Our podcast today provides an analysis of Trump’s Fed dilemma of how he can inject a measure of democratic consent into a political institution created by Congress, in 1913, to operate independent of constitutional authority.
Since 2008, the Fed has consistently mismanaged the national financial system by artificially keeping interest rates too low, for too long, which has caused a long-term structural distortion in the capital markets.
By manipulating interest rates, the Fed has set up the boom-bust business cycle, that begins with rampant asset speculation, not authentic economic growth.
Trump’s immediate dilemma is caused because Trump wants stable monetary policy to promote domestic economic growth, and the current Fed Chairman wants to raise interest rates to stabilize global financial markets.
“Despite a Federal Reserve that doesn’t know what it is doing… we are on course to have one of the best Months of June in US history. Now they stick, like a stubborn child when we need rate cuts & easing, to make up for what other countries are doing against us. Blew it!”
The longer term dilemma for Trump, and all middle class Americans, is that the Fed Chairman sees his job as stabilizing global financial markets, not promoting domestic national economic growth.
The Fed’s intent to shift attention to global markets is best seen after the crash of 2008. The Fed paid foreign and domestic banks $1.7 trillion to keep them afloat.
Nothing in the Constitution, or the Fed’s 1913 legal authority, prohibits the Fed from squandering American tax money on foreign corporations and banks.
The combination of quantitative easing and corporate bailouts, in 2008, is a microcosm of Trump’s bigger Fed dilemma. Trump wants to Make America Great and the Fed wants to make the global economy great, for global financial elites.
Our analysis today places Trump’s dilemma into the analytical framework of James Buchanan’s theory of public choice, and argues that the major flaw in the entire Fed system, since its creation, is that its secret operations are disconnected from the consent of the governed.
Buchanan argues that the nation needs a “constitutional money system,” that clearly defines the mission of the Fed, and places its actions under legitimate constitutional authority.
The Fed’s behavior of rewarding banks, since 2008, is exactly the outcome predicted by Buchanan, when a tiny coterie of insider elites aim to improve the welfare of the global economy by central planning.
The operation of the Fed is called “global corporatism,” where privileged elites make decisions in secret, aimed at rewarding themselves, and their global crony capitalist friends.
Trump’s immediate decision about replacing the current Chairman will not correct the long-term institutional defects of the financial system that rewards Wall St. bankers at the expense of the American middle class.
I am Laurie Thomas Vass, and this is the copyrighted Citizen Liberty Party News Network podcast for June 28, 2019.
Our podcast today is under the CLP topic category Economic Growth, and is titled, Trump’s Fed Dilemma
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The Fed’s War on the American Middle Class.
In his excellent article, “States Where the Middle Class Is Disappearing,” Thomas Frohlich details 40 states where the middle class is vanishing. (https://bit.ly/2Ye75A3, February, 2019),
This vanishing act is not magic, it is a deliberate policy outcome of the Fed’s war against the American middle class. Following the theory of James Buchanan, the welfare that the Fed is maximizing is global corporate welfare, not American domestic welfare.
American middle class workers can see the effects of the Fed’s policy outcome, but do not have a strategy to confront it.
In a recent Breitbart article, Shawn Wodogaza, a recently laid off Lordstown GM worker, told the Times he voted for Trump but that he is lost politically; he and others feel that the plight of the middle class is lost on the country’s elected political establishments and certainly corporate executives.
“I don’t know where to go,” Wodogaza said in an interview with the Times.
Rick Marsh, who worked at GM’s Lordstown plant for 25 years, before he was laid off, got the politics of the Fed’s war exactly right. Marsh stated,
“…the dichotomy was not so much Republicans vs. Democrats but rather the ruling elite vs. ordinary Americans. I realized these parties were not so different. They are all there to make money on our backs.”
The GM workers understand the dynamics of how the elites in the swamp operate. They know that America’s ruling class has gutted the middle class and allowed multinational corporations to send high-paying manufacturing jobs to China and Mexico in order to boost profits and cut costs.
The source of collusion between Democrats and crony capitalist Republicans lies in a symbiotic relationship between wealth redistribution of the socialists and taxation of global corporations.
Democrat socialists need the tax revenues of global corporations, and the Vichy Republicans need the Democrat’s policy of open global borders to conduct their business in a seamless global economy.
The result of the collusion, as the GM workers know, is devastation for the American working class.
In response to Trump’s threats, the Fed’s Board members are making the argument that Trump, and the common workers, are too stupid to make important financial decisions.
Philadelphia Fed President Charles Plosser said,
“This runs the risk of monetary policy decisions being based on short-term political considerations instead of the longer-term health of the economy,”
Cleveland Fed President Loretta Mester stated that more democratic oversight of the Fed is “misguided.”
“They really are about allowing political considerations to influence monetary policy decisions. This would be a tremendous mistake, because it would ultimately lead to poorer economic performance.”
Mester’s statement gets to the nub of the Buchanan theory about whose welfare matters to the Fed. The workers at the GM plant would argue that their economic performance could not be worse.
The economic performance in the 40 states where the middle class is disappearing could not be worse.
The economic performance for global corporations and banks could not be better. Profits at the 1500 largest U. S. corporations are at historic highs, and trending higher.
Putting Trump’s Fed Dilemma Into the Buchanan Framework
Buchanan changed conventional economic theory by correcting the blind spot in the starting assumptions of the theory that political decisions in the United States are made by elected politicians, who respond to the desires of voters.
In conventional economic and financial theory, there is no center of unelected power where an enlightened few can effectively isolate themselves from constituency pressures.
Buchanan’s theory of public choice changed conventional theory by adding the idea that public policy emerges from the interaction of self-interested individuals.
Applied to Congress and the operation of the Fed, Buchanan offers an explanation of economic reality that suggests that the bureaucrats at the Fed use their positions to maximize their own welfare, as if their own welfare was the economic welfare of the nation.
For example, when Loretta Mester states that economic performance would decline if common citizens were involved in financial decision-making, the economic performance that she is talking about is her own.
The animosity and pomposity of her attitude towards common citizens originates in her deeply held belief that competitive free markets would lead to worse economic outcomes than the Fed’s central planning.
Buchanan created a theory of public choice that explains that the Fed’s higher-than-socially-optimal inflation rate benefits financial elites, so that the elites can enjoy the revenue from the Fed’s money creation.
The modification of conventional economic theory put a new variable into the standard individual economic welfare function that concerned the bureaucrat’s own improvement in welfare.
As all the individual welfare functions of all individuals in the nation are aggregated into a national social welfare function, the weighting given to the bureaucrat’s own welfare skews the distribution of aggregate benefits to the politicians.
With the Fed’s shift to focus on global markets, the national social welfare function now contains a new variable that measures the improvement in global financial markets.
The interpretation of the new variable, from the Fed’s point of view, is that American domestic economic performance cannot improve unless global economic performance improves.
Obviously, the theoretical flaw in the Fed’s thinking is that the new national social welfare function is not bounded geographically to the territory of the United States.
In the hands of the Fed, the former national social welfare function has become a global welfare function, which is the essence of the conflict between Trump and the Fed.
The question is: whose welfare is to matter to policy makers at the Fed?
The outcomes of the Fed, for the middle class are much worse, since 1997, when the Fed bailed out Russia’s banking system, which aimed at helping global financial elites, in this case Russian oligarchs.
In the prior closed national welfare function, the Fed’s policies caused money to flow into specific domestic financial sectors, creating an asset bubble in those sectors.
In the prior closed national welfare function, middle class workers in sectors not affected by the Fed-generated boom saw a decline in their purchasing power and thus their standard of living.
In the new, open-border, global welfare function, the Fed’s actions cause money flows into specific global financial sectors, causing a world-wide decline in the welfare of middle class citizens, around the globe, whose financial interests are not linked to the operations of the global corporations.
In the new, open-border, global welfare function, the Fed’s monetary policies increase aggregate spending on goods and services, in specific global economic sectors.
The main difference between the prior closed national welfare function and the new global social welfare function is that the benefits of the Fed’s policies now flow to a tiny minority of global financial elites, not just to domestic elites.
Competitive Free Markets vs Global Corporate Central Planning
Buchanan argues that the Fed’s policy goals should be limited to improvements to the welfare of citizens who live in the geographical territory of the United States.
The best policy goal, according to Buchanan is to limit the Fed’s authority to a constitutional commitment to maintain a stable monetary environment, in the domestic U. S. economy.
In addition to limiting the Fed’s authority, Buchanan advocates a return to the state-sovereignty federalism.
In Constitutional Economics, Buchanan characterizes federalism as an ideal political order. The logic of Buchanan’s advocacy of federalism is that the division of authority between states and the central government limits the range of political coercion by the centralized elites.
In a federalist system, for example, citizens would have the means to alter or abolish the power of the Fed to undermine the American middle class.
Under the Fed’s central planning, the U.S. economy collapses every 10 years. At every collapse, the American middle class bears the brunt of the economic damage, while the privileged financial elite escape unharmed.
The previous eight postwar recessions were caused by the Fed’s manipulation of interest rates.
For example, Alan Greenspan’s monetization of debt policies created two economic recessions, in 1990, and ten years later, in 2001.
Ten years later, the run up to the collapse in 2008 was caused by Ben Bernake’s asset bubble in real estate, and the Fed’s monetization of bank debt.
The economic instability is caused by how the Fed decides to turn debt in all markets into increased money supply.
All public and private debt consists of either money or interest-bearing notes.
The economic instability is caused when the Fed creates a new money supply to buy the treasury securities that it issues.
In other words, the Fed acts as both the buyer and the seller of its own investments, which it finances by creating money.
The new currency is worthless, and the newly issued treasury bonds are worthless, but the increase in money supply kicks off a new 10 year round of the business boom-bust cycle, which ends in economic collapse.
The Fed’s actions directly benefit the banking elite because the Fed pays the banks interest. In other words, the Fed simultaneously borrows money from the Treasury and, more significantly, pays interest to Wall St. bond holders on reserves.
The Fed is currently paying bankers 50 basis points on both required and excess reserves. So the Fed, itself, is increasing how much interest the Fed will pay to “borrow” reserves from the commercial banks.
The 50 basis points means that the Fed will be paying commercial banks some $13 billion in annual income. This interest payment is unearned and risk-free because the bonds are backed by U. S. taxpayers.
Trump’s immediate dilemma is that the current Fed Chairman wants to raise interest rates in order to enhance the benefits to his bank constituents.
Applying Buchanan’s analysis, the American taxpayers are underwriting the monetization of America’s debt, not just the Fed created government debt of 21 trillion dollars, but all debt, including personal credit card debt, which is over a trillion dollars, and student loan debt which is over trillion dollars.
When the boom goes bust, the Fed will bail out the banks, force government induced cartels in the banking system, and reward the owners of the government securities by buying their worthless debt.
The Fed chairman wants to raise interest rates because doing so would cause large increases in federal government debt interest payments to bankers.
Trump does not want the Fed to raise interest rates because he wants to increase the rate of economic growth.
The two policy options are mutually incompatible and cannot be pursued at the same time.
The Fed’s policy option rewards global bankers.
Trump’s policy option of economic growth rewards middle class American citizens.
Trump’s dilemma is a picture of the class war in America, between global elites and middle class citizens.
This is my Conclusion
The class war on the middle class in America between globalists and nationalists can best be seen in the 1990 actions of the Republican Vichy globalists to eviscerate American manufacturing.
The income and employment multipliers in manufacturing, plus the internal career ladders, created a strong national economy, which provided upward occupational mobility for the middle class.
Prior to 1992, every one manufacturing job created 7 other jobs. Every dollar of manufacturing output delivered to the final demand markets created an income multiplier of 1.8.
The globalist policies were successful in eliminating 5 million good, stable jobs. The globalists were successful in closing 50,000 American manufacturing plants, and moved those operations to Mexico and China.
The economic damage inflicted on the middle class by the globalists was financed by the operations of the Fed.
Trump is fighting the Fed, fighting the Vichy Republicans, fighting the socialists, fighting Hollywood, fighting the American university and public education teachers, fighting the socialist propaganda media, trying to correct the economic damage inflicted by the globalists.
Trump is a one-man army, fighting alone, without the support of a political party.
Trump’s Fed dilemma is a class war dilemma for all middle class voters.
It is time for Trump voters to realize that the Fed, the Republicans and the Democrats do not share common social values that served to bind the nation in a common national mission.
The best, non-violent solution for Trump voters is a civil dissolution of the nation into two new nations, and to lead that political movement, Trump will need a new political party.
I am Laurie Thomas Vass, and this podcast is a copyrighted production of the CLP News Network
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