Jerome Powell is Not an Adult

The institutions are rotten to the point of farce.

The prolific Croaky Caiman recently praised Federal Reserve Chairman Jerome Powell for standing up to Trump’s erratic demands to cut interest rates. He describes Powell as the adult in the room, keeping order and holding back the deranged populists. I wish that were the case! Trump’s cabinet is indeed incompetent and erratic, but the Old Guard, the (old) Establishment, the Respectable Conservatives™ are absolutely not adults in the room. They are incompetent, stupid, and farcical. Unfortunately, the rot in our institutions goes very, very deep.

Jerome Powell’s buffoonery is best illustrated by his role in the history of the Federal Reserve’s 2% inflation goal. In the 1980s the leadership of the Federal Reserve believed (correctly) that lower inflation is always better. The ideal rate is 0% and 2% would have been seen as a ceiling of acceptable inflation.

But a Central Bank that keeps inflation low can’t print unlimited cash for the government, so in 2012 Ben Bernanke decided that the 2% number would now be a target, not a ceiling. The elite had come to believe (or pretend to believe) that very low inflation might be too low, so if inflation was only 1%, the Fed should try to get it up to 2%.

Inflation is very good for the elite for two reasons. The first is obvious - it’s helpful if you can print unlimited money for yourself. The second reason is a more subtle phenomenon called the Cantillon effect. If you printed $1 trillion and gave it to the military, the military would use it to pay soldiers and buy military equipment. This increased demand for military equipment would raise the price of military equipment, but it would not (yet) raise the prices of all the other goods in the economy, so the military arms manufacturers get a kind of inflation-related bonus. They can sell their wares at the new (higher) price level but everything they buy is still priced at the old (lower) price level. When the military arms manufacturers buy things, the new money is now in the hands of the people who were close to the military arms manufacturers. Now those people get an inflation-related bonus because they have the new money and most of the things they want to buy are still at the old (lower) price level. Eventually all the money diffuses through the economy and the whole economy arrives at the new (higher) price level. But along the way, a lot of real wealth was transferred from outsiders to well-connected insiders. When the Federal Reserve creates new money, it gives it to giant Wall Street banks. Those well-connected banks do very well because they can spend the money before it has diffused into the rest of the economy, so the things the bankers want to buy are at the old (lower) price level. The commoners have to pay gradually rising prices for a long time before the new money gets to them.

Jerome Powell became Fed chairman in 2018 so he was in charge during the COVID-19 pandemic. During the Pandemic, the Fed printed a colossal amount of money. Everyone who knows anything about economics knew that this would create a lot of inflation, but Powell claimed that there would be a different problem: he claimed that inflation would be too low! Later, when inflation began to rise, Powell claimed that inflation would be small and “transitory.” Later in 2021, the Fed removed the word “transitory” from its statements and admitted that inflation had been higher than the Fed had claimed it would be.

In 2020 Powell also declared that the Fed’s 2% target was really supposed to be an average over several years. Since the years before 2020 had had an inflation rate lower than 2%, Powell said that henceforth the Fed would try to keep inflation above 2% in order to “make up” for the low inflation of previous years. The 2% number had started as a ceiling, then become a target, and is now a floor.

America’s central bank is doing what the central banks (or mints, or kings) of so many other decaying empires have done. They are funding the state’s lavish expenses by debasing the currency.

Jerome Powell’s job is to be a kind of royal excuse-maker. As the inexorable trend of civilizational decline continues and the state demands more and more money, Jerome Powell leaps in to explain why the new round of money-printing is not being done for its obvious purpose - to satisfy the state’s budget needs - but actually is being done for some urgently needed monetary policy reason.

The bond markets hang on Jerome Powell’s every word. Even if Jerome Powell were consciously lying and everyone knew he were consciously lying, he would still be expected to keep up the charade, pretend everything is fine and calm the markest, because Powell’s words affect bond traders’ expectations about what other bond traders will do.

The Federal Reserve was a bad idea from the beginning. It has devolved into a complete farce. But if you call out the farce, you will never be on the Federal Reserve Board of Governors, so the only people who end up on the Board of Governors are people who either believe the BS, or pretend they believe it for the sake of their career. Institutions don’t un-rot themselves. We need new institutions.

My discussion/debate with Croaky Caiman is here