The Opening Salvo
Regardless of what you think about Trump, he recently did the world a big service. He pointed out, in his unique, unadulterated style, the monetary elephant in the room to a global audience. Trump’s attack on the Fed is consistent with, and will only elevate, his outsider status. In the polite environs of get-along, scratch-my-back-I’ll-scratch-yours Republicans and Democrats, questioning the Fed is off-limits. The entire primary campaign with over 20 candidates alluded to monetary policy on only a few soundbites. The topic of Fed policy did not make the Republican or Democrat primary debates. Monetary policy is a dry subject but it need not be. Especially when central banks’ errant monetary model of zero interest rates, trending to negative, is driving the economic future of everyone on the planet.
Here is what Trump said in the first Presidential debate with Clinton.
“Now, look, we have the worst revival of an economy since the Great Depression. And believe me: We’re in a bubble right now. And the only thing that looks good is the stock market, but if you raise interest rates even a little bit, that’s going to come crashing down.
We are in a big, fat, ugly bubble. And we better be awfully careful. And we have a Fed that’s doing political things. This Janet Yellen of the Fed. The Fed is doing political — by keeping the interest rates at this level. And believe me: The day Obama goes off, and he leaves, and goes out to the golf course for the rest of his life to play golf, when they raise interest rates, you’re going to see some very bad things happen, because the Fed is not doing their job. The Fed is being more political than Secretary Clinton.”
Whether the Fed is political, hopelessly lost in their errant demand-side model, or some combination of the two is debatable. What is not debatable is that the Fed cannot raise interest rates for precisely the reason Trump stated. (See Fed Rate Hikes for more detail.) ZIRP policy has steered the Fed into a monetary box canyon. Fed rate hikes will cause “some very bad things to happen” when eight years of economic distortion and capital misallocation based on manipulated interest rates begin to unwind. The Fed justifies its inability to normalize rates on a constantly moving goal post of economic data. No matter the stated goal or what the economic data indicates, the Fed is always one more FOMC meeting away from the onset of normalization.
Indeed, one reason the Fed desires to raise rates is so they can lower them to fight the next recession. Except, the Fed cannot “fight” recessions. This is the great misconception about the Fed’s seemingly omnipotent power. The Fed’s power is limited to three choices. It can maintain a stable dollar whose value does not change. It can devalue the dollar through inflation, or it can increase the dollar’s value through deflation. These choices have tremendous influence on the direction an economy turns. Sustained, beneficial economic growth across all social strata requires the foundation of a stable dollar. Inflation and deflation are money illusion that distort and misallocate capital and resources. Trump has properly called out the Fed on their increasingly desperate attempts at money illusion through interest rate manipulation. Fed mismanagement through money illusion is responsible for the widening inequality gap. The Fed’s interest free money flows to the powerful, crony, connected, and speculators while pensioners, savers, and the productive class fall further behind.
Trump’s attack on the Fed is consistent with the intellectual history of his economic advisors. He has brought sound money advocates into his campaign. Judy Shelton is a long time gold standard advocate with many books and articles on the subject. Her idea for “Shelton bonds” will give savers the option to own government bonds backed by gold’s historic stability in value. Current government fiat bonds will lose value in relation to the Fed’s stated inflation goals with a return to market set interest rates. Trump advisors David Malpass, Newt Gingrich, Stephen Moore, and Larry Kudlow are also long time advocates of sound money.
Trump’s political ascendency befuddles the conventional wisdom of the establishment. Their only recourse is to issue increasingly dire warnings about the calamity of a Trump presidency. Trump’s success is not difficult to understand. Citizens want economic growth and the opportunity to provide a higher standard of living for their children in a safe world. Establishment Republicans and Democrats have offered neither, and these desires continue to move further away from political attainability. Trump’s endorsement for a return to sound money and his critique of useless wars and a lessening of heightened superpower tensions resonate with voters. His rise in the polls directly parallels the establishment’s decreasing grip on power. Whether Trump gets some things right or wrong, his ability to open a dialogue on political correctness, immigration, trade, foreign policy, economic growth, and the Fed has tapped into long-held voter frustration. Trump appears malleable enough to move toward pro-growth policy as his learning curve increases.