When it was revealed long ago that an instigator of the Watergate break-in wanted to bug the office of DNC Chairman Larry O’Brien, the joke at the time was something along the lines of “Why?” The question was explicit. O’Brien’s emptiness made those who knew him wonder Why the desire to know what he was thinking.
The joke about O’Brien came to mind when reading the headlines about China allegedly spying on Federal Reserve officials. Really, why? What useful information could be gleaned from spying on these mediocrities? Still, the hope here is that little has been gleaned, but not for the reasons some might think.
For now, it’s worth pointing out that much of what the Fed does is already being spied on; albeit much more efficiently by market players. If anyone wants a reasonable chance of understanding what lies ahead for the central bank, all sorts of research firms (Medley Global Advisors come to mind) are already providing it. From there, there are deep markets that trade based on the odds of what the Fed will do next. No need to spy.
After which, the question of espionage must return to questioning what might be learned from the charitably average minds of the Fed. The latter is the largest employer of economists in the world, and it shows. The reflection inside the Marriner Eccles building is not worth spending time on.
As longtime Fed Vice Chairman Donald Kohn confidently asserted of the Phillips curve in the early 2000s, the Phillips curve is “at the heart of how most academic researchers and policy makers, including this one, think about fluctuations in inflation”. Former Fed Chairman Ben Bernanke has made it clearer what passes for thinking at the Fed, which is that there is “the highest level of employment that can be maintained without creating inflationary pressure “. Translated for those who need it, most Fed economists believe that economic growth causes inflation.
On this subject, if we ignore that rising prices are often not a signal of inflation as such, rooted in what Kohn, Bernanke and others deeply believe is that economic growth in full boom leads to labor and capacity shortages that drive up the prices of both. Except they don’t. On the one hand, Kohn and Bernanke’s core beliefs assume that the United States is an autarkic island of economic activity, as opposed to what it is: an integrated part of a global whole. Anything produced and/or simply designed in the United States is a consequence of global economic cooperation. In other words, American producers are in no way constrained by the supply of workers and factories in the United States.
What the Fed types also believe assumes that demand can exceed supply, that economic growth creates demand that suppliers cannot meet. Consider a speech Bernanke gave in 2007 at the Stanford Institute for Economic Policy. Although a rhetorical fan of globalization and trade, Bernanke observed “there seems little reason to conclude that globalization as a whole has significantly reduced inflation” and that “indeed, the opposite may be true”. For Bernanke, the arrival of new consumers signals higher demand than supply, and therefore higher prices. But all demand begins with supply. It is the supply of market goods and services that stimulates demand.
We could be getting into the robotization of “hands” in the economy, something that is a direct result of economic growth producing resources that allow further automation, but brevity prevents too much ink from being spilled on the truth sure that the surest sign of rising economic growth is price drop. This is so because growth is a consequence of investment, and the basis of investment is the exponential creation of more at prices that continue to fall.
What do economists say drives economic growth? They think it’s consumption. It did not occur to them that consumption is what follows production. How we know something so obvious hasn’t been apparent to economists is the consensus within the Fed that 2% inflation (whatever it is) is a desirable outcome. For Fed officials, the persistent rise in prices will encourage people to consume more, which will stimulate the economy. You can’t make this up! Don’t worry, it gets more ridiculous and sad.
Fed officials generally believe that the response to periods of slow economic growth is Fed money creation and congressional spending. Economists take it backwards. Abundant money is a natural market phenomenon. Implicit in the belief that this is not the case is that the Fed chose abundant “money supply” in Palo Alto, CA but very little in El Monte, CA. In fact, prudent financiers brought about this result. And it would be no different if the federal government had no role in the money. Money is a consequence of economic growth, not an engine of it. Fed officials think they can create growth by “flanking” the “money supply”. They cannot do such a thing. If they could, West Baltimore would already be booming.
When they think the central bank is overstretched, Fed officials call on government spending to boost growth. Except that the government can only spend to the extent that the economy has already grown or will grow. Here, Fed officials count double when they imagine that spending by Nancy Pelosi and Mitch McConnell will have a multiplier effect.
Oh yes, there is also the one about the war. Ask a Fed official what ended the “Great Depression.” You will be told that the mutilations, murders and destruction of wealth during the Second World War were the source of our rebirth. The very humans who fuel all growth must apparently be exterminated when times get tough.
All of this brings us back to China. What the hell could they get of value from the Fed? It makes you wonder… about the mental health of the Chinese. How could they be a threat if they think Jerome Powell’s thoughts are valuable? That is why it is hoped that their espionage did not bear fruit. This is so because Chinese growth is ours. Since that’s the case, let’s hope they stop spying on an entity that knows nothing about prosperity.