I wouldn't be surprised if we saw a stagflation period similar to the 1970s. The reason I say this is because the Fed has been delaying a correction for 20 years or so, and it cannot last. Lowering interest rates may seem like a good fix in the short-term, but over the long run delaying bubbles from popping is a very dangerous thing to do. I'm not sure what the end result will be, but I do not believe a happy end is in store for this monetary policy. If stagflation does occur, the last thing we want to do is implement further disastrous policies like we did in the 1970s. What's interesting to note is that 1971 was the last year the U.S. was on at least some remnants of a gold standard, once the gold standard was abandoned the money supply greatly increased. Possible correlation to the stagflation period soon thereafter? I believe so.
What's important to note here is that it isn't only the U.S. using a fiat monetary system with large central bank in charge of monetary issues. All the major economies of the world are using a fiat monetary system (unbacked paper money) and have central banks running the show. It certainly makes you think about what the future holds given the terrible failure of fiat monetary systems through all times of history. The downfall of the Roman Empire was greatly helped through a debasement of the currency in an effort to stimulate the economy (sound familiar?).
To understand fiat money you must understand the role of government. Politics and economics come clashing on the issue of monetary policy and it is impossible to discuss monetary policy without discussing both politics and economics somewhat. The only thing that is behind the unbacked paper money that we use day in and day out is the credibility of the government. Thing is, when the government gets deeply in debt and gets involved in reckless spending, abusing the idea of paper money becomes an easy and natural thing to do. Fiat money relies way too much on a self-controlled government and that really is where the problem lies. Economics and politics should be separate but unfortunately when discussing monetary policy it is impossible to separate them.
Tags:
currency, economy, fiat money, government, inflation, stagflation
Posted at: 10:16 AM | Add Comment
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