Think I missed this banger when it came out last year. Hashtag anniversary reads.
I'm a big fan of Josh (e.g., here #820834, #869803). He's incredibly well-read in monetary economics and has a keen mind devoted to many other things too.
Since he got tenure (I think?) at Ole' Miss, he got much spicier and less academicsy. No complaints from me.
Anyway, in this piece about America's fragilities, he delineates wth happened to America: the general case is the introduction and spread of fragility—monetary, financial, foreign policy, and domestic institutions.
America's institutions are unwinding
Here's the story
- Money: dollar-monetary system squek and gnarl
- Financial system: bubbles, collapses, and ever-expanding leverage
- foreign policy: ever-never wars, with no victory and no obvious purpose
- institutions: media, but mostly universities+health authorities gone to shits.
I'm a money guy (#793537), so I'll recount that portion, but the rest of the article is well worth it for the other components.
Hendrickson gives his general credible commitment story (#854062) for monetary policy: the Bank of England could suspend gold payments and print a bunch of money during the Napeolic Wars without unleashing hyperinflation, because holders of its notes and British (war) debt trusted the commitment (=deflation after, stable long-term price level).
By mostly sitting out WWI, and remaining on gold (-ish), U.S. amassed a bunch of gold inflows, and returns to the gold standard was simple enough for it, but proved a complete disaster for the Europeans (deflation, depression) with spillover on the U.S. and complete destruction of what was left of the monetary order. After WWII, U.S. tried again with the Bretton Woods system, making sure to recycle its money reserves across the planet:
This system sought to make the dollar and gold perfect substitutes as global reserve assets. Since the U.S. could control the supply of dollars, a shortage of gold could not have the catastrophic consequences it did during the interwar period since the dollar could be substituted for gold.
...but, America's rulers found a way to mess that up—Triffin dilemma, Nixon shock, etc.
"By the early 1980s, what had emerged was the current international monetary system in which U.S. Treasury securities serve as the global reserve asset"
So, almost two centuries after Britain, America found itself in the magical place where it could borrow and print money scot-free, with the USTs serving as the asset at the base of the growing world's financial center.
What is critical to the system continuing is a continued expectation that the U.S. will not resort to inflationary finance. But the U.S. does not actually have to resort to inflationary finance for the system to unwind; just the expectation that the U.S. will resort to inflationary finance will trigger inflationary finance as a self-fulfilling prophecy.
And that's where we are, a bloated former hegemon teetering on the brink of disaster, or at least massive withdrawal.
This one-paragraph on the broken institutions is all you need to know about America's collapsing standards:
Perhaps it would make it easier to sleep at night if there was evidence of an intellectual and professional class capable of dealing with the consequences of fragility. Unfortunately, there is no evidence for that. The public schools and the universities have been largely taken over by ideology and the need for rectification of social injustice. The students produced by this system and indoctrinated in this ideology now form the ruling class. They are overwhelmingly represented in government bureaucracies and the media.
fuck.... yes!
It is things like these that really make me thing America is toast. Then again, America is dynamic and big and ever-changing, and besides, the candidates for better prospects are few and far between.
Perhaps a betting man still has hopes for 'Murica.
We. Shall. See.
Our Problem is Incompetence