Trump's Beef with the Fed Moves to A New, Worrying Level
Jerome Powell (Reuters - Jonathan Ernst)
There is nothing new about a President, or any politician for that matter, banging heads with the Fed. The independence of the central bank and its long-term mission to foster stability makes that inevitable. Politicians tend not to look beyond their immediate needs, whereas economic progress is best measured in decades rather than months.
It's for that reason that we should not overreact to Donald Trump’s criticism of his own pick for Fed Chair, Jerome Powell, even though this does feel different from criticisms in the past.
The difference is essentially one of style.
Whatever you think of Trump, his thinking is always clear to see. His propensity to tweet whatever is on his mind at any given time gives us a unique insight into his priorities, and right now it is clear that he is unhappy with the Fed tapping the brakes as growth accelerated.
Other Presidents, when unhappy with Fed policy, have grumbled in private and, in extreme circumstances, offered veiled criticisms couched in an acknowledgement of the importance of independence. This President is just a lot more forthright.
There is, however, one way in which politicians influence the central bank. The Board of Governors that runs the Fed, as well as the Fed Chair, are appointed by the President, subject to confirmation by the Senate.
As I said, the President’s open dissatisfaction with monetary policy is not something to get worked up about. It is unsettling to some, but essentially changes nothing.
Donald Trump’s latest reported candidate for appointment, Herman Cain, is different.
Cain’s politics are not the point. What should be worrying for all investors are his views on economics, and on monetary policy in particular. Cain has, on several occasions in the past, voiced support for a return to the gold standard, and that would be a step backwards. It could strangle growth in America and put the country at an enormous disadvantage when compared to other countries.
Tying currencies to gold gives an enormous advantage to those that produce most of the metal. They can keep their production as reserves, allowing them to expand their money supply and therefore their economic capacity. As you can see from this list, that would give both China and Russia an advantage over the U.S.
It is no accident that the greatest period of economic expansion in history has followed the abandonment of the gold standard. Nor is it any accident that the decision to fully abandon the gold standard was taken by a Republican, Richard Nixon. A free-floating currency means that that currency’s value is decided by a free market, an imperfect system for sure, but one that has proven over time to be the most equitable and efficient yet devised.
What is surprising is that opposition to that system is now found in the Republican Party, Cain being a case in point.
Opposition to the current system isn't exclusive to the right, obviously. There are those on the far left who believe that monetary policy should be set by Congress rather than by an independent central bank. It doesn’t take a lot of imagination or an in-depth knowledge of economics to see how that could be disastrous. The aforementioned short-term outlook of politicians would make for a strong temptation to just print money to finance pet projects and garner popularity. The effects of that have been seen throughout history, from Germany’s Weimar Republic to modern-day Venezuela.
There is nothing wrong with challenging orthodoxy, that is how progress is made in all walks of life. Sometimes, though, you have to look objectively at what the status quo has achieved. From that perspective, an independent Fed and a free-floating dollar, not one tied artificially to a commodity, has been enormously successful and increased the overall wealth of not just this nation, but the world.
To abandon that, or even to hint at doing so by appointing someone like Cain to the Fed’s board, just because the current President is upset with Powell, would be folly in the extreme.