In anticipation of the upcoming annual Economic Policy Symposium in Jackson Hole that started this past Thursday, many financial news organizations interviewed various Federal Reserve Governors regarding the published program agenda, entitled “Macroeconomic Policy in an Uneven Economy”. While many of the questions were scripted to the Federal Reserve’s narratives, there were some that were well on point regarding Fed policy and actual economic conditions, which the Governors should have, and in some cases did anticipate. The answers were interesting in the jargon used to either avoid hard questions or spin like Orwellian Newspeak.
One question posed was what did the agenda title actually mean? I imagine that much of the public would not be able to tell the difference between macroeconomics and microeconomics. The phrase and definition of macroeconomics was first proposed by John Maynard Keynes in the 1930’s as a proposition that governments should decide on economic policy. Before then autocrats in monarchies and other authoritarian countries simply decreed whatever economic regulations they wished. Keynes attempted to raise such dictates to a science. We have another invented term as a corollary, i.e. microeconomics as the study of those decisions of individuals and businesses; seemingly regarded as the lesser stuff even though it’s what makes for an economy in the first place.
Now go to “…in an Uneven Economy” for more discursive thinking. The answers were many and varied, but one consistency that became apparent is that no one could provide a coherent answer, but also none of the answers were consistent among the Governors. This should be expected with an agenda so vague and ambiguous. All economies by nature are “uneven” as the very genesis of the discipline we call economics is about scarcity, i.e. if there was no scarcity in the world the study of economics would be meaningless. Further, no matter what policies any bureaucrat can conjure up they will never make any economy “even”, and empirically have made them worse.
Then we have the telling question for which we get very creative spinning. The question was “Is the Federal Reserve at all concerned about increasing inflationary trends far greater than either its target or its expectations, and the fact that it no longer appears to be transitory?” To the first part the answers were somewhat dismissive as if inflation did not exist or was unimportant; for the second part the answers by some governors were truly creative and included a common theme, i.e. we should not be thinking about the current inflationary trends as “transitory” but “episodical”. Wow, that one sent me to my Webster’s as I was not sure it was a real form of episode, but the Governors were grammatically right on, although regrettably disingenuous. The term itself regards a series of interconnected episodes, or in other words not something transitory, but something of a longer, and perhaps indeterminate duration. So there we have it, spinning a situation in such a way that we can actually see the spin.
Not to be swayed by the spinning, some more adventurous interviewers ventured into the QE area and the related topic known as tapering. The term “Quantitative Easing” first arose in the public lexicon in 2008 when the Fed started buying UST securities in order to increase the money supply. But what do you buy that with? No problem since the Fed simply orders more Federal Reserve Notes, i.e. US dollars, from the UST’s Bureau of Engraving and Printing; it’s monetary inflation on steroids. Those USDs are in turn distributed to the regional Fed banks, who are required to put up collateral for the new money circulated; they in turn distribute the new money to the various commercial banks and lending institutions. It’s kind of a trickle down process, but the first at the trough are the big investment banks where their large clients in corporate America come to feast. Easy money at Fed repressed rates, creating the booming valuations in stocks and real estate, unfortunately at the expense of those dependent on market determined interest rates.
The spin on this starts with the name itself, which would indicate that there is some unnatural restriction that has to be eased, when in fact the reality is that investments and lending, in many respects similar but not always the same, should actually decrease as risk increases. This is the free market’s way of cleansing itself of bad assets and actors in the economy and redirecting money to where it will provide return on investments that would attract further investments, and so on, leading to real growth and the prosperity and jobs that come with that.
When the Governors where asked about the plans for the Fed to “taper”, i.e. buy fewer UST securities and/or allow interest rates to return to market functions, and/or cool off the printing press, we get very fluid responses ranging from later this year, 3Q next year, or as late as middle of 2023. Asked if they think delaying tapering or continuing with their other “tools” would overheat the economy, or make our national debt even more of a dangerous burden, and we get varied responses, but again with a new consistent buzz word, i.e. the need to “balance” many considerations.
The first thing to understand is what the Federal Reserve Act mandates economically to begin with, and there are only two considerations, i.e. work to assure maximum employment and minimum inflation; admittedly these are inherently contradictory goals, but who are we to question the wisdom of Congress. The second thing to consider is the word “balance” as in a balance sheet. One of the Feds financial regulatory duties is to assure stability in the banking system, and one of the procedural tools it uses is a financial stress test focused on a bank’s balance sheet, i.e. a bad balance sheet translates as a bank in financial stress. By all measures in that regard the Fed’s balance sheet is stressed beyond belief, itself dependent on the life support of massive doses of paper money as if it grew on trees….well close, dollars are printed on cotton that grows on a shrub, but let’s not get picky, no pun intended.
In summary the Fed has spun out of control, even by the metrics of so called Modern Monetary Theory; theories are nice as an academic exercise, but empirical evidence shows that MMT is little more than failed economics. When interest rates approach zero while inflation increases, you are essentially already at net negative rates, so the Fed’s open market operations such as QE are not only no longer effective, but are doomed to failure. Consider the fact that since 2008 we have had QE1…2…3 …4…get the point?
Dating back to ancient Rome and its imperial regimes, the need for more and more money to finance its hegemony of the then known western world, so devalued its wealth time and again until it imploded; Rome fell because it failed economically, and politically from within, and not because of some barbarians at the gate. Beware America, history has a way of repeating itself.