I wouldn’t be Chairman of the Federal Reserve Bank if you paid me (and I’m pretty sure it’s a paying gig, so that’s how much I would never do it).
Because it’s basically an impossible job. At least, the dual mandate is an impossible goal to achieve.
First off, interest rates don’t hire people. So making the Fed responsible for full employment is like saying the PGA commissioner has to get more holes-in-one in golf’s Major Tournaments. Sure, he could make the courses easier, let players use balls and clubs that are currently illegal. But the ball still has to go in the hole. There’s a certain randomness to that.
But that’s not even why I wouldn’t take the job. You want me to ensure full employment? Fine. I’ll give it the Scotty treatment (add your own Scottish accent): “I can’t get the rate to 5%, Captain, she’s gonna blow.” Then, whatever you get is fine because nothing blew up. It’s all about managing expectations.
I wouldn’t take the job because the Fed is facing a much more difficult task… one that I think is impossible to achieve. Because this particular mission pits the Fed against natural market forces and the power of Silicon Valley. I don’t even want to pretend I (or anyone else) can win this fight.
To the Fed’s credit, I think former Chair Ben Bernanke tried every trick in the book, and a few that weren’t, to win this fight. He cut interest rates to zero. He expanded the money supply by 400%. He said the Fed would guarantee every counterparty obligation in the world. He bought $4 trillion worth of Treasury bonds and mortgage-backed securities. He printed huge posters that said, “The stock market will not go down,” and posted them everywhere. (Though, to be fair, Bernanke did stop short of actually dropping bundles of cash from helicopters.)
It’s somewhat ironic that Bernanke’s critics were so sure that he and the Fed would win. They said all those QE purchases and zero interest rates would inevitably spark massive inflation. No matter what the Fed has tried, it has been unable to fulfill its second mandate of getting a little inflation going to ensure price stability.
And it might not ever be able to get its desired 2% inflation going.
Tax on Savings, Incentive on Spending (and Investing)
I know plenty of people think it’s insane to actually want inflation. Why on earth would you want your money to be worth less in the future? Or, conversely, why would you want stuff to be more expensive in the future?
Well, a bit of inflation actually can be a good thing. It has to do with velocity of money.
The Fed defines velocity of money like this: The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.
It should be easy to see why the velocity of money is associated with economic activity. In a healthy economy, there should be a lot of buying and selling, with money changing hands. A LITTLE inflation helps the velocity of money along (please note I said a little).
A little inflation means prices will be higher in the future, so there’s no sense in delaying a purchase. A little inflation encourages borrowing, because you will be paying back the loan with dollars that will be worth less in the future. And if you want to beat inflation — that is, if you want your money to grow over time — you’d better be investing.
I know some people hate inflation. They call it the “silent tax.” They say it punishes people who just want to save their money. And while both of those points are valid, I’d rather look at inflation as punishment for not investing.
Yep, I said it. Because every single American should be investing a little cash every single month, even if it’s just a company-sponsored 401(k).
I consider the whole argument that investing is risky to be complete bunk. A simple plan that invests your money in great companies that pay dividends — a plan that reinvests those dividends — will make you money over time. And you don’t have to pay to be in a plan like this. You can do it all yourself with ease (and if you want some ideas about great companies to invest in, a Wealth Advisory subscription is cheap, just $49 a year).
This is why I love my job. There’s nothing better than finding great companies that can grow my subscribers’ and my money over time. I get the emails from them, and I wouldn’t trade it for a job at the Fed that simply can’t be done.
Great Companies Are Beating Inflation
The Fed has an unofficially official annual inflation target of 2%. And I can’t remember the last time it was hit. Many people say this is why wages are barely moving. They say it’s a sign that the U.S. economy is still very weak. After all, if economic activity were truly strong, money would be flying around, and prices and wages would increase.
But maybe we’re just looking at it wrong.
When I was a kid (40 years ago, oh my god), my first pair of Levi’s cost somewhere between $25 and $35. Today, I can buy a pair for $45 to $50. That is massively underperforming inflation. And sure, you can say there’s less cotton in them, that they are poorly made, and that’s fine. The bottom line is that as a percentage of income, Levi’s are damn cheap.
Moore’s Law — that semiconductors double efficiency and halve price every two years — means computing costs do nothing but come down. Oil prices are where they were 15 years ago. Solar and wind prices continue to fall. Energy costs overall have fallen so much that coal, once the cheapest fossil fuel, is now not economically viable.
Next up, we’re gonna be hitting a drive-thru in an autonomous car for a burger flipped by a damn robot. People are so scared of robots taking over huge swaths of the economy that they are seriously discussing a universal basic income. Simply being a human will get you a paycheck. (Personally, I think it’s a little early to start up such a wing-nut notion, but people like their wing-nut notions.)
My point here is that innovation and productivity are deflationary. As we get better at doing stuff, the price falls. As more people participate, value falls. And the cycle seems to be getting faster. These are forces that are pushing inflation lower. The Fed simply can’t fight, and shouldn’t even want to.
Interest rates have been falling for close to 40 years. I’m not gonna go wing-nut here and tell you that inflation is permanently defeated. But if $4 trillion won’t buy a little inflation, it’s probably time for the Fed to rethink its mission.
Until next time,
Briton Ryle |
