John Taylor Warns Of A "Highly Disastrous, Totally Uncontrollable Inflationary Conflagration"

During the past few years, the activist strain of central banking has spread around the world like wildfire, but the impact of this change on the future course of the global economy is very unclear. The number of countries involved now covers the developed world, the multitude of interventions in the financial market has expanded dramatically, and the amounts involved are exponentially higher than they were in 1979 when the Chrysler bailout began the process. Back then, the US Treasury guaranteed a $1.5 billion loan to the automaker, but the government demanded and received $2 billion in concessions from labor, the company, and other stakeholders. The star-crossed team of Treasury Secretary G. William Miller and President Jimmy Carter fell to Lee Iacocca’s political pressure 15 months before the 1980 election. This outcome differed dramatically from that of the Penn Central collapse, nine years before, as Congress had turned down its bailout request. By the mid-1980’s, the Chrysler rescue was seen as a great success, while everyone knew that the Penn Central refusal ended as a black hole, with many billions poured into Conrail and Amtrak just to keep the trains running.

With the arrival of Alan Greenspan activism took a big step forward, as he reversed the stock market crash of 1987, rescued Mexico with Bob Rubin in 1995, South East Asia in 1997, and then the global banking system, as it got in too deep with Long Term Capital (LTCM) in 1998. There were some failures, most notably Russia in 1998, but these interventions led directly to a feeling of complacency among investors as moral hazard, the Greenspan ‘put,’ and the President’s Working Group on Financial Markets became a widely perceived reality. Buy risk, you were safe, was the only way to go. Still, the monetary base, heart of the fractional reserve system, was largely untouched. Now, 14 years after LTCM, we know that the previous quarter century was just child’s play. The central banks have to pay a lot more for optimism today. Loans aren’t enough; now they must give the money away. Printing presses are running flat out (I know this is different than Zimbabwe, but…) and the developed world monetary base is almost three times higher than it was at the start of 2008.

More