The Wacky Monetary Policy Thinking of Judy Shelton

Judy Shelton

News media reports continue to indicate that Judy Shelton is being considered by the President's economic team for nomination to the Federal Reserve Board.

The Wall Street Journal reports:

The Trump administration is vetting Judy Shelton, a conservative economist and former Trump campaign adviser, for a seat on the Federal Reserve Board, according to people familiar with the matter, putting the longtime Fed critic one step closer to a leadership role at an institution she would like to drastically change.

Ms. Shelton, 64, was recently interviewed by Larry Kudlow, the director of the National Economic Council, but has yet to meet with President Trump.

I categorize her views as wacky.

The Journal informs:

Her preference for a linked currency — one tied to gold or some other reference point, rather than simply backed by faith in the government — would make her unique among her colleagues. She wrote in 2018 that “we make America great again by making America’s money great again.

A gold standard would be a positive but, at the same time, she holds positions that are as anti-gold as you can get. From the same Journal article:

She has regularly praised Mr. Trump’s economic policies, and now favors near-zero interest rates, a position likely to curry favor with a president who has called the central bank the “biggest risk” to the economy...

In an interview, Ms. Shelton criticized the Fed’s current practice of paying interest on excess money that banks keep at the Fed as a way to set the Fed’s policy rate. The approach, she said, encourages banks to hold money that they would otherwise lend out, since they are being paid to keep their money idle. To help “phase out” the practice, Ms. Shelton said, she would support gradually cutting interest rates back to rock-bottom.

This is madness. It appears she wants to remove the interest paid on excess reserves so that banks would lend the money out. There is currently over $1.3 trillion being held as excess reserves. If that money finds its way into the system, it would result in the explosion of the money supply by a multiple of the $1.3 trillion.

This is about as far as you can get from a gold standard. And what is this about wanting interest rates near zero? That's another means by which the money supply could explode.

Bottom line: Her monetary policy views are contradictory and for the most part radically inflationary. She should be thought of as potentially becoming the Gideon Gono of American monetary policy thinking.

-RW