By: Brendan Brown
October 14, 2013
The acclaim in the media sends a shiver down the spine. Janet Yellen, just nominated by President Obama as the next head of his Federal Reserve, will be “the most powerful woman in the planet”.
The name and personality of the Governor was unimportant because in that monetary system (gold) a set of automatic rules determined the growth of high-powered money supply whilst interest rates were free of manipulation and market determined. The nearest situation to that in the post gold standard era was the brief monetary revolution in Germany and Switzerland through the 1970s and early 1980s where the central bank followed a monetary base rule with all else left to the market.
The dollar monetary system presided over by the Federal Reserve through the chairmanships of Alan Greenspan and then Ben Bernanke has gravitated towards the opposite end of the pole. The Maestro presides over the setting of short-term interest rates whilst attempting to gain increasing power to determine long-term interest rates. The Maestro sees himself as pulling key levers which determine the macro-economic outcome. Even his mouthing of convoluted phrases can shake the market and affects the path of the business cycle.
A doctrine of monetary authoritarianism has emerged through the past two decades which features the targeting of inflation (at 2% p.a.), a deep phobia of deflation, the systematic denial of asset price inflation and its monetary origins, an embracing of regulation as a key tool of macro-economic management and so-called prudential control, and the legitimization of currency warfare (by the US).
The doctrine is deeply flawed. Its pursuance has produced violent cycles of asset price inflation and deflation including the greatest financial panic and greatest recession in modern times and now the weakest economic recovery ever from great recession. Ahead looms the probability of a 1937-style crash and recession. And beyond that there is the specter of another age of high inflation.
So why should we describe the theatre of the Fed as a comedy?
Comedy according to its definition in the theory of drama is not essentially funny, though it may exude humour in a Kafkaesque manner.
The essence of comedy is a deep flaw which is unrecognized by the lead character and towards which he or she lacks all flexibility in confronting. The clash between this inflexibility and sudden happenings in the real world produces the comic climax.
Think of “Don Juan” which Moliere describes as a comedy. Don Juan’s flaw is uncontrollable sexual conquest. Even when the statue of a slain father of his biggest conquest warns him that unless he repents he will be consumed by the fires of Hell he cannot change his ways.
And so it is with the doctrine of monetary authoritarianism which pervades the Federal Reserve and is fully endorsed by its present political master, the Obama Administration. There are no grounds at all to imagine that the new nominated chief, Professor Yellen, will demonstrate any flexibility in applying the doctrine let alone experiencing a “road to Damascus” moment in which she doubts its validity.
So what drama can we expect in the theatre of the Yellen Fed?
Most likely it will open with some economic disappointment. The US economy may well enter one of its frequent growth cycle lulls (indeed it may already have done so). She will postpone QE tapering – indeed postponement could become indefinite. No doubt one element in the decision of the White House to nominate her was the belief that she could engineer a powerful growth cycle upturn ahead of the crucial mid-term Congressional elections (November 2014). Of course that belief need not be substantiated. It is plausible that President George W. Bush when he nominated Professor Bernanke as Fed Chief in 2005 believed this respected in some quarters student of the Great Depression who had spoken about money helicopters could juice up the US economy ahead of the 2006 mid-terms. In fact a first growth recession was to intervene, Bush lost control of Congress, and his chief’s continuing blunders contributed to the severity of the crash and recession which set in during late 2008 on the way to a Obama/Democrat landslide.
Similarly there is the prospect that Yellen will fail to deliver a growth cycle upturn through 2014. Economic disappointment in 2014 could bring a Republican victory in 2014. It is too early to know if that would be the prelude to a political revolution which would eventually sweep aside monetary authoritarianism and close the Yellen Fed comedy show. A first indication will be whether the Republicans in the Senate vote en bloc against the Yellen nomination, emphasizing that the Yellen Fed is the Obama/Democrat Fed.
Dr. Brendan Brown is the author of “The Global Curse of the Federal Reserve and Head of Economic Research, Mitsubishi UFJ Securities International plc.