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The Federal Reserve, between "the deep state" and the "economically clueless state"

Călin Rechea ( Translated by Cosmin Ghidoveanu)
Ziarul BURSA #English Section /

Călin Rechea ( Translated by Cosmin Ghidoveanu)

clueless state"

The association between the Federal Reserve and the "deep state" fighting President Donald Trump was only a matter of time. Probably the only question is why so much time has passed from the first allegations made by Trump against the Federal Reserve leadership to explicit statements by a member of the administration.

That step was taken by Larry Kudlow, the president's economic adviser, in an interview with CNBC, where he hinted that staff at the Federal Reserve would include "deep state" agents.

After pointing out that "their models are deeply flawed", Larry Kudlow said "the staff in the deep state has not helped much." He was of course, speaking about the support for the economic programs of the government led by Donald Trump.

In an article in the Wall Street Journal, Kimberly Strassel defined the "deep state" based on its composition, that is, indefinite-term employees from state administrative institutions, who are gaining increasing power as government powers and roles expand.

The president's adviser later softened his criticism, stating that "the Fed was now moving in the right direction, by cutting interest rates."

According to the WSJ definition, the Federal Reserve staff may indeed be part of the "deep state", but it's actually more of a "state that is out of touch with the economic reality".

That state of things is described by a former US central bank insider, Danielle DiMartino Booth, in the book "Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America", published in February 2017.

After spending time in Wall Street banks, Ms. DiMartino Booth served as an adviser to Federal Reserve Bank of Dallas Chairman Richard Fisher for nine years.

"During that time I had the opportunity to observe the narrow vision and arrogance of the Economics Ph. D.s at the Fed, who could not understand that their theoretical models had little connection with real life," writes DiMartino Booth in the first chapter, where she states that "The Federal Reserve is the most powerful and impenetrable institution in the world."

Isn't that a characteristic of the persons or institutions that are part of the "deep state"?

Things have become the way they are because "the central bankers have invited politicians to abdicate the authority of leadership to an endogamous society made up of Economics Ph. D.s from academia, who are infected with "group thinking"," as DiMartino Booth writes.

Endogamy is defined in DEX as "compulsory contracting of marriages within a community or social group, practiced by some primitive populations". The results of this "practice" are well known: the disappearance of the populations that are being gradually crushed by the physical and mental degradation of the members.

It is hard to believe that the outcome will be different in the case of endogamy at the central bank level, especially since the responsibility for monetary policy decisions is nonexistent, especially if we use Professor Nassim Taleb's definition of his latest book, "Skin in the game".

It is precisely that complete lack of responsibility is also highlighted by Richard Fisher's former adviser.

Following the decision to cut the policy rate to zero, in December 2008, "Fed officials returned quietly to their own offices, being protected from the effects of this decision and without feeling any pain in their ivory towers", although "they knew the serious effects on those who saved and on the elderly".

Since then, more than ten years have passed, and the economic reality has refused to allow itself to be "modeled" by unrealistic assumptions, nor has it adequately responded to the monetary wave generated by the starting of the printing presses.

"Real people, small companies or the corporations did not respond according to the expectations of the models drawn up in the academic environment", and "the rational choices of the agents of the real economy were unforeseen by the Monetary Policy Committee", writes DiMartino Booth, who also makes an extremely serious accusation: "The Fed policy has caused long-term investments to be halted and has jeopardized the increase in the number of well-paid jobs."

"Zero interest prevents the natural disappearance of weak companies, and excess production capacity burdens the economy for generations," DiMartino Booth further writes, and she also believes that "we no longer have to accept the Fed's excuses for its failures."

Why is such logic so complicated for the "technicians" in central banks? Because they are able to publish, just a few months apart, analyses that have diametrically opposed conclusions?

One such case features two works by Jens H.E. Christensen, an economist at the Federal Reserve Bank of San Francisco.

In August 2019, Christensen published, together with Vice President of the institution Mark Spiegel, a study on the influence of negative interest rates on inflation expectations in Japan ("Negative Interest Rates and Inflation Expectations in Japan", FRBSF Economic Letter).

The conclusion was that "the efficiency of the negative interest rate as a monetary policy instrument is uncertain when inflation expectations are anchored at a low level" and "it is desirable to take measures to avoid the decline in interest rates to the zero threshold".

The same Jens H.E. Christensen published, in October 2019, the article "Yield Curve Responses to Introducing Negative Policy Rates", also on the FRBSF website.

"Negative interests can become an important instrument of monetary policy to combat future economic contractions," is the author's conclusion. What more could be said?

The adverse effects of negative interest have also been analyzed in an article in the "Journal of Financial Services Research" (July 2019), which shows that they actually lead to a contraction of credit and cancel out the effects of quantitative easing.

The study was based on data collected from 6,558 banks in 33 OECD member countries (Organization for Economic Co-operation and Development).

Unfortunately, the most powerful central bank in the world seems to be showing us more and more often that it is not just out of touch with the economic reality, which it aspires to plan so that economic cycles strongly influenced by the wrong monetary policy no longer exist (ed. note: there are studies which show that after the establishment of the Federal Reserve, in 1913, the duration, but especially the scale of the economic cycles has increased), but also with the "financial reality".

That is precisely why the quantitative easing program and the massive repo operations were restarted, amid a liquidity crisis on the interbank market, for which no explanations have yet been found.

Federal Reserve officials are also dodging the explanations on the efficiency of repeating some monetary policy measures, as the evolution of the real economies shows that they are far from the sustainable growth that was promised.

A radical change has taken place, though: the debt burden has increased rapidly, both in terms of nominal value as well as of the debt to GDP ratio.

The problem of these huge debts, a direct result of the disastrous policies of the big central banks of the last decades, has also been addressed by Bernard Connolly, one of the few economists who predicted the crisis of 2008 and the author of the book "The rotten heart of Europe", in an article from the British daily The Telegraph.

In his opinion, "all the desperate measures to postpone the recession will ultimately lead to governmental control over the distribution of incomes, but also to the allocation of spending and economic activity."

Precisely for that reason, Connolly believes that "the central banks have been and are useful idiots of Marxism and communism."

But is the position of "useful idiot" compatible with that of a "deep state" agent?

About her book, Danielle DiMartino Booth says that she wrote it "to tell the story of the Federal Reserve's transformation from lender of last resort to the savior, and then the destroyer, of the American economic system."

After more than a decade of "perseverance" on the path of undermining the real economies by continuing the process of excessive financialization, the big central banks will soon face new existential "challenges".

The International Monetary Fund has just published the Global Report on Financial Stability, where it is "surprised" to discover, that the global financial system is much more precarious and unstable than it was before the bankruptcy of the Lehman Brothers investment bank.

The fact that the institution has constantly supported the ultralax monetary policy of the big central banks is overlooked, as is the blatant contradiction between the urging of governments to stimulate aggregate demand and the aggressive promotion of the programs to fight climate change.

It now remains to be seen whether central banks will be able to promote the need for stimulus interventions and policies in the future based on the mystical aura offered by their presumed competence.

Perhaps with a little luck, these institutions will be able to "dismantle" the most important part of a dictum attributed to Abraham Lincoln, according to which "you cannot fool all the people all the time", and then could continue by "invalidating" Albert Einstein, who once said that "the madness is doing the same thing over and over again and expecting different results."

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