With a Wall Street Journal Op-Ed (ungated here) from Senator Elizabeth Warren, and a long Manhattan Institute essay last year by Dan Katz and Stephen Miran, the latter CEA Chair and Fed Board nominee, both ends of the horseshoe are calling for fundamental reform at the Fed.
After thirty years in the bond market, I have come to think that central banking is pretty much the same thing as central planning, with similarly bad success rates. It’s always worth remembering that the Fed is the US’ third central bank, its predecessors having gone, er, bankrupt.
I think MV=PV has sufficiently proven its ineffectiveness. Ballooning the balance sheets of both FED and ECB lead to bubbles and asset inflation—not inflation of consumer prices. Or am I missing something here? In the data I read supply shortages and a very low supply elasticity exacerbating post Covid excess demand. The aggregate supply curve was nearly flat.
I don’t know. LT yields augment when inflation expectations rise. These rise with uncertainty when markets get rattled by unpredictable behavior of decision makers.
US debt is covered by private and foreign sector balances and there are high CB bank reserves. In Europe only a few countries have a potential problem—the usual suspects—but northern countries have extremely low government debt. The ECB holds more than €10 trillion in bank reserves, mostly coming from private savings. Banks get 4% and pay 1%—it’s a money tree. Now, that’s an unsustainable problem right there I think.
Here in the Netherlands we boosted the Covid economy with €100 billion, increasing the debt to GDP ratio from 43% to 52%. Five years later we’re back at 43%.
Germany installed a debt brake (debt ceiling) 15 years ago. Resulting in underspending and underinvestment—its economy is in shambles, infrastructure needs upgrading, digitization is rudimentary, etc.
France is as usual a mess. No fiscal discipline! Debt to GDP ratio like the US around 120%. But France has high speed trains, nuclear power stations all over the country, an operative and earnest military, naval industry building subs, aerospace industry building jets, etc. and it’s a happy country.
It’s not clear to me that the Fed needs more democratic control. The executive branch and the legislative branch cannot handle fiscal policy. Why would we think they should have more control over monetary policy?
Yes, John is spending a LOT of time dissecting dubious arguments of people like Elizabeth Warren who will have almost zero actual impact on anything anyway, and almost no time dissecting the effects Trump's behavior could have. On that note, John hasn't even written here on the most reckless fiscal bill (considering it is neither a recession nor wartime) in US history.
I suspect we would not have read him write stuff like a “we are not a democracy”. But what I see in lesser minds is not that they changed what they think, but they did change what they let out.
The possibility of Fed independence is two things: (1) impossible and (2) undesirable. The quantity of money (whatever money is these days) definitely matters in a political economy, and so far as I can tell, JC's version of how it matters is as good as it gets.
The important question is not whether the Fed should be independent; it isn't, couldn't be, and by my lights (who bloody well cares about my lights?) shouldn't be. The important question is how the quantity of money (whatever money is these days) is regulated and who gets to do it in our Constitutional republic, which is supposed to be a federation of sovereign states, but isn't and hasn't been for decades.
The best shot humans have at answering that question is rules. That's what the Constitution is supposed to be. History shows us that rules matter, but are no panacea. In the end, rules just slow things down; they don't ensure outcomes the rules were intended to bring about. Only persons can do that.
Whatever is done about money in a society, which necessarily must be done in a social context, should make the closest approach possible to unanimous consent of the people. We have a republic with representative; we should use them. Obviously, unanimity is impossible, but requiring a ⅔ vote or even an 80% plus one, instead of simple 50% plus one, to make decisions comes a lot closer.
Here's a proposal: get the government out of the money business altogether. Members of a society will decide through their voluntary exchanges what is money and what is not, provided we do not allow government operatives to have a say. Who knows; money might turn out to be Bitcoin or something like it. Given today's technology, maybe that would be a good thing.
The democratic republics of the 20th century were all centrally-planned economies wherein the state owned the means of production and determined the products and rate of output of the products to be produced in those democratic republics. The ruling elites of those states advantaged themselves and disadvantaged those who were not members of the ruling party. Katz and Mirans fail to see the irony in their prescriptions (largely supported by their conclusory statements) of democratic accountability. What could go wrong with a system charged with conducting monetary policy when the governors of the system serve solely at the pleasure of the president? What could go wrong with a nationalized system of reserve banks, the presidents of which serve at the sole pleasure of the governors of the states comprising the reserve banks' regions?
Instead of parsing Katz and Miran's paper, take their prescriptions as given and then analyze the behavioural consequences by the decision-makers: (a) POTUS, (b) state governors, (c) appointees to the board of governors of the reconstituted federal reserve system, (c) presidents of the several nationalized reserve banks, (d) Congress, (e) market makers in the Treasury securities trading system, (f) market makers in the equity markets, (g) foreign central banks holding deposits with the federal reserve bank of New York, (h) foreign currency market makers in the USD.
Suppose Katz and Miran's prescriptions for increasing democratic responsibility in the federal reserve system were put in place on day 1 -- January 20th, 2025. What would be the probable course of the USD, the US bond market in Treasury securities, US monetary policy, and foreign investor responses? What would be the worst-case scenario imaginable? What would be the best-case scenario imaginable?
This is a management behaviour problem with national and international consequences for the U.S. economy and for the global financial system. Katz and Miran have proposed a democraticized utopian vision of monetary policy control by elected leaders. Politics is a zero-sum non-cooperative game. What is the most likely Nash equilibrium attainable under the Katz-Miran federal reserve system reorganization? At what cost?
Is there a Pareto improvement possible with the Katz-Miran prescription? Katz and Miran didn't point to one. Their sole criterion is "democratic control" over a politically-independent Federa Reserve System having a creeping mandate to engage in "political" decisions that Katz and Miran cite as contrary to the popular will (popular democracy).
That John can point to the parallels of the Katz-Miran prescriptions with Sen. Eliz. Warren's prescriptions for increasing the democratic accountability of the Federal Reserve System to the "people" is no coincidence. It arises from the same logical fallacy--democratic accountability to the people. The soviet was the 20th century innovation in government based on state-control of the means of production. What will be the 21st century innovation in government oversight of U.S. monetary policy? Will it be the status quo ex ante, or a novation in which idiosyncratic presidential control (referred to as "democratic control") takes precedence over monetary policy?
The most important purpose of the central bank is to "arrange" privileged interest rate for the Government. "Independent" or "accountable" central bank, "rules or discretion" ... this kind of debates have little value. The central bank is de-facto a fiscal agent, it implements the "inflation tax". So, I don't care whether Thump would fire someone. The President in his own twisted way is honest - he breaks the illusion of independency. Also, I don't care whether the mandate of Fed is "dual" or "single" - it will be inevitably broken with interpretations. I don't care anymore what is "price stability". If there is no common sense and common law in the world of finance, words become vague and unreliable.
I think that fiscal dominance is bad not only when it appears, but also it is bad as possibility, as a tool that can be used. And it is unstoppable. Sorry for my depressing Friday. :-)
“the natural leftward bias of DC technocrats and academics”!is a truly remarkable statement coming from someone who chooses not to write when it does not serve his (or his employer) bias.
The Federal Reserve creates checks, hands the checks over to Treasury so Treasury can go into the Treasury bonds market and purchase back some of its bonds. Financial institutions sell the bonds to Treasury for the Federal Reserve checks, then deposit the checks into banks. The banks then turn the Federal Reserve checks into money, thereby inflating the money supply. If the Federal Reserve check is $1 billion, the money supply has been artificially increased by $1 billion. But the increase in money doesn't just stop with the $1 billion check from the Federal Reserve. The creation of money continues when I borrow $100,000 from one of the banks. When I deposit that check into my bank, my bank - assuming a 10% bank reserve requirement - can now lend out $900,000, adding another $900,000 to the money supply. Because we're dealing with a Federal Reserve fractional reserve requirement of 10%, this process will continue on until $10 billion dollars of credit has been created.
INFLATION DEFINED
The Treasury prints money for the purpose of exchanging old currency for new currency. If the Treasury released into the economy new bills without excising from the market the same value of old bills, the result would be a market-wide increase in prices for goods and wages, therefore no inflation. Inflation is where the currency loses its purchasing power, but as we can see from the above, wages rise commensurate with the prices of consumer goods. Properly speaking, inflation entails the loss of purchasing power, which can only take place via central bank credit expansion.
After thirty years in the bond market, I have come to think that central banking is pretty much the same thing as central planning, with similarly bad success rates. It’s always worth remembering that the Fed is the US’ third central bank, its predecessors having gone, er, bankrupt.
I think MV=PV has sufficiently proven its ineffectiveness. Ballooning the balance sheets of both FED and ECB lead to bubbles and asset inflation—not inflation of consumer prices. Or am I missing something here? In the data I read supply shortages and a very low supply elasticity exacerbating post Covid excess demand. The aggregate supply curve was nearly flat.
I don’t know. LT yields augment when inflation expectations rise. These rise with uncertainty when markets get rattled by unpredictable behavior of decision makers.
US debt is covered by private and foreign sector balances and there are high CB bank reserves. In Europe only a few countries have a potential problem—the usual suspects—but northern countries have extremely low government debt. The ECB holds more than €10 trillion in bank reserves, mostly coming from private savings. Banks get 4% and pay 1%—it’s a money tree. Now, that’s an unsustainable problem right there I think.
Here in the Netherlands we boosted the Covid economy with €100 billion, increasing the debt to GDP ratio from 43% to 52%. Five years later we’re back at 43%.
Germany installed a debt brake (debt ceiling) 15 years ago. Resulting in underspending and underinvestment—its economy is in shambles, infrastructure needs upgrading, digitization is rudimentary, etc.
France is as usual a mess. No fiscal discipline! Debt to GDP ratio like the US around 120%. But France has high speed trains, nuclear power stations all over the country, an operative and earnest military, naval industry building subs, aerospace industry building jets, etc. and it’s a happy country.
Check out my essay and tell me your view:
https://open.substack.com/pub/ed12621126/p/stop-agonizing-about-the-national?r=5ch0o6&utm_medium=ios
It’s not clear to me that the Fed needs more democratic control. The executive branch and the legislative branch cannot handle fiscal policy. Why would we think they should have more control over monetary policy?
Yes, John is spending a LOT of time dissecting dubious arguments of people like Elizabeth Warren who will have almost zero actual impact on anything anyway, and almost no time dissecting the effects Trump's behavior could have. On that note, John hasn't even written here on the most reckless fiscal bill (considering it is neither a recession nor wartime) in US history.
mr. Cochrane is an employee of a think tank with a clearly stated political lean. what else do you expect?
He wasn't always like that though. The culture wars sucked him in and chewed him up, like so many others.
I suspect we would not have read him write stuff like a “we are not a democracy”. But what I see in lesser minds is not that they changed what they think, but they did change what they let out.
The possibility of Fed independence is two things: (1) impossible and (2) undesirable. The quantity of money (whatever money is these days) definitely matters in a political economy, and so far as I can tell, JC's version of how it matters is as good as it gets.
The important question is not whether the Fed should be independent; it isn't, couldn't be, and by my lights (who bloody well cares about my lights?) shouldn't be. The important question is how the quantity of money (whatever money is these days) is regulated and who gets to do it in our Constitutional republic, which is supposed to be a federation of sovereign states, but isn't and hasn't been for decades.
The best shot humans have at answering that question is rules. That's what the Constitution is supposed to be. History shows us that rules matter, but are no panacea. In the end, rules just slow things down; they don't ensure outcomes the rules were intended to bring about. Only persons can do that.
Whatever is done about money in a society, which necessarily must be done in a social context, should make the closest approach possible to unanimous consent of the people. We have a republic with representative; we should use them. Obviously, unanimity is impossible, but requiring a ⅔ vote or even an 80% plus one, instead of simple 50% plus one, to make decisions comes a lot closer.
Here's a proposal: get the government out of the money business altogether. Members of a society will decide through their voluntary exchanges what is money and what is not, provided we do not allow government operatives to have a say. Who knows; money might turn out to be Bitcoin or something like it. Given today's technology, maybe that would be a good thing.
The democratic republics of the 20th century were all centrally-planned economies wherein the state owned the means of production and determined the products and rate of output of the products to be produced in those democratic republics. The ruling elites of those states advantaged themselves and disadvantaged those who were not members of the ruling party. Katz and Mirans fail to see the irony in their prescriptions (largely supported by their conclusory statements) of democratic accountability. What could go wrong with a system charged with conducting monetary policy when the governors of the system serve solely at the pleasure of the president? What could go wrong with a nationalized system of reserve banks, the presidents of which serve at the sole pleasure of the governors of the states comprising the reserve banks' regions?
Instead of parsing Katz and Miran's paper, take their prescriptions as given and then analyze the behavioural consequences by the decision-makers: (a) POTUS, (b) state governors, (c) appointees to the board of governors of the reconstituted federal reserve system, (c) presidents of the several nationalized reserve banks, (d) Congress, (e) market makers in the Treasury securities trading system, (f) market makers in the equity markets, (g) foreign central banks holding deposits with the federal reserve bank of New York, (h) foreign currency market makers in the USD.
Suppose Katz and Miran's prescriptions for increasing democratic responsibility in the federal reserve system were put in place on day 1 -- January 20th, 2025. What would be the probable course of the USD, the US bond market in Treasury securities, US monetary policy, and foreign investor responses? What would be the worst-case scenario imaginable? What would be the best-case scenario imaginable?
This is a management behaviour problem with national and international consequences for the U.S. economy and for the global financial system. Katz and Miran have proposed a democraticized utopian vision of monetary policy control by elected leaders. Politics is a zero-sum non-cooperative game. What is the most likely Nash equilibrium attainable under the Katz-Miran federal reserve system reorganization? At what cost?
Is there a Pareto improvement possible with the Katz-Miran prescription? Katz and Miran didn't point to one. Their sole criterion is "democratic control" over a politically-independent Federa Reserve System having a creeping mandate to engage in "political" decisions that Katz and Miran cite as contrary to the popular will (popular democracy).
That John can point to the parallels of the Katz-Miran prescriptions with Sen. Eliz. Warren's prescriptions for increasing the democratic accountability of the Federal Reserve System to the "people" is no coincidence. It arises from the same logical fallacy--democratic accountability to the people. The soviet was the 20th century innovation in government based on state-control of the means of production. What will be the 21st century innovation in government oversight of U.S. monetary policy? Will it be the status quo ex ante, or a novation in which idiosyncratic presidential control (referred to as "democratic control") takes precedence over monetary policy?
The most important purpose of the central bank is to "arrange" privileged interest rate for the Government. "Independent" or "accountable" central bank, "rules or discretion" ... this kind of debates have little value. The central bank is de-facto a fiscal agent, it implements the "inflation tax". So, I don't care whether Thump would fire someone. The President in his own twisted way is honest - he breaks the illusion of independency. Also, I don't care whether the mandate of Fed is "dual" or "single" - it will be inevitably broken with interpretations. I don't care anymore what is "price stability". If there is no common sense and common law in the world of finance, words become vague and unreliable.
I think that fiscal dominance is bad not only when it appears, but also it is bad as possibility, as a tool that can be used. And it is unstoppable. Sorry for my depressing Friday. :-)
“the natural leftward bias of DC technocrats and academics”!is a truly remarkable statement coming from someone who chooses not to write when it does not serve his (or his employer) bias.
MECHANICS OF THE INFLATIONARY PROCESS
The Federal Reserve creates checks, hands the checks over to Treasury so Treasury can go into the Treasury bonds market and purchase back some of its bonds. Financial institutions sell the bonds to Treasury for the Federal Reserve checks, then deposit the checks into banks. The banks then turn the Federal Reserve checks into money, thereby inflating the money supply. If the Federal Reserve check is $1 billion, the money supply has been artificially increased by $1 billion. But the increase in money doesn't just stop with the $1 billion check from the Federal Reserve. The creation of money continues when I borrow $100,000 from one of the banks. When I deposit that check into my bank, my bank - assuming a 10% bank reserve requirement - can now lend out $900,000, adding another $900,000 to the money supply. Because we're dealing with a Federal Reserve fractional reserve requirement of 10%, this process will continue on until $10 billion dollars of credit has been created.
INFLATION DEFINED
The Treasury prints money for the purpose of exchanging old currency for new currency. If the Treasury released into the economy new bills without excising from the market the same value of old bills, the result would be a market-wide increase in prices for goods and wages, therefore no inflation. Inflation is where the currency loses its purchasing power, but as we can see from the above, wages rise commensurate with the prices of consumer goods. Properly speaking, inflation entails the loss of purchasing power, which can only take place via central bank credit expansion.