begs the question – so now what?