It takes only two things to keep people in chains:
The ignorance of the oppressed
and the treachery of their leaders.
Regarding the economy, what is the Federal Reserve’s most important job?
Trump picks Jerome Powell to succeed Yellen as Fed chair
Jeff Cox, JeffCoxCNBCcom
President Donald Trump nominated Jerome Powell to run the Federal Reserve once current Chair Janet Yellen’s term expires.
The move follows an extended period of speculation over who would be named to head the central bank, whose aggressive policies have been considered crucial to a climate of low interest rates, surging job creation and booming asset prices.
“Today is an important milestone on the path to restoring economic opportunity to the American people,” Trump said. “The Fed requires strong, sound and steady leadership” and Powell “will provide exactly that type of leadership.”
Yellen’s term has been marked by a mostly uninterrupted bull market run in stocks that began in March 2009.
The central bank has taken the first steps in unwinding the $4.5 trillion balance sheet built up during the efforts to spur growth through bond purchases.
Yellen is “a wonderful woman who’s done a terrific job,” Trump said.
In short, Trump fired a “wonderful woman who’s done a terrific job,” and who has seen a “mostly uninterrupted bull market.” In her place, he hired a man who, so far as Trump knows, will do exactly the same thing. The difference: He will be Trump’s, not Obama’s.
Aside from snuggling up to the President, what is the real job of the Fed Chairman? If I were President, and about to hire a new Fed Chairman, I’d tell him/her something like this:
You have two tasks: Run the banking system efficiently and control inflation by controlling interest rates.
Don’t try to stimulate the economy; that’s Congress’s and my job.
Don’t worry about federal deficits or debt or unemployment. Those all belong to Congress and me.
Keep your focus on the banking system and inflation.
Why would I stress that focus? Recently, an article in The Week said otherwise:
Could this policy tweak revolutionize the Fed?
John Williams, the president of the Fed’s San Francisco branch, and one of the officials who regularly votes on monetary policy, is suggesting a move to something called “price level targeting.”
The Fed manages the economy by adjusting interest rates up and down in order to meet its dual mandate: to maximize employment and to keep prices stable.
The problem is the so-called “dual mandate,” which is really a triple mandate, or more: Not only maximize employment and keep prices “stable” (i.e. 2% inflation), but grow the economy, prevent & cure recessions, prevent & cure “bubbles,” and generally be responsible for the entire economy.
Note how Janet Yellen was given tacit credit for the 9-year recovery from the “Great Recession.
Thus, Congress and the President (C&P) are not at fault for anything that goes wrong; it’s all the Fed. How very convenient.
Never mind that C&P determine all federal spending, all federal taxing, all federal regulations and all supervision of financial laws. We are supposed to believe that none of that affects employment, prices, or economic growth.
No, it’s the Fed that supposedly is responsible for the economy. Can it get more ignorant than that?
Actually, it can, because of the underlying belief that cutting interest rates is stimulative and raising rates is recessive. This belief is based on the idea that high rates make borrowing easier, and borrowing is stimulative.
There are two problems with that belief, one theoretical and one factual. The theoretical goes like this: Low interest rates stimulate businesses and individual borrowing, and borrowing is stimulative. Therefore low interest rates stimulate the economy.
But facts from history do not show that low rates stimulate borrowing:
More facts: History also does not show that low rates stimulate hiring:
With the 2008 crisis, the Fed found itself cutting interest rates all the way to zero, and it still didn’t stimulate the economy nearly enough.
If cutting interest rates all the way to zero didn’t stimulate the economy enough, doesn’t that provide a strong clue that cutting rates simply doesn’t stimulate the economy?
And let’s not forget that cutting rates reduces the number of dollars the federal government pumps into the economy in the form of interest on T-securities.
And the final nail in the “low-rates-stimulate” coffin, here is a comparison of interest rates with Gross Domestic Product:
The central bank likely won’t have nearly as much room to cut interest rates and boost the economy when the next recession arrives.
Correct. The central bank won’t be able to “boost” the economy by cutting rates below zero. Why would anyone think a below zero — or any other low rate — would be stimulative?
But if the Fed can’t cut rates any lower, it might still be able to boost the economy by credibly promising to keep them at 0 for longer.
Strangely, the author (and most policy “experts”) believes cutting rates down to zero is stimulative, but cutting rates below zero is recessive.
So for instance, if the rate is at 5%, and the Fed cuts five percentage point all the way down to zero, that will stimulate the economy, but if instead, the Fed cuts 5.1 percentage points, that will be recessive???
Folks, if that makes sense to you, you also might be interested in what a Nigerian prince has to offer.
In summary: The Fed controls interest rates, which in turn, partly control inflation. That’s it. Economic growth is controlled by Congress and the President.
America is a business; a very, very big business. Never ask a bank to run a business.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell
•All we have are partial solutions; the best we can do is try.
•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money no matter how much it taxes its citizens.
•The more federal budgets are cut and taxes increased, the weaker an economy becomes..
•No nation can tax itself into prosperity, nor grow without money growth.
•Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
•A growing economy requires a growing supply of money (GDP = Federal Spending + Non-federal Spending + Net Exports)
•Deficit spending grows the supply of money
•The limit to federal deficit spending is an inflation that cannot be cured with interest rate control. The limit to non-federal deficit spending is the ability to borrow.
•Until the 99% understand the need for federal deficits, the upper 1% will rule.
•Progressives think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.
•The single most important problem in economics is the Gap between the rich and the rest.
•Austerity is the government’s method for widening the Gap between the rich and the rest.