Wednesday, July 3, 2019

Is Trump Trying to Pack the Federal Reserve With Crazed Money Printers?

Judy Shelton
UPDATE BELOW.

 By Robert Wenzel

 This is big trouble.

 President Trump plans to nominate Christopher Waller and Judy Shelton to fill the two remaining seats on the Federal Reserve Board of governors, he announced in a series of tweets.
There is a strong indication that both of these likely nominees are just what Trump wants, mad money printers who will want to keep interest rates below free-market levels and in the process flood the economy with money.

 He is packing the Fed with crazed money printers.

 There is no question that Waller loves the smell of green ink.

 The Wall Street Journal reports:
In a 2015 paper, Mr. Waller found that injecting more money into the economy can help revive an economy when central banks have already brought rates down to zero.
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In 2009, Mr. Waller wrote that central banks could let inflation run higher for a while to make up for periods of weaker inflation and help the economy recover from downturns. 
As far as Shelton, as I have pointed out before, it is really difficult to understand what she really thinks, since her specialty seems to be incomplete and contradictory thoughts (SEE: The Wacky Monetary Policy Thinking of Judy Shelton).

 Joseph Salerno warns that she is an oddball supply-sider when it comes to monetary policy:
The bad news is that she leans heavily toward supply-side economics, which is deeply flawed on monetary policy. Like most supply-siders, the position she advocates may be summed up in the motto, “I favor sound money—and plenty of it.”
And it turns out her solution for the 2008 financial crisis was even more money printing than actually occurred after the crisis and she has a wacky contradictory position about it. Salerno again:
 Shelton attributes blame for “the devastating 2008 global meltdown” to the Fed’s “influence over the creation of money and credit.” She then goes on to criticize the Fed’s policy of paying interest on excess reserves for slowing down the economic recovery from the post-crisis depression. Her argument is that paying interest on excess reserves discouraged the banking system from fully lending out the enormous amount of reserves that gushed forth into the system through the Fed’s QE programs. While this is true, the Fed’s policy was still very expansionary... [F]rom mid-2011 to 2017, the year-over-year (YOY) growth rates of the money supply as measured by the Fed aggregates of M2 and MZM varied between 5% and 10%. These slightly exceeded the monetary growth rates recorded during the run-up of the housing bubble from the beginning of 2002 through 2005, which culminated in the “devastating global meltdown” that Shelton bemoaned a few sentences earlier. Thus, Shelton considers the same rates of monetary growth inflationary in the earlier period but contractionary in the later period. 
In other words, she correctly blames the financial crisis on Fed money printing but then calls for more money printing as the solution!

Salerno calls her positions "bad news" relative to what sound money advocates would support and "clearly evident" contradictory positions.

And don't get sucked in by her statement that she is for a gold standard. She is just as confused here.

Salerno writes:
Shelton also reveals the flaws in her supply-side position when she argues that a gold standard and a Bretton Woods-like regime, by “linking the supply of money and credit to gold,” would both be effective in “redress[ing] inflationary pressures.” Shelton’s position here shows a lack of theoretical and historical awareness of the vast differences between the classical gold standard and the Bretton Woods System in their nature and operation. The former was a genuine gold standard in which gold coins were in circulation and all bank notes and deposits were instantaneously redeemable in gold. The Bretton Woods System on the other hand was a form of “price-rule monetarism,” in which the Fed followed a rule to target a legally mandated price of gold by buying and selling gold, foreign currencies, or domestic securities. There was no gold in circulation as a medium of exchange and the convertibility of dollars into gold was restricted to foreign governments and other official institutions.
The historical Bretton Woods system had inherent flaws that led to its slow motion inflationary collapse in the late 1960s and its disappearance in 1971. This did not stop supply-siders, including Shelton, in her 1994 book Money Meltdown , from penning proposals for an updated version of Bretton Woods. 
As Ludwig von Mises wrote:
Under the gold standard the dollar and the pound sterling were merely names for a definite weight of gold, within very narrow margins precisely determined by the laws.
That is paper money could be redeemed for a specific weight of gold, and gold coins could also circulate. This is not what Shelton is advocating when she calls for a "gold standard." By calling for a Bretton Woods type standard, she is calling for a manipulated fake gold standard that eventually results in the link between gold and currency cut.

Indeed, in 1971 President Richard Nixon cut the Bretton Woods gold standard relation between the US dollar and gold:


If these two Trump nominations are confirmed by the Senate, the Fed will have on its board two more mad money printers. This will result in great volatility in the economy and more difficulty in making sound investment decisions.

You will be better off putting your money at Golden Nugget Atlantic City (formerly known as Trump's Castle). At least there you will have a just under 50% chances of coming out ahead.

UPDATE

Ramesh Ponnuru at Bloomberg writes:
Shelton’s prescription for monetary policy has changed so dramatically, and her rationale for it makes so little sense, as to make her appointment to the Fed a gamble. Does she believe what she is now saying, or is she just saying what Trump wants to hear? ...

[A] Journal interviewer began his write-up by saying, “These are dizzy days for monetary economists.” For people keeping track of Shelton’s pronouncements, they’re even dizzier.

Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.comand Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bankand most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. More about Wenzel here.




at 12:01:00 AM

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