Make no mistake about it. The Federal Reserve has always been a political body.
From its existential fight over a century ago to today, it has served the interests of politicians. It was designed to do exactly that, but not in a direct fashion.
The word juggling required to hoodwink the masses has taken many forms, but the very nature of the existence of the Fed makes it inevitable.
The latest hot take from the newest member of the Fed’s Board of Governors is a prime example.
Christopher Waller, the newest member of the board, gave his debut speech yesterday. Here is the part that deserves our attention:
Because of the large fiscal deficits and rising federal debt, a narrative has emerged that the Federal Reserve will succumb to pressures to keep interest rates low to help service the debt and to maintain asset purchases to help finance the federal government. My goal today is to definitively put that narrative to rest. It is simply wrong.
Monetary policy has not and will not be conducted for these purposes.
To be honest, I don’t even know if he knows the difference. That isn’t personal, though. Around here we have an internal mandate to attack policy, not people, when warranted. If you don’t know why that is a distinction, welp, that’s a whole different conversation our society should be having these days.
Waller shows that he is a perfect fit for the Federal Reserve — he has the classic blind spot that the Fed’s board members have shown since its inception over a century ago — and it is not a coincidence. New board members are groomed for it.
I have no doubt that no one in the government will pressure him. I also have no doubt that he wouldn’t have gotten a board seat if there was ever a question of whether pressure was required to stick to the “company line.”
There are many forms of politics, and they aren’t limited to the winners of elections. There are many forms of collusion, and they don’t require direct interaction.
There is the veneer of independence and there are rules in place to insulate the Fed from day-to-day populism, but it was never meant to be anything else but political.
Like the original version of the Senate, it was designed to coast through periods of change and preserve the status quo. That status quo is protected by how board members are selected. Big surprise, it is by politicians.
Here is where Waller is right and wrong. Sure, the board will not cave to direct political pressure, but members sitting on it will never get there without adhering to the political status quo.
The Federal Reserve Board may not “succumb to pressures to keep interest rates low to help service the debt and to maintain asset purchases to help finance the federal government” as Mr. Waller stated, but board members would not be on the board if their interests were not aligned.
Consider the concept of the economic straightjacket — as one moves up in any organization, be it corporate or governmental, they are selected for their adherence to the status quo. The position they fill is bound by the limits considered tolerable by those in power.
That means that regardless of party affiliation, the Fed Board has exclusively been picked by politicians with a vested interest in spending more than tax revenue generates for our entire lifetimes. Board members are also implicitly expected to insulate the Board itself, and the politicians that empower them indirectly, as well.
Ignore the lip service — the bias is baked in. The Fed doesn’t need to bend its knee to politicians. The board members are more than willing to march boldly forward, hand in hand.
We live in a time when the new administration spent nearly the entirety of its 2020 revenue, $3.42 trillion, in one fell swoop in its first month in power. The goals may be noble, but the repercussions are undeniable.
We live in a time when the same institutional interests groom their “most promising executives” and custom-build their compensation packages with the revolving door between banks and political appointments in mind.
Of course everything looks fine according to the Fed. Of course Waller can say there is no direct pressure. The government grooms the Fed, the Fed provides the illusion of expertise to validate debt-fueled policies. One hand washes the other. Always has, always will.
This is something we need to live with, unfortunately. We, as investors, want to build some wealth that is insulated from this ever-increasing debt tolerance feedback loop that steals from the future to fund the largesse of the present. I wish we didn’t need to do this, but it is what it is.
How to do that? We don’t need to look far back into history. Ask people in South American countries that have imploded, or countries where the central bank threw the common folk under the bus, like in Iran, India, or Turkey. Ask them how to preserve some wealth when their currencies are being contorted to the point where they collapse. Ask them what to hold when the jig is up.
You have to have exposure to something else that is worth something to others, regardless of the machinations and biases of a dozen people beholden to failing dogma and ignorant of their blind spots. Nothing can quite serve the same function as gold.
Gold is still the premier hedge for this brand of shenanigans, ensconced in the trappings of the ivory tower. These days, we need such a hedge, though it need not be a large part of our portfolio. We need something that other people want, preferably when ideologues are proven to be full of it.
Luke has a great option for you and has been providing fantastic coverage over our weird, debt-fueled times. You should listen to the man.
