The President of the United States is greatly displeased with Federal Reserve Chairman Jerome Powell according to Bloomberg rumors.
“The president has talked privately about firing Powell many times in the past few days, said two of the people,” Bloomberg says.
The Federal Reserve Act 1913 gives Trump the authority to fire Powell, but it has to be “with cause.” Usually that would mean that Powell has been acting in such a grossly negligent manner in a way that is not comparable to any reasonably competent Fed chairman.
In other words, just what is cause depends on who you ask. Meaning if Trump wanted to argue it, he probably can.
His argument would be that Greenspan has now apologized for raising interest rates 8 times in two years or so in 2006-7, calling it a mistake.
As can be seen on the chart to the left, Fed has raised interest rates about 8 times since 2017, five times just this year.
If that now once more leads to a crash, is that gross negligence amounting to with cause?
In a court, Powell would perhaps say that he has to tackle inflation. Trump would then show this chart:
This is an interesting chart because it puts much in perspective. We can see for example that soon after the Fed was created in 1913, there was a huge contraction in money supply/circulation extending pretty much all the way to the 30s.
In the 50s, instead, we have huge inflation as well as in the 70s-80s. The latter is perhaps a more memorable time of rubbish bins going uncollected in Britain.
Since then, things have been somewhat calm on the inflation front. A bit up, a bit down, but roughly at around 2% save for some yoyoing in 2008. So lets zoom in.
We can see here inflation was close to 6% in 2008. Interest rates at the time were about 5%. Banks suddenly stop creating new money, so we get a sudden contraction in money supply. Interest rates likewise drop to about 0% in 2009. As in free money for the bankers. The public was never given loans at 0%.
Then inflation rises to about 4%, but interest rates remain at 0 until 2016, just before the then election. Since then we’ve seen a tiny uptick in inflation to the target of 2%. Compare all this to the economy:
We can see here that it appears there is effectively no relationship whatever between inflation and the economy.
Now this chart starts in the 50s when inflation was high as we saw, but growth was very high too at 15%. Likewise in the 80s we have pretty high growth by current standards, but at the time inflation was circa 20% as were interest rates.
Another revealing factor is that the 2008 contraction wasn’t that bad in perspective. The 70s-80s recession seems to have lasted far longer. In the 60s, it was deeper. Finally growth is now generally lower, but inflation is also generally lower.
In this fictitious court we have ourselves created, Trump would probably ask why interest rates were not raised even 0.25% in 2012 when inflation spiked to 4% in an economy that was also growing at circa 4%?
Why were they not raised at all, he’d probably wonder, for all of Obama’s presidency when data shows there was growth for much of that time?
Powell might say because banks were under-capitalized, which is obscuring speak for they had no money and we wanted to give them quite a lot of it for basically free save that they have to pay it back.
An honest Powell may then say that banks now have enough money, so we want to make our “shareholders” (the commercial banks which receive about 6% of our dividends) a bit more profitable as we need to get back into the business of fleecing the masses.
There’s far better uses for that money, Trump might say. People have to pay interest twice. First as private citizens on their mortgage or other credit, and second as a taxpayer on the $21 trillion government debt.
The US government now pays primarily banks about $1 trillion in interest. That will now rise to $1.25 trillion after this rate hike of 0.25%. All of that will have to come from taxes.
The alternative would be to tax them through inflation, Powell might say, because that is rising. To that, one might ask why then has the Office of the Comptroller of the Currency (OCC), the banks’ regulator, together with Fed, lowered capital requirements for some banks recently. Should they not be raising capital requirements if inflation is the real concern?
Then one might ask what exactly is the relationship between interest rates and inflation? Do higher interest rates not actually cause inflation?
That’s what Turkey’s president said and he was kind of dismissed by the billionaire owned mainstream media, but he might have been right.
If you recall, money comes into existence when one borrows as explained by the Bank of England. It is not the case that banks take money from savers and give to borrowers. Banks literally create new money and lend it.
That money is then destroyed or ceases to exist once it is paid back. Yet not all of it. As a simple example. If you borrow 100 at 2.5%, you pay back 102.50. That 2.5 now becomes real money for the bank.
To understand this better, there are three types of money. There is digital central bank money, which acts as sort of reserve currency for banks. Then there’s bank money, which isn’t real money but a promissory note from the bank. Then there’s cash.
Commercial banks transact with each other only on central bank money. That thus puts a limit on how much money banks can create. However, they’ve never explained what role interest has on all this.
It does appear that the 2.5 becomes central bank money. That means banks can now create more digital notes out of thin air, ergo inflation.
If that 100 was borrowed at 25%, the bank now has 25 real money created by them from effectively thin air. Ergo, a lot more inflation.
Economist were wondering how inflation can go negative when interest rates were at zero. The above may be the answer. There was no more real money being created.
The argument is of course that if money is effectively free, then there would be more people who would want to borrow. That might mean that a lot of new money is created, but not a lot of real money. That new money would be only temporary until the new loan is paid back.
If instead interest rates are higher, then there’s a lot of new real money being created. That in effect turns on the game of chairs music because for ten people to pay back the loan, there has to be one who can’t pay it back and has instead to pay the interest of the ten individuals. That one person becomes two and so on until no one can pay anything back as too much new real money is created and bank lending gets out of hand.
That problem doesn’t have an easy full solution because apples do grow on trees, so conceptually you’d think money has to grow from trees as well to oil the economic growth.
The problem is obviously that most of these apples are going to very few individuals. The fruit picker hasn’t seen wage growth in real terms since the 70s.
Meaning that commercial banks are in effect public institutions that serve primarily only their own interest at the cost of the public.
Perhaps, therefore, banks need to be imposed certain duties. As in you have to give x of the profits to the state or the poor or in cheaper loans and so on.
While where Fed is concerned, they need to explain why they not raising capital requirements instead of lowering them.
As far as bitcoin is concerned, eventually there will be no new supply, so it might not have this game of chairs of new money from a real producer going under. Cryptos thus are a bit up today:
Eth has been the biggest recent gainer, but it still hasn’t managed to overtake xrp. All are green, however, perhaps because of this re-focus on how fiat money works.
We’re cryptonians, so we don’t think it works very well. On the other hand, we have common sense too so we don’t think fiat should disappear tomorrow. There needs to be a gradual replacement or alternative first, if one proves itself worthy of it.
In the meantime there’s crypto as a hedge and as parallel money to keep Fed in check. Something they do need, as well as some accountability.
The billionaire owned media is saying Trump shouldn’t open his mouth, but he is the elected President of the United States. Powell, on the other hand, has no accountability to anyone.
“In 1933, by way of the Banking Act of 1933, the Federal Reserve Act was amended to create the Federal Open Market Committee (FOMC), which consists of the seven members of the Board of Governors of the Federal Reserve System and five representatives from the Federal Reserve Banks.”
The Federal Reserve Banks are private institutions which serve the interests of banks. The board of governors are appointed, but the FOMC meetings are held in secret so we don’t know what the private bankers said or indeed the governors.
It is difficult, therefore, to see just whose interest Fed is serving when they raise interest rates to 2.5% while inflation is at 2.2%.
As the elected president, Trump has the right to say whatever he wishes – within reason of course – subject to the judgment of Congress which can impeach him, subject to the electorate which can vote him out, and subject to all individuals who can take to the streets.
Congress too should do its job of asking Powell to explain to them and the public just what exactly is he doing. Because in a representative democracy there is no independent institution, there is accountability and checks and balances.
We vote for individuals for a reason, especially individuals who can crash the market. No one voted for Powell. Where thus does he get his independence from the people? Or does he know better through some sort of divine right?
Perhaps, he probably has more information than most, but he needs to be cross examined and it may be the case that we need to utilize juries a lot more.
Such decisions like raising interest rates are inherently political. There is no math equation here or some sort of atom we can examine to tell us reality. There is instead only subjective judgment.
There is no reason why such judgment should not be expanded to a randomly selected jury court of ordinary individuals. They tend to be quite good at making difficult decisions and can command far more trust than an unelected individual who even the President doesn’t like.