Mr China

"This is a history of the Federal Reserve. I tried to read it when it first came out and I’ll confess I didn’t get very far. I went back to it a few years ago and found it fascinating. He does a wonderful job. He sees the Fed as the real locus of power in the US democracy. Not the president, not the congress, but the central bank, and he does a great job of making that argument. This book was the first popular look behind the curtain of this very secretive institution. People think of the CIA as the secretive organisation, but the Fed is probably just as secretive or it certainly was at the time, in the 80s, and he shines a light on it. He also tells the story of how Paul Volcker, the chairman of the Federal Reserve at the time, really waged war on inflation, the great problem then in the American economy and probably in the developed world. He shows just how great the costs were of vanquishing inflation. Inflation is basically rising prices and that’s OK. If a six pack of beer costs two per cent more a year, or your rent or gasoline, that’s not such a big deal, but if everything’s going up at ten per cent a year and your wages aren’t, inflation doesn’t tend to plateau as the Germans found back in the 20s – it starts at six, then it’s nine, then 12 and then it becomes unstoppable because people keep trying to get ahead of it, so you’ve got the sort of hyper-inflation that countries like Brazil and Germany have had and it gets embedded in the economy and it’s very difficult to get rid of. It worms its way into every economic and financial institution and it becomes quite difficult to kill. When prices are rising it’s a sign of economic activity running too high so you need to cool the economy off by raising interest rates. Now, of course, the cost of raising interest rates is that you’re trying to put the brakes on the economy so businesses fail, people get put out of work and, in the US context, you get the very bad recession we had in 1981-2 which was a double-dip recession and until this latest recession it was the worst economic period for the US since the Great Depression. It was a very tough time. And it was. But the only way to get prices to stop rising is to reduce demand. Prices are going up when a lot of people are buying those products. There’s more demand than there is supply. So you cool off demand by raising interest rates which makes it harder for businesses to borrow money to expand, for people to borrow money to buy a car."