They're Not Even Pretending Anymore
February 28, 2019·Politics
The Federal Reserve is supposed to be independent from political pressure. Presidents aren't supposed to bully the Fed Chair into loose monetary policy for election timing. But a parallel between Nixon's secret bullying of Arthur Burns in 1971 and Trump's public criticism of Jay Powell reveals something that has shifted: the pretense itself has vanished. The same pressure exists, but now it's shouted from the rooftops instead of whispered behind closed doors.
• Nixon needed loose money to win re-election in 1972, and he got it through relentless White House pressure on Burns. Secret tapes show threats, ultimatums, and quid pro quo arrangements. The mechanism was crude but effective: the President wanted the money spigot open, and Burns delivered. What made it work was that both men maintained the fiction of Fed independence in public.
• Trump faces an identical political timeline and economic need. He needs a strong market and loose conditions to justify his reelection. The difference is that he doesn't hide it. He tweets criticism of Powell directly. He talks about interest rates in real time. The White House strategy is the same as it was in 1971, but the discretion is gone.
• Powell has adopted the same posture as Burns: he finds ways to justify doing what the President wants while claiming it's based on economic data. When financial markets become volatile, policy tightens. When the White House signals concern, policy loosens. The inputs that matter have shifted, but the Fed still calls it "data-driven decision making."
• The mechanism works because both the President and the Fed Chair believe they're acting in the country's best interest. Neither sees it as corruption. They genuinely believe that Democratic spending would be worse, that keeping capital markets afloat protects everyone, that the alternative is unthinkable. This alignment doesn't require coercion. It requires shared conviction.
• The question now is what happens when everyone knows the Fed isn't independent and stops pretending it ever was. If the central bank's decisions are political rather than technical, what does that mean for confidence in currency, debt, and the entire system built on the assumption of institutional independence?
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Comments
Wow, I didn’t realize how Burns caved to Nixon. I do remember my professor in grad school revering the guy. I wonder what he thinks now?
But a question Ben, Powell is an independently wealthy man with many years in the private sector, probably used to high pressure.
Burns spent his years in the sheltered world as an academic, so perhaps Powell is more immune to any White House bullying?
Anyway, I hope so.
I don’t think Burns then or Powell now thought of themselves as “caving”, even though that’s exactly what it seems like to us. Instead, and you see this SO OFTEN when people get close to charismatic people like Trump and Nixon (and yes, both Trump and Nixon are EXTREMELY charismatic, particularly to other powerful people), Burns then and Powell now truly believe their actions are in the best interests of the country. I think they truly believe it would be a disaster if a Democrat gained the White House and started spending like there’s no tomorrow. Neither Nixon nor Trump inherited their Fed Chair … they picked them. There’s no daylight between Trump’s view of the proper political aims of monetary policy and Powell’s view of the proper aims - it’s all in service to Capital and its anointed representative now sitting in the White House.
My speculation for the near to medium term is that money will be kept loose to keep the asset bubble afloat. The resulting inequality and instability, plus Trump, will sweep the Democrats into power, one way or another (i.e. via an asset bust and economic crash, or via the middle class feeling left out and stuck in bad jobs.) Then money will really flow to the masses, and we’ll have the inflation required to diminish the debt and reset the whole system.
This article points to the Achele’s Heel of the entire system: the elites are incentivized to destabilize their own system, one way or another. Thank you. I didn’t know the discussions were this frank.
The classic model of the cycle is that, after a financial bust, you have deflation to help protect the reputation of elite-issued money and debt by placing the pain of adjustment squarely on the shoulders of the rest of the population. After the people sober up from the excesses of the previous boom, start respecting money by charging less and working harder, you can start to have inflation, and the ‘improved’ qualities of the work force will help minimize the degree of inflation required to stabilize the system for the long haul.
When the system is finally stable and the economy generating its own growth, you can start the Prosperity! narrative, and the whole cycle restarts.
All of this may sound natural and morally fine (note that the modern Western system survived 600 years by tacking as close to nature and morality as possible, rather than defying them openly.) The trouble is that the driving force at the very center is a command system, rather than truly free market forces. This is what causes the above-mentioned incentives and the major problems of humanity. And, let’s not mince words, it’s by design, to benefit the few, while most of the rest of us don’t understand how money really works. (What is great about this space is the small step it takes to make people a little more aware.)
The destination (inflation) is known but the path there is mighty fluid. In November-December it looked like we would get real deflation first. Growth is slowing, parts of Europe are entering recessions, China is slowing.
But then Powell sees the Ghost of Feds Past (Powell) in the mirror of his room in his lonely ivory perch. Adding to Ben’s comments below about the importance of charisma, there are probably other things in play here like ‘Seeing Behind the Curtain’ - which it appears the ECB did as well while pretty rotten economic data keeps coming in, particularly in Europe (and Korea). There’s a saying that I will mangle - “Don’t stare into the abyss too long because it will stare back at you”. This is the real or imagined effect here - its sort of like a story of “Seeing Behind the Curtain” leads to “I Cannot Unsee This” which leads to “Stockholm Syndrome” which leads to “Charisma and Gaslighting” and then you are just another ghost of the long line of your predecessor Fed Governors.
Powell goes dovish, Europe freaks out as their data worsens (and want to join the crowd), and China launches a fission bomb of credit stimulus in January and we reflate FAST.
It’s possible this is the same path that we thought would emerge but more slowly back in the Oct- Dec period. Just accelerated x 10. I see less people on both sides of the aisle complaining about Trump’s oil tweets, his USD tweet today, him suggesting ANYTHING in he way of a Chinese trade deal is negotiable (Meng Wanzou). Have we all been gaslighted, or is everyone simply too addicted to #SPXNEWHIGHS ? My gut says both, but I think there are other things at play here too.
Back to the MMT vs Supply Side/Fed buys everything suggestions - it’s likely we get continued slowing in the real economies of the US, Europe and China. In the US, the comps are tough re: base effects from the Trump tax cuts. Lag effects of actual and implied effective borrowing rates are real. though this will fade. Do we deflate before we inflate? It’s hard to say, certainly inflation data has been soft globally, but we need to focus on the rate of change in real time. The economy (inflation) impacts of something like MMT are years away. The market (asset prices) impacts of the Ghost of Feds Past are happening now in addition to the permanent state of asset prices since QE forever.
Happy to hear any predictions.
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