President Donald Trump has effectively told the Federal Reserve to turn on the printing presses.
After getting central banks to back down from hiking and hiking interest rates, the president now wants them to get rid of quantitative tightening (money burning) and turn it into quantitative easing (money printing). Trump said:
“If the Fed had done its job properly, which it has not, the Stock Market would have been up 5000 to 10,000 additional points, and GDP would have been well over 4% instead of 3%… with almost no inflation. Quantitative tightening was a killer, should have done the exact opposite!”
According to Mario Draghi, the President of the European Central Bank, Fed and the rest apparently engage in some sort of objective science. He said:
“If the central bank is not independent then people may well think that monetary policy decisions follow political advice rather than objective assessment of the economic outlook.
Central banks ought to be left free to choose what is the best way to comply with their mandates.”
The US constitution has the minting of money, and thus monetary policy, solely under the purview of Congress, not some “independent” – partly commercial bank owned – institution of great secrecy.
The freedom to choose by the previous Fed chair, Alan Greenspan, is what some accuse of effectively crashing the economy in 2008 due to increasing interest rates some 8 times in 2 years to 6%, making mortgage repayments unbearable, thus mass defaults, and the banking crisis that followed.
If Greenspan was making some sort of objective decisions, then it is quite interesting he has now admitted he was wrong.
Monetary policy is the most political matter that can possibly exist after war and peace (security in general).
That such decisions are even made in secrecy in board meetings, rather than the Fed chair campaigning in elections, and that central bankers coordinate in secrecy in the Bank of International Settlement (BIS) meetings, raises a lot of questions about the freedom of citizens.
“Somehow we got to a point where people think central banks can do just about anything, which is not actually true. It’s a very imprecise business,” Bank of Canada Governor Stephen Poloz said.
So it’s objectively imprecise then? Or is it imprecisely objective? Not that it matters either way, just as political interference or independence matters are irrelevant as long as such interference is not of an undue nature as judged by the public.
There are two main issues. First, what role does interest play in our current monetary system? We can guess, but we shouldn’t have to guess. If these central bankers and the entire machinery behind them is working in the public interest, then they should clearly explain to the public the role of interest.
If say 100 is borrowed from a commercial bank and you pay 150 back in total, 100 that was borrowed and 50 in interest, where does the 50 go? Does this 50 become central bank money? Are commercial banks thus effectively printing out money with every loan they make?
If they are, there are many questions because all things equal then an increase in the supply of money is effectively a tax on everyone.
Since the current financial system is debt based, the quantity of money necessarily has to increase, but if loans are effectively public goods and paid by the public through an indirect inflationary tax, then perhaps the central bank should through the government have certain schemes like borrowing a mortgage at central bank rates or a business loan at central bank rates.
Otherwise and in addition there are many policy considerations because commercial banks are basically borrowing printed money at 2% and selling it at 5% with such banks having a monopoly on this matter, thus making immense profits which they don’t set aside for a rainy day because they can always rely on the government to give them part of the current and future taxes.
If central bankers want any understanding, the secrecy regarding the role interest plays in the financial system can not possibly continue. The public has to know so that there can be accountability as of course there is no free choice on such matters of huge importance, only right choices (which are usually tradeoffs) because mistakes can be incredibly costly.
The other important matter is the role inflation has in the attribution or distribution of value.
School textbooks have their own dogma (and for all they say, Trump did go to Wharton), but from a common sense perspective the increase of supply has many effects.
If we focus on the rich billionaires like Bloomberg, a yearly inflation rate of 2%-4% decreases their wealth if they do not put their money to work.
Usually such money goes to Real Estate, stock markets, equity investment in start-ups, potentially government bonds (which is similar to under the mattress), and then things like art pieces, commodities, maybe cryptos, scarce things.
Logically, if all else is equal, the value of all these investments should grow in line with population growth and is somewhat shielded from inflation.
By unit of account their value may increase, but if we look at the pie, a growing pie, and how it is shared, the most important consideration is wages.
Money travels thus. The central bank prints it. The commercial bank receives it. The companies are then given it. The employees are finally paid it.
Just how much companies receive and pass on to employees is probably the most important statistic in all of economics which obviously isn’t available because commercial banks or central banks for some reason don’t have a duty to engage in such basic transparency as who got how much in loans from the central bank.
Transparency which should be public, but it’s not available to even civil servants. Not that there is any civil servant that looks at these matters because we are led by donkeys.
Just how much of what is printed gets to the employee is probably a far better measure than inflation because no one can really measure inflation because we don’t even have basic stats of how much banks are lending, how much is paid back, and how much goes in interest blackholes.
A reasonable amount of inflation, however, logically is probably a tax on the rich far more than the poor, although everyone is affected in one way or another.
That’s because the poor have no savings or any money, so inflation doesn’t matter to them as long as it is within a reasonable range. While the rich have to put their money to use, which eventually perhaps translates to higher wages.
In other words. If Trump says it, Fed should get on with it. If he is wrong, he’ll pay at the ballot box while for Powell there are no consequences.
Trump necessarily wants the best for the economy and the American people. While what Powell wants no one quite knows as he did not face the immense scrutiny that Trump has faced and continues to face.
Nor do the recent hikes that almost crashed the stock market last year give much room to the Fed chair who may well be so incompetent as to court the President’s blame.
Turn on the presses. The more money should presumably mean more lending competition, thus lower interest rates, and thus less of our money going to a blackhole of BIS bankers and Bezos