Wednesday, February 19, 2020

Incompetents at the Fed

Trump and Incompetents on the Fed

Trump keeps telling us how great the economy is doing and how we should all take a bow to his great skill. Well, the economy is doing quite well under the circumstances, for which Federal Reserve Board Chair Jerome Powell and his fellow board members deserve the credit. Trump is just going along for the ride and deserves no credit whatsoever. His abusive comments dashed out on Twitter sound like his usual angry response to anyone who does not follow orders, but the abuse has not deterred Powell from acting in good faith.

By now it is hard to think the Trump base would object to anything he might do after what has already transpired, but if ruining the economy accounts at all, then he might want to question his latest scheme to take over monetary policy. His current nomination for Federal Reserve Board, a women named Judy Shelton, wants to return to a gold standard and eliminate deposit insurance.

As every good capitalist knows the value of money is determined by the supply of it relative to its demand for needed transactions. Obsessives like Ms. Shelton want money to be a supply of something they can pick up and store like gold, but gold is a commodity like cars, clothes and corn flakes, all subject to rising prices.

When money was gold, changes in its price rippled through the economy causing inflation or recession. A gold standard requires giving the public the opportunity to exchange currency for gold at a fixed price making it necessary for the government to stabilize the price of gold by holding large inventories to sell in a shortage, or buy in a surplus. Managing gold inventories was subject to the erratic success or failure of mining ventures and the erratic whim of hoarders and speculators.

If Ms. Shelton would ask herself how the U.S. Treasury could remain ready to exchange gold at a fixed price if the market price of gold goes up, she might notice a problem with a gold standard. If the market price of gold starts to rise there will be speculators to show up at the U.S. Treasury to exchange their currency for an ounce of gold at the fixed price. They will speculate the government will eventually run of gold by having to sell it and have to let the price rise to a new level. Then they can resell their gold at the higher market price.

The need to buy or sell gold to hold the price changes the money supply the same way open market operations change the money supply now, except the buying and selling of gold to keep its price stable cannot be timed to meet the needs of stabilizing the economy.

In 1933, the United States left the gold standard, announcing it would no longer convert dollars to gold at any price. Banks were allowed to designate other assets than gold as reserves, which make it easier to manage the money supply. Other countries followed and in 1971 the gold exchange standard for international payments ended by mutual agreement of the international community.

Using gold as money creates many problems that have to be solved, but has no benefits of any kind. It does not impose discipline because money is always a human decision. Humans decide what it is and how much of it there will be. The Republicans know this, but they are willing to pander to Trump and his conspiratorial base.

A few Republican Senators express worry with a crackpot on the Fed. The Washington Post from February 9, 2020 quoted an insider who says “I don’t think she belongs on the [Fed] Board, but it’s not going to be an apocalypse. She’s not going to change the direction of monetary policy.” Don’t be too sure. Others think Trump is positioning her to be Fed Chair when Powell’s term ends in early 2022.

Republicans have their own agenda and while they are not against a stable well managed economy, it is not first on their agenda for economic policy. Recall the Bush recession of 2008-2010 following the 1999 Banking deregulation, which provided the wealthy and well placed unlimited opportunities for speculation and financial gambling. If the incompetent Trump gets control of monetary policy, it will be much worse than that.

No comments: