Naked Money by Wheelan Charles

Author:Wheelan, Charles
Language: eng
Format: epub
Publisher: W. W. Norton & Company
Published: 2016-04-03T16:00:00+00:00

The Great Moderation: Thank You, Inflation Fighter Man

By the 1980s, disco, leisure suits, and chronic inflation were all on the wane. The next two decades were a unique period of prolonged low inflation and low variability in GDP growth. Even disruptions like the stock market crash of 1987, the first Gulf War, and the popping of the dot-com bubble caused only minor economic ripples. It is arguable that Chairman Greenspan held interest rates too low for too long, helping to set in motion the real estate bubble that precipitated the 2008 financial crisis. We’ll leave that debate for the next chapter. For now, the crucial point is that the twenty-five year stretch from 1983 to 2008 was singular in American history. As Ben Bernanke has said, “One of Greenspan’s important accomplishments for most of his tenure was achieving greater economic stability . . . There was so much improvement in the stability of the economy that the period has come to be known as the Great Moderation, as opposed to the Great Stagflation of the 1970s or the Great Depression of the 1930s. The Great Moderation was a very real and striking phenomenon.” 97

On the international front, things were less copacetic. The collapse of the Bretton Woods system left the world’s major economic powers scrambling to coordinate exchange rates and global capital flows. Even the successful efforts in this regard, such as the Plaza Accord, were ad hoc. As described in chapter 6, the world’s major powers met in New York in 1985 to coordinate policy so as to engineer a depreciation of the dollar. (America’s major trading partners were persuaded to facilitate a weaker dollar—which worked primarily to the benefit of U.S. exporters—because U.S. trade deficits had grown large enough that they were perceived to be a threat to global stability.) The dollar fell 40 percent over the next two years—too far, in fact. The same players met in Paris in 1987 (the Louvre Accord) to stabilize the dollar. But that’s about it. The world is currently without a formal process or institution for coordinating economic policies across nations in a way that stabilizes the system and promotes prosperity for all.

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