Thursday, November 30, 2017

BREAKING Trump Nominates a Disturbing Anti-Gold, Pro-Negative Interest Rates, Economist to be a Fed Governor

This is probably President Trump's worst move yet on the economic front.

The White House has announced that the President has nominated Marvin Goodfriend to be a governor at the Federal Reserve Bank.

This guy is bad news from beginning to end.

I wrote in June:
Goodfriend spoke on the subject [of negative interest rates] at the Federal Reserve Bank of Kansas City’s economic symposium at Jackson Hole in 2016.

In one paragraph of his speech, he managed to go full-Keynesian, anti-gold and in support of negative interest rates:

The zero interest bound is an encumbrance on monetary policy to be removed, much as the gold standard and the fixed foreign exchange rate encumbrances were removed, to free the price level from the destabilizing influence of a relative price over which monetary policy has little control—in this case, so movements in the intertemporal terms of trade can be reflected fully in interest rate policy to stabilize employment and inflation over the business cycle.
Here is FT introducing what Goodfriend also proposed in the speech:
 Of course, deeply negative interest rates are difficult to impose when paper money exists as an alternative. Even after costs of storage, the effective lower bound probably isn’t much below -1 per cent. Goodfriend’s proposed solution to this challenge is truly radical (emphasis FT).

So here is how Goodfriend wants to get around the "problem" of the difficulty of imposing negative interest rates:

 The zero bound encumbrance on interest rate policy could be eliminated completely and expeditiously by discontinuing the central bank defense of the par deposit price of paper currency. The central bank would still stand ready to exchange bank reserves and commercial bank deposits at par; and it could stand ready to convert different denominations of paper currency at par. However, the central bank would no longer let the outstanding stock of paper currency vary elastically to accommodate the deposit demand for paper currency at par.
Instead the central bank could grow the aggregate stock of paper currency according to a rule designed to make the deposit price of paper currency fluctuate around par over time. The paper currency growth rule would utilize: i) historical evidence relating currency demand to GDP, ii) the estimated interest opportunity cost sensitivity of the demand for currency relative to GDP, and iii) the GDP growth rate....…The deposit price of paper currency would adjust flexibly much as floating exchange rates adjust to equilibrate the foreign exchange market when international interest rates differ from each other
The FT explains what this means:
In other words, the value of a paper dollar would no longer be guaranteed. It may say $10 on the front but if the policy rate were -10 per cent the piece of paper would only be worth $9. Here’s his conclusion (emphasis FT):...
 The idea of negative nominal interest rates takes some getting used to, but it should be possible to persuade the public that such flexibility is well worth it to provide better employment security and more secure lifetime savings.This is one of the most insane monetary policies I have ever come across---and there are many to choose from. 
Can you imagine walking around with dollars that can be instantly charged a negative interest rate by the Federal Reserve at any time?

I have heard of many insane monetary policy schemes but this tops them all.
I really can think of an economist with worse policy prescriptions than  Goodfriend.

This is terrible news.


1 comment:

  1. If there's one thing worse than a moron, it's an IGNORANT moron.
    Folks, we've got trouble here in River City. I've described this guy as the drunk (yeah, yeah, I know he doesn't drink)at the end of the bar. "We oughta kill ALL those gooks" etc.
    But now, he's appointing seriously powerful people who are HORRIBLE!!!
    Glad I'm old and don't have to deal with the fallout.