Federal Reserve

Follow the Money

By David Stockman  |  November 18, 2019

Let’s follow the money and see where it goes

Because every second the Treasury grows

If we follow the money and see where it leads

Get in the weeds, look for the seeds of Hamilton’s misdeeds

– Lin-Manuel Miranda, “Washington on Your Side” from Hamilton: An American Musical

The Federal Reserve pretends to have eyes only for Main Street. It speaks boldly of fulfilling its statutory mandate with respect to maximum employment, stable prices, and moderate interest rates.

In fact, its only client is Wall Street. Our monetary central planners – wittingly or not – work exclusively to its financial pleasure.

And, indeed, the Fed’s policy harlotry comes at immense cost to Main Street. It crushes savers and retirees. It incentivizes Corporate America to strip-mine cash flows and balance sheets to fund stock buybacks, senseless M&A, and other self-serving feats of financial engineering.

We’re left with virulent inflation of asset prices that confers immeasurable windfalls – and unspeakable power – to the tippy-top of the wealth ladder.

The Fed’s Humphrey-Hawkins mandates and macroeconomic management functions are nothing but a glorified beard.

Our monetary central planners ostentatiously pursue them. And they assiduously refuse to acknowledge that they don’t work, that they cause more harm than they do good, and that they can’t be fixed.

That’s because the monetary policy transmission channels to Main Street consumers and businesses were choked off and busted long ago by massive amounts of private debt and financial speculation its own efforts have fostered over the last several decades.

Most Main Street households are at Peak Debt. They can’t leverage up even further in response to the Fed’s “stimulative” ultra-low interest rates.

At the same time, Corporate America’s C-suites have devolved into stock-trading joints; they use cheap debt and company cash to goose the value of their options on Wall Street, not to invest in productive plant, equipment, technology, human capital, and other ingredients of real growth.

The Fed’s single, crude policy tool – control of the price of credit, directly through pegging the money-market rate, indirectly through “QE” and other methods to repress bond yields – is impotent in today’s macroeconomic context.

What we call “central banking in one country” is massively swamped by the $85 trillion trade and capital flows of the planet’s deeply integrated economic and financial infrastructure.

These forces drive inflation on a global basis without regard to the Fed’s fetishistic 2.00% target, even as it’s dubiously measured by one arbitrary metric of domestic inflation, the “personal consumption expenditure deflator.”

Likewise, domestic output, resource utilization, and labor markets aren’t locked up in some self-contained economic bathtub.

The Fed cannot simply inject just the right amount of “demand” and fill potential gross domestic product (GDP) to the brim of full employment, Humphrey-Hawkins “mandate” or no. The idea of a closed-system of potential GDP and full employment is obsolete in this world.

The domestic supply side is heavily pushed, pulled, textured, and catalyzed by the infiltrations and competitive impacts of the global economy’s teeming supply of labor, capital, technology and enterprise.

Turning back these elemental forces – like the Fed’s recent attempts to offset the Trade War instigated global slowdown – is a task way, way above its pay grade.

The Fed’s obsession with domestic labor market conditions and the rate of inflation (to the second decimal place!) amounts to impact-free arm-waving. It relentlessly calls out these variables in its internal deliberations and external communications. But it’s all just so much hot air.

These days, the Main Street economy arguably doesn’t need a central bank to manage narrowly construed money functions.

Indeed, when these purely money functions are examined, the extent of the Fed’s massive usurpation of financial power and mission creep becomes startlingly clear. It doesn’t really possess an irreplaceable monetary elixir – so-called higher-powered money – without which credit expansion and economic growth would not take place.

To the contrary, at market-clearing interest rates and asset prices on the free market, there would always be enough credit and long-term capital from private savings to meet the needs of a growing and prosperous capitalist economy.

It’s worth noting that the designers and architects of the Federal Reserve had no notion at all that the new system was needed to supply high-powered money to the banking system to facilitate credit growth and the expansion of commerce in the ordinary course.

Congressman Carter Class, his legislative collaborators, and their banking advisors had no reason back in 1913 to deny their lying eyes. Since the Civil War, they’d witnessed decades of massive economic growth, unprecedented industrial expansion, stunning technological progress, and soaring living standards.

And there’d been no central bank at all…

The bottom line is the Fed’s broad, macro management ambitions can’t possibly be executed effectively in a deeply integrated global economy. Pursuit of them only generates collateral effects – excessive household debt, rampant financial engineering – that makes things worse in the long run.

It’s well past time to end it.

Begin Here…

This is the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market…

To common sense.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR