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One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors. -- Plato (429-347 BC)

Monday, November 02, 2015

Donald Trump's No Supply-Sider As His Trash Talk About Yellen Reveals

Donald Trump 
ARRA News Service Screenshot
by Ralph Benko, Contributing Author: Donald Trump’s mouth remains a hot mess. In a recent exclusive interview with The Hill he gets monetary policy both sideways and backwards.Trump also accused Federal Reserve Chairwoman Janet Yellen of keeping interest rates low in order to shield Obama from having to leave office during a recession.

“She’s keeping the economy going, barely,” Trump said. “The reason they’re keeping the interest rate down is Obama doesn’t want to have a recession-slash-depression during his administration.”

. . . “You know who gets hurt the most? People who practice the American dream and did what should have been the right way — the people that went through 40 years of their life and saved a hundred dollars every week [in the bank],” Trump said.

He paused, shaking his head before adding: “They worked all their lives to save and now what happens is they’re being forced into an inflated stock market and at some point they’ll get wiped out.”
While admiring Trump’s empathy for the thrifty … if indeed ignorance is bliss Donald Trump must be among the most blissful people on the planet. And apparently he busily is attempting to make us all blissful, here regarding Fed policy.

Thanks, Donald. Love you back! But … no thanks.

I myself have been and remain publicly critical, even harshly so, of the Yellen Fed. That said defaming Yellen’s motives is foul ball. What’s next, charges of monetary policy by “blood wherever?”

In making wild allegations against Yellen Trump’s just trash talking. There’s no evidence at all that Yellen is attempting to push a “recession-slash-depression” out of the Obama years. Furthermore, Trump’s position, on which he doubled down for Bloomberg, seems to be that raising interest rates will produce “a recession, or worse.” And then he berates Yellen for not raising rates. This, at best, is perverse.

“Recession Now?”

Not supply-side.

Trump’s analysis is open to question. As Heritage Foundation’s Dr. Norbert Michel points out, the Fed cannot “set” interest rates. Dr. Michel has elaborated on this several times. Michel, at McCloskey, for instance, pointed out in 2000 that the Fed’s open market operations constitute a very small part of the world’s capital markets. McCloskey highlighted that, in a capital market of approximately $300 trillion, the Greenspan Fed typically increased or decreased its bond holdings in the neighborhood of $40 billion per year.

Beyond those numbers, there’s basic supply and demand. If, for example, the worldwide money market rate is 4%, how could the Fed’s open market operations sink that rate to 1%?

Presumably, the Fed could purchase every Treasury security it could find. Let’s assume that these operations are initially successful in that they sink the fed funds rate and U.S. money market rates start to drop.

Absent explicit prohibitions, there’s no way to prevent US investors from taking the higher rates abroad, so people would invest in non-US based funds. Maybe the massive US exodus would cause a price increase (and rate decrease) in the foreign funds, but then we’d also see a price drop (and rate increase) in US funds. Those rates can’t get too far apart for too long.
Michel takes an astute, if somewhat maverick, position. Count me in as incredulous as to the purported omnipotence of the Fed. (The Fed’s purported omniscience already has been repeatedly and conclusively disproved.)

In my parallel universe, although apparently not in Trump’s, supply and demand, not the Fed, still rules prices (such as interest rates). Under a healthy monetary regime in a free market credit will be both abundant and affordable with interest rates set by the market to the “Goldilocks Standard” of “just right.”

The Fed’s current unforced error shows up in commodities’ prices, which are in free fall, and the dollar’s mad tear in the foreign exchange markets. These suggest that the Fed is excruciatingly tight rather than too loose.

As Buttonwood, of The Economist, noted last July:HAD stock markets fallen more than 40% from their peak, the national news bulletins and the mainstream papers would be full of headlines about collapse and calamity.What might this have to do with monetary policy? At Matt Egan at CNN observed last July (after addressing legitimate demand-side issues):Because the American economy looks better than its peers and the Federal Reserve has stopped its stimulus program, the greenback has raced ahead of rival currencies like the euro and the yen.

That’s bad news for commodities because most of them are priced in dollars. A stronger greenback depresses demand by making oil and other natural resources more expensive to buy in other currencies.
Contemporaneously with, and surely not coincidentally so, the bust in commodities the dollar has appreciated dramatically against the currencies of our trading partners. It has gone up by almost 20% in the past 15 months as recently noted by Harvard Business Review in Strong Dollar, Weak Thinking.

Working just from supply-and-demand, and with due respect for the fall in demand based on slowing in China and in Europe, positing a restriction on supply of dollars relative to demand would be consistent with the upward volatility of the dollar.

This is a dizzying, and unhealthy, development. Big swings like this are bad for business and workers both.

There might be a stock market bust coming. There may even be a recession.

If so, blame the Fed. That said blame it for the right reason — excessive tightness.

The Fed’s targeting commodities prices may have been, as some argue, the expedient behind the Great Moderation and the attendant robust economic growth. The evidence for that position is intriguing but equivocal. And as an aside let it it be noted that for technical reasons commodities price targeting is not an acceptable alternative to the gold standard. Trump asserted on WMUR earlier this year that we don’t have enough gold to restore the gold standard. According to their sister station’s transcript Trump responded to a questioner:WE USED TO HAVE A VERY SOLID COUNTRY BECAUSE IT WAS BASED ON A GOLD STANDARD FOR IT WE DO NOT HAVE THAT ANYMORE. THERE IS SOMETHING VERY NICE ABOUT THE CONCEPT OF THAT. IT WOULD BE VERY HARD TO DO AT THIS POINT AND ONE OF THE PROBLEMS IS WE DO NOT HAVE THE GOLD. OTHER PLACES HAVE THE GOLD.Memo to Trump: Prof. Lawrence White has demonstrated rather conclusively there is ample gold to sustain the classical gold standard. That said, until such time as the monetary authorities restore the gold standard commodities prices and the price of the dollar in the foreign exchange markets are important indicators of Fed policy. These, both, indicate that the Fed is excruciatingly tight.

As war is too important to be left to the generals monetary policy is too important to be left to the central bankers. Time for Congress to pass the Brady-Cornyn Centennial Monetary Commission to conduct a rigorous empirical study about what Fed policies have led, and most likely again would lead, to job creation, economic mobility, and financial security for working people. That Commission — rather than wild accusations — is what it will take to put the Fed, and thus the American economy, and thus the American Dream, back on track.

Meanwhile Trump should stop throwing wild pitches and stop throwing beanballs at Janet Yellen. In indicting Janet Yellen on phony conspiracy charges of intent to make Obama look good, for Trump’s calling for what he himself calls a recessionary interest rate hike, for making questionable assumptions about the Fed’s power to set interest rates, and for failing to nail the Fed for its actual unforced error — excruciating tightness — Trump just earned himself a big Bronx Cheer. Donald Trump is no supply-sider.
Ralph Benko is senior advisor, economics, to American Principles in Action’s Gold Standard 2012 Initiative, and a contributor to the ARRA News Service. Founder of The Prosperity Caucus, he was a member of the Jack Kemp supply-side team, served in an unrelated area as a deputy general counsel in the Reagan White House. The article which first appeared in Forbes.

Tags: Ralph Benko, Donald Trump, No Supply-Sider, Yellen, To share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service. and "Like" Facebook Page - Thanks!
Posted by Bill Smith at 2:30 PM - Post Link


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