Post the 2009 Financial Crisis I was more than a little flabbergasted by the quadrupling of the Fed’s balance sheet.
And why would I not be?
The oil crises of the 1970’s are etched into my memory as an era of high inflation and economic misery. Even Warren Buffett wrote about it in his classic article on how “Inflation Swindles the Equity Investor
” Breaking the back of double-digit inflation in the UK needed no less than an Iron Lady. And if it had not been for Ronald Reagan’s fortitude, Paul Volker might well have been thrown out of office before his job was done.
Our reward for the principled defeat of inflation and the return to sound money was the go-go 80’s. And before long Stanley Fisher freed the Bank of Israel from political meddling - as did Gordon Brown at the Bank of England.
It seemed as if a great battle had been won. From then on, sober central bankers who carefully controlled the supply of money would ensure endless prosperity for the rest of us.
The Economist might well have called it “a new golden age of crunchiness”.
In this light of this history, how could I not have been appalled as the Fed went on the most enormous spending spree that the world has ever seen?
And at the European Central Bank, we have gone from the first governor - a crunchy Dutchman to Claude Trichet, a frenchman - to Mario Draghi - who each seem to have progressively walked back the policy gains of the prior era.
I have now come to understand why this was a sensible thing. That Ben Barnanke’s historical grounding in the Great Depression helped him and Hank Paulson to understand how dangerous it would have been not to expand the money supply.
Nevertheless, I was still quite certain that it would result in significant inflation.
After all, how could all the money sloshing around the system not be inflationary?
But here we are seven years later, and we still have no inflation to speak of.
Which all begs the question of the moment:
Why are interest rates so low?
Ben and Larry’s answer to this has been a bit of a revelation to me.