As is well known now, Janet Yellen was confirmed last Monday as Fed Chairman. On its face, this should concern those who desire economic growth.
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Figure the Fed itself is superfluous. We don’t need a federally chartered lender of last resort. In fact, the banking system would be quite a bit healthier if there weren’t one owing to the logical truth that private businesses of all stripes would only lend to solvent banks experiencing short-term cash crunches.
Considering monetary policy, money’s sole purpose is to facilitate the exchange of goods. In that case, the only good money is money that is unchanging in value. With the Fed staffed by individuals trained in the fraudulent discipline that is economics, it’s broadly true that very few inside our central bank’s walls believe in stable money values. Because they don’t, our economy would be much better off if we had a monetary authority possessing one mandate: maintain the integrity of the unit of account (the dollar) by stabilizing its value.
Unemployment? The Fed is charged with pulling the economic levers to keep it low, but since central planning was widely discredited in bloody fashion during the 20th century, the very mention that the Fed should have a role in how many Americans are working is comical at best, economically tragic at worst. Quality bank regulation? Think 2008.
Interest rates? See above. The dollar is easily the most important price in the world, but not far behind the dollar’s price in import is the price of credit. It should horrify us then, that our central bank presumes to tinker with interest rates. Rates of interest, if free of central bank meddling, are the market’s way of matching the credit demands of borrowers with the cost of credit requirements of lenders.
Worse, Yellen brings to the Fed fallacious economic views that wouldn’t convince the most common of common economic thinkers. Quoted in Time magazine recently about what powers an economy, Yellen observed that “economic stimulus comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.” Where does one begin? If individuals sell appreciated stocks or homes in order to consume, then by definition sellers have new consumptive ability that is matched by the reduced consumptive ability of the buyers of appreciated stocks and homes.
After that, it’s a tautology that all consumption always and everywhere results from production first. If this is doubted, readers should attempt a life of consumption without work. Unless someone’s willing to lend them the fruits of their own production, these ‘consumers’ will starve.
Yellen is also known to subscribe to the view that inflation is an economic stimulant. Interesting there is that the investors whose funds power all economic activity are buying future dollar income streams when they invest. How a devalued dollar would prove a lure to investors is one of those mysteries that the hapless economics profession has never explained. Quantitative easing (QE)? Wouldn’t life be easy if flooding banks with dollars could stimulate the creation of the next Google, but for creating dollars with no regard for the value of same, QE simply corrupts money, and for doing so robs the economy of vitality for money losing its most useful feature as a stable measuring stick that facilitates the very trade that causes us to produce to begin with.
Yellen’s arrival at the Fed at first glance speaks to rough times ahead, but there’s a bullish case to be made. For one, she wasn’t confirmed unanimously. 26 senators voted no. This is important because while it’s commonly assumed that the Fed is independent, it’s not. It’s very much a political institution serving at the pleasure of politicians. The votes against her speak to a growing skepticism within the political class about the worth of quantitative easing.
The above looms large given the harsh reality of QE. While most in the media write as though the Fed can increase the supply of money in circulation, it really can do no such thing. Money in circulation is demand determined, and as such, the irony of quantitative easing is that it works against growth in the money supply precisely because unstable money is less desirable to economic participants. And for it weighing on economic growth since floating money makes investment and trade hazardous, quantitative easing also leans against money growth mainly because economic productivity constitutes money demand.
Add to QE’s economy-sapping flaws a little-known truism about the Fed itself. As Robert Bartley wrote in his classic 1992 book The Seven Fat Years, “In the Fed’s Board of Governors or Open Market Committee, no dissent is taken lightly. And 4-3 victories are seen as a disaster (my emphasis).” This is crucial because as has become increasingly apparent, top Fed officials in Dallas and Richmond (to name two) haven’t been shy about expressing their growing discomfort with quantitative easing. The rising unease within the Fed about QE means that Yellen will lack the consensus to continue Ben Bernanke’s failed monetary experiment, all to the benefit of the dollar.
Happily, we’ve already seen it. Markets always price in the future. The dollar hit a low of roughly 1/1900th of an ounce of gold in 2011, but since then has rallied to 1/1200th of an ounce. The greenback’s rise has not surprisingly occurred in concert with rumblings later proven true about Bernanke’s merciful departure from the Fed, widening skepticism among politicians about QE, and then of course increased discomfort about it within the Fed.
Janet Yellen is a walking, talking economic fallacy in the mold of her soon-to-be predecessor in Ben Bernanke, and left to her own devices she could doubtless do a lot of damage to the economy. But the good news is she can’t. With politicians and central bankers increasingly wise to the lie that is quantitative easing, Yellen will be very much constrained. And that’s very bullish.