The Wisdom of Monetary Central Planning

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by David Stockman

“Wisdom, itself, is often an abstraction associated not with fact or reality but with the man who asserts it and the manner of its assertion.

– John Kenneth Galbraith, “The Great Crash, 1929″ (1955)

“The Federal Reserve no longer cares about “Money” at all. They do put up a valiant pursuit of “Economy.” But our monetary central planners’ real function is to foster Wall Street. Their modus operandi is the falsification of money market rates. That’s how they subsidize the carry trade. They keep it growing via the epic financial fraud implicit in its massive balance sheet purchases from Wall Street dealers, which are funded with counterfeit credits.

That’s not my opinion. That’s the official position of one of the Fed’s core insiders, St. Louis Fed President James Bullard. Bullard’s 1990 doctoral thesis was titled “Time-Varying Parameters and Nonconvergence to Rational Expectations under Least Squares Learning.” He’s been on the Fed’s payroll ever since. Of course, he’s infected with Keynesian group-think. He now avers that the job of the Fed is to process the orders it gets from Wall Street: “We did get a bad reaction in financial markets. I think the market started to think we were too hawkish, might cause a recession. I think all of this weighed on the committee and got people to change their thinking… the normalization process in the United States is coming to an end.”

Of course, it’s more perverse than that. Because he’s right about causing a recession. If the Fed were to let markets “price in” the dismal debt-encumbered reality, collapsing stock options would trigger another C-suite driven recession: restructuring plans, asset write-offs, and liquidations of inventories and jobs. The Fed is hanging on for dear life, folks, predictably – capriciously – countermanding every incipient equity market selloff. And it’s reduced to increasingly desperate and nonsensical rationalizations.

For instance, the Eccles Building has recently manufactured the claim that the financial system now needs approximately $1.2 trillion of excess reserves to function properly. This implies that “quantitative tightening” should be terminated after the Fed’s balance sheet has been reduced to $3.6 trillion. The fact is, until Ben Bernanke panicked in September 2008, there had never been material excess bank reserves. Total reserves on deposit with the Fed had rarely reached $40 billion in modern times. Yet annual real GDP growth was reasonably buoyant in the 1980s and 1990s, notwithstanding the absence of excess reserves in the banking system.

The claim that most of the aberrant eruption in reserves is necessary for healthy Economy is absolute Eccles Building malarkey. The Christmas Capitulation is all about the insensible hope that the day of reckoning can be deferred forever.

Its Peak Debt on Main Street. And internet enabled global trade is dominated by the China Price for goods and the India Price for services. In this context, the Fed has neither the competence nor the tools to do anything about Economy. Its Humphrey-Hawkins inflation, employment, and interest rate mandates are pure legislative nostalgia, at best. More aptly, it’s the ultimate Mission: Impossible.

The Federal Open Market Committee pegs interest rates and monetizes government debt and other securities based on academic theories that such moves will help improve the performance of Economy. It’s doing little more than underwriting rampant speculation and ever-inflating financial assets for Wall Street. Quite naturally – inevitably, of course – asset inflation cycles reach their own asymptote. It happened in 2000, in 2007, and again in 2018.

But this is the era of Bubble Finance. So, our monetary central planners throw common sense – not to mention empirical fact – to the wind… They make up ever more implausible excuses. Of course, they capitulate to Wall Street…

A Personal Plunge Protection Plan: Everywhere you look, there are signs of weakness. The Great Disruptor may indeed succeed in right-sizing the American Empire – but it’s through no intentional effort of his own. You see, the world is tiring of the “Indispensable Nation.” It’s starting to suffer too much the costs of “Team America: World Police!”

That doesn’t mean, however, that Imperial Washington is on board to end Forever War… far from it. Neocons are ginning up the old martial spirit against Iran, and Very Serious People on both sides of the Duopoly are eyeing Venezuela for intervention. The Warfare State will metastasize until something bigger stops it. AOC-and-MMT-style socialism plus the Green New Deal promise the same for the Welfare State. What it does mean (and this is the short version) is “easy money as far as the eye can see.”

Appeasing Wall Street is, of course, critical to maintaining the status quo. The Fed is therefore merely an instrument of Imperial Washington. So, we’re stuck abroad… And Main Street is stuck in stagflation… The fundamentals are terrible… All we have is debt to sustain us. But our monetary central planners will test the absolute limits of U.S. hegemony – including the durability of the dollar as the global reserve currency – to nourish the Acela Corridor.”