Guess who's back? Shady's back!
Shady is inflation, and also Jerome Powell, now set to serve a second term at the Fed
[photo by Julian Schultz
via
Unsplash]
President Joe Biden has nominated Jerome Powell to a second term as Federal Reserve Chairman (video). This means it is now as good a time as any to consider what this Trump nominee has done in the job.
Since the days of Paul Volcker running the Fed in the early 80s, the Fed’s true mandate had long been for using monetary policy to tamp down inflation. Now more recently Powell had decided to target job growth as well, with those two now seen as being more-or-less equal.
But of course there are different types of inflation. The reflexive fear (and chronic overestimation) of inflation among Baby Boomers is legendary. Inflation can lower the value of savings—but it can also lower the burden of debt. Seeing inflation as only bad is a rational perspective for the super-wealthy. But what about everyone else?
As Daniel Alpert writes in a paper for Cornell:
“With an increasingly higher percentage of workers working just to live, and so much of production flowing to either capital or to ‘labor’ that saves and does not spend it, the U.S. economy is simply not currently wired to transmit growth to inflation-producing aggregate consumption demand.”
So in practice, the low-inflation environment of the last few decades (check the calculator for yourself) has served to enrich those already wealthy while not creating enough demand for optimal growth because when low-income consumers are as unequal to others their spending of everything they earn does not make up for the non-spending of those with excessive incomes.
So while the wealthy have tried to stoke panic over inflation several times over the last few years (Warren Buffet said it was “exploding” in 2008), it has all led to pretty much nothing. Is this time different?
Yeah, this time is probably different. First of all, I have a hypothesis that America’s economy has been running at chronic under-capacity. This is mostly a result of the massive fallout from the financial panic of 2008-2009. This last decade has seen economic growth, but weak growth and from a small base. The prevalence of Boomer CEOs has not been helping. (Consider this data point from 2020: “The average age of incoming CEOs for S&P 500 companies has increased about 14 years over the last 14 years.”) Second, certain commodities are much more volatile even than usual with the numerous supply chain and logistics issues so common during the latter part of the pandemic: wood, oil and other bulky commodities account for a large share of the overall inflation right now. Third, the labor market appears to have started gaining pricing power lately after being on the decline for about 40 years. The costs to consumers will probably stay a little higher because of that.
So it’s still not clear if this inflation will be shorter-lived or continue for a while. Plenty of people are debating that online, for example Twitter CEO Jack Dorsey is talking about “hyperinflation” while investing guru Cathie Wood is saying it should be a lot milder than that.
So will the pick of Powell over Lael Brainard matter much for inflation? Probably not, although the pick is disappointing because Brainard takes a more modern and thoughtful approach to central banking. First, she is aware of the disruptive impacts that climate change can have on the banking system and she wants to include that in their calculations. Second, she takes a more realistic approach to digital currency, for example favoring an online dollar that could help the unbanked. But as happens in many cases like this in Washington D.C., one man chose another man for the job and that’s it.
Powell’s positions on cryptocurrency is where he is really shady. On the surface he tries to sound nuanced on the issue—Cointelegraph writes that Powell “said in September that the agency was ‘working proactively to issue a CBDC’ but was unlikely to support a blanket ban on cryptocurrencies like Bitcoin (BTC).” But even entertaining the idea of a ban is clear evidence of an authoritarian mindset: Jay Powell seems to think that he gets to work with the same playbook as the Chinese government, if he wants to. There is no conversation to be had on banning cryptocurrencies and using his platform to stoke it is, well, shady.
Much has been said by the Fed chairman about crypto, but a good amount of it has been predictable recycled propaganda. In March he shared his outdated mindset pretty clearly: “They’re highly volatile and therefore not really useful stores of value and they’re not backed by anything.”
Powell would personally prefer to buy bonds backed by cities: when the Fed went on an asset buying spree in 2020-2021, it bought lots of municipal bonds, an asset of which Powell was a holder.