Ever wonder what the next infrastructure project might be after President Biden gets done rebuilding the roads, bridges, and green boondoggles on which he’s going to spend our trillions? How about the United States dollar? It’s been floating around without any legal definition or link to gold for fifty years now and has lost nearly 98% of its value against the metal into which it used to be exchangeable at a fixed and statutory rate.
What puts us in mind of this are the remarks Monday of Christopher Waller. He’s the newest member of the Federal Reserve Board. He spoke at a symposium of a think tank. He announced his topic to be the virtues of the central bank’s independence. Then he tried to insist that he and his fellow governors would not be subservient to Chairman Yellen’s Treasury Department. Quoth he:
“Because of the large fiscal deficits and rising federal debt, a narrative has emerged that the Federal Reserve will succumb to pressures (1) to keep interest rates low to help service the debt and (2) 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.”
Nor did Governor Waller stop there. He said his colleagues and he would “continue” to act “solely” to carry out the congressional mandates of maximum employment and price stability. The Federal Open Market Committee works exclusively to “move the economy towards those goals.” Said he: “Deficit financing and debt servicing issues play no role in our policy decisions and never will.”
That strikes us as a vain boast, even without the question of where Mr. Waller comes off speaking for the entire Fed board. Mr. Waller did note that, in February, Chairman Powell made to the Economic Club in New York the point about how deficit financing and debt servicing issues play no role in Fed policy and never will. That surprised us and sent us to play the video of Mr. Powell’s remarks.
It turns out that the question was asked by economist Gregory Mankiw of Harvard, and it’s by no means clear, as least to us, that Mr. Waller gave the full flavor of Mr. Powell’s response. Mr. Mankiw noted that, while federal government debt “is now reaching historical highs as a percentage of GDP,” the “budgetary cost of debt service is not high at all by historical standards, thanks to historically low interest rates.”
“Might,” Mr. Mankiw asked, “the impact of higher interest rates on the federal budget enter into the Fed’s thinking about how quickly and how much to raise interest rates as the economy recovers?” The answer, Mr. Powell responded, “is clearly no. We’re a long way from the situation where we would have to take into account the question of the federal government’s ability to finance itself. That’s in no way where we are.”
“Federal budgetary issues do not play a role in our deliberations at all,” Mr. Powell maintained.
Then, candor called.
“As a completely separate matter,” Mr. Powell admitted, “the U.S. federal budget is not on a fiscally sustainable path. That’s been the case for a long time, and it’s certainly the case now. That’s different from saying that the level of debt is unsustainable. It’s clearly not, as you’ve mentioned. You’ve got low interest rates. My own view is that fiscal authorities will need to return to that question.”
Whoa. That’s completely different from Mr. Waller’s claim that “debt servicing issues play no role in our policy decisions and never will.” What we heard Mr. Powell say was merely that the time is not now. It would wait until the “economy is strong, unemployment is low, and taxes are rolling in.” Mr. Biden’s bet is he can raise taxes on business and investors without killing the goose that lays the golden eggs.
Meantime, the Fed is buying $80 billion of Treasurys a month, suppressing the government’s borrowing costs in the process. Mr. Powell can’t be entirely unaware of the Biden deficits.
This reminds us of President Eisenhower’s dilemma. In 1952, he’d run on the last GOP platform to call for gold convertibility of the dollar. He was promptly beset by advice that before he fixed the dollar, he’d have to fix the economy. The Wall Street Journal insisted that he couldn’t fix the economy until the dollar was restored. Ike (and Congress) flinched. Seventy years later, with the gold-value of the dollar down 98%, another administration is asking for trillions for a new bridge to nowhere.