#BTColumn – Sing-a-long with the Fed

The views and opinions expressed by the author(s) do not represent the official position of Barbados TODAY.

by Adrian Sobers

“Suckers think that you cure greed with money, addiction with substances, expert problems with experts, banking with bankers, economics with economists, and debt crises with debt spending.” – (Nassim Nicholas Taleb)

“Deficit spending and inflation are simply alternative forms, albeit less obvious, of taxation.” – (Walter E. Williams)

For a recent textbook example of Taleb’s truism, the reader need look no further than the Letters to the Editor section of the Wall Street Journal under the heading: Death Is No Escape From Taxes.

Responding to Professor Alan Blinder’s op-ed, one writer provided a timely reminder that “trusting politicians and experts to run our economy is foolish.” Another ended, “I suppose we can be grateful that the professor teaches economics rather than federal taxation.” But there is more to Taleb’s truism.

At the time of writing, the Federal Reserve’s balance sheet stood at just over US$8.3 trillion. On September 1, 2008 it was just under US$1 trillion. A textbook case of: “Well, that escalated quickly.”

This rapid escalation and expansion of the money supply, this monetisation of government debt at the (literal) expense of taxpayers/consumers, is the cause of the general increase in prices. One does not have to be an economist, and certainly not of the Princeton variety, to figure this out.

It will become clearer, and painfully so (sorry to say), when the market realizes that the Fed is making things worse with their bond buying bonanza. In fact, we got a hint of what will eventually happen (albeit on a smaller scale).

Current Fed Chair Jerome Powell testified before the US Senate alongside Treasury Secretary (and former Federal Reserve Chair), Janet Yellen.

Mr. Powell admitted that they might have gotten it wrong about the transitory nature of inflation. (Reality is slowly but surely setting in.)

However, when he went before the House of Representatives, he sang a completely different tune (central bank independence be damned).

We can put this change of tune down to two things: the market’s reaction to his Senate testimony and the fact that, like anyone else in his position, he wants a second term. There will be no relief in general price increases until the governance problem is addressed.

Mr. Powell’s change of tune should erase any lingering doubts among persons who might have been skeptical about the governance problem before us.

Former central banker Paul Tucker spoke to specific steps we can take to tackle this issue in Unelected Power, but since his detailed recommendations are beyond our scope here we will have to settle for a general statement. Those with ears and all that.

“The reemergence of unelected power is one of the defining features of modern governance. It has been on display, perhaps as never before, since 2007 as politicians chose to step back from the problems of restoring prosperity, largely leaving it to central bankers to revive and redesign the international economic and financial system.

We want functional, democratically elected, and accountable legislatures but definitely not unelected overmighty citizens. Fortunately, in modern democracies it is within our power to determine whether we end up with them.”

Unfortunately, one of the features of modern democracies is that we still think we can solve expert problems with experts, and debt crises with debt spending.

Closer to reality, President of the St. Louis Fed, Jim Bullard, started singing from a different hymn sheet from Mr. Powell, admitting that the inflation we are seeing now is not transitory but is here to stay: get used to it (paraphrasing here). At this point, we would have to be suckers par excellence if we are still holding out hope that the “transitory” narrative is true.

Worse still, we would be even bigger suckers to believe the current Fed Chair that they have the tools to fight inflation should it ever get out of hand. Does the reader need to be reminded when one of his predecessors reassured us that the subprime market was “contained”? Fool me once and all that.

While the Federal Reserve is the best example for this subject, we can still learn from closer to home. The Jamaica Observer reported a recent rate hike from the Bank of Jamaica “by 1 percentage point — tripling the rate from 0.5 per cent to 1.5 per cent — drawing the ire of at least one economist who slammed the move as being misguided.” Our concern here is not the artificially low rate or the economist’s reaction, but the comments.

Virtually all of the commenters, no doubt in their capacity of consumers, based their responses on the false definition of inflation as rising prices. Rising prices are the symptom, inflation is the central bank’s expansion of the money supply.

The sooner we stop being suckers on this point, the sooner the correct persons can be held accountable. (Hint: Don’t hold your breath as it would force governments to be fiscally responsible.)

Salman Rushdie’s closing remarks in his lecture on Philip Roth, the “literary revolutionary” turned “political prophet”, also applies to Walter E. Williams, “One can only bow one’s head before such a career, while expressing deep regret that, […] he turned out to be right on the money and that he’s no longer around to help us work out where we go from here.”

Adrian Sobers is a prolific letter writer and commentator on social issues. This column was offered as a Letter to the Editor.