“We believe monetary policy is in a good place.” – Federal Reserve Chairman Jerome Powell, October 30, 2019.
The Sky is Falling
Ptolemy I Soter chronicled an episode from Alexander the Great’s 334 BC negotiations with the Celts located by the Ionian Gulf. As detailed by Ptolemy and echoed later by Arrian of Nicomedia, when Alexander asked the Celtic ambassadors about their greatest fears, they responded:
“We fear no man: there is but one thing that we fear, namely, that the sky should fall on us.”
In this spirit, we offer a serious message, echoing ancient concerns: The sky is, in fact, falling. While the consequences remain uncertain, they are indeed alarming.
In this context, “the sky” signifies the debt-based dollar reserve standard that has prevailed for 48 years. Remember August 15, 1971, when President Nixon “temporarily” halted the dollar’s convertibility into gold? Since that date, the dollar has existed solely as fiat currency under the Treasury’s jurisdiction.
During the G-10 meeting in Rome in late 1971, Treasury Secretary John Connally succinctly explained this new reality to his European counterparts:
“The dollar is our currency, but it’s your problem.”
Without the constraint of gold, the proliferation of debt-based money has escalated to unprecedented levels, becoming a problem for everyone involved. Over the past three decades, the Federal Reserve has continually facilitated Washington by providing increasingly cheap credit.
Consequently, public, private, and corporate debt in the U.S. has skyrocketed. Current estimates place total U.S. debt at around $74 trillion. The outcome is an economy that is distorted and disfigured beyond recognition.
Selective Blind Spots
America has shifted away from being a vibrant, free-market economy. Instead, it now operates under the central planning of Washington and the Federal Reserve. The illusion of prosperity is maintained through trillions in spending fueled by an unparalleled debt bubble.
Straightforward calculations indicate a looming economic catastrophe. Social Security and Medicare are facing significant long-term financial challenges, requiring current workers to bear an ever-increasing burden to support retired beneficiaries.
Moreover, the global environment that birthed the debt-based dollar reserve standard has vanished. Nevertheless, both the dollar reserve standard and the Federal Reserve remain entrenched as legacy institutions.
The gap between the current reality—characterized by trade imbalances, overwhelming debt, wealth inequality, and inflated asset prices—and the outdated dollar reserve standard is impossible to bridge. Without allowing for natural transformation, a total collapse is inevitable.
In the interim, rather than adopting policies that facilitate economic transformation and lessen the eventual fallout from a collapse, today’s planners and policymakers are doing everything possible to uphold a failing financial system. Their academic and professional commitments make them deeply invested in maintaining the status quo.
Such selective blind spots among even the brightest minds are commonplace when turmoil looms. For instance, just two years before the Soviet Union’s collapse, Paul Samuelson—the “Father of Modern Day Economics”—and co-author William Nordhaus wrote:
“The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.” – Paul Samuelson and William Nordhaus, Economics, 13th ed. [New York: McGraw Hill, 1989], p. 837.
Could Samuelson and Nordhaus have been more misguided?
The Federal Reserve is a Barbarous Relic
After the Federal Open Market Committee (FOMC) meeting in October, the Federal Reserve announced a 25 basis point cut to the federal funds rate, now ranging from 1.5 to 1.75. This was not unexpected.
However, critical insights emerged a few days before the FOMC meeting. Fed Chair Jerome Powell received encouragement from Bill Dudley, former President of the Federal Reserve Bank of New York, who expressed his views in a Bloomberg Opinion article:
“People shouldn’t be as worried as they are about the risk of a U.S. recession. That said, it wouldn’t take much to trigger one, which is why the Federal Reserve should take out some insurance by providing added stimulus this week.
“Sometimes, an adverse event and human psychology can reinforce each other in such a way that they bring about a recession. Given how slowly the economy is growing, even a modest shock could do the trick.
“This danger strengthens the argument for the Fed to ease monetary policy at this week’s meeting of the Federal Open Market Committee. Such a preemptive move will reduce the likelihood of the economy slowing to stall speed. Even if the insurance proves unnecessary, the potential outcomes are not dire. It merely means a stronger economy and a faster return of inflation toward the Fed’s 2 percent target.”
Dudley, like Samuelson, seems to believe that economic data can be aggregated and graphed, and that by manipulating credit prices, he can create more favorable economic circumstances. He thinks he can prevent a recession through ‘insurance’ rate cuts aimed at stimulating the economy.
Like Samuelson, Dudley appears oblivious to a fundamental truth: The Federal Reserve cannot anticipate or prevent a recession. Following numerous crises, including the dot-com bubble, the housing market crash, and the great financial crisis, the Fed’s credibility is clear to all but Dudley.
The Federal Reserve has become a barbarous relic. The next economic downturn may mark its demise. Yet, what follows could be even more troubling, driven by the tides of populism.
Sincerely,
MN Gordon
for Economic Prism
Return from The Federal Reserve is a Barbarous Relic to Economic Prism
