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When Fed Chair Jerome Powell announced Sunday evening he was under criminal investigation from the DOJ this week, the markets braced for a shock.\u00a0 The probe\u2014centered on a $2.6 billion renovation of the Fed\u2019s Washington headquarters\u2014was immediately branded by an unusually direct Powell as a \u201cpretext\u201d to force interest rate cuts. Futures went down.<\/p>\n
Yet, Monday came, and while gold and silver went vertical, equities stayed calm and the dollar barely drifted. To economist Tyler Cowen, the renowned libertarian from George Mason University and author of the influential Marginal Revolution<\/em> blog, this lack of market panic is the most revealing part of the drama. It isn\u2019t that investors trust the administration\u2019s motives; it\u2019s that they have already accepted the \u201cugly little truth\u201d that the Federal Reserve\u2019s independence is a relic of a bygone era.\u00a0<\/p>\n \u201cWhat Trump did was terrible,\u201d Cowen said on the technology podcast TBPN, referring to the administration\u2019s erratic, \u201cCaptain Queeg\u201d style of institutional pressure. \u201cBut to me, the reason markets didn\u2019t react more is because we already wrecked the independence of the Fed. That\u2019s the ugly little truth behind this story. It was already wrecked.\u201d<\/p>\n In Cowen\u2019s telling, the damage was done years ago, through fiscal policy. Budget deals, tax cuts and a chronic deficit have steadily narrowed the Fed\u2019s real freedom to act, regardless of its formal mandate.<\/p>\n \u201cThe basic problem is our debt and deficits are so high that over time, we will monetize them to some extent and have higher inflation because we prefer that over higher taxes, no matter what we might say,\u201d Cowen said on technology show TBPN.<\/p>\n That preference, Cowen argues, quietly undermines central bank independence. Even without overt political pressure, a heavily indebted democracy is one that limits its own monetary choices. At some point, inflation becomes the least politically painful way to manage obligations that voters are unwilling to finance through taxes or spending cuts.<\/p>\n This diagnosis is a grim echo of the work of Ray Dalio, the billionaire founder of top hedge fund Bridgewater Associates, who has long warned of the \u201cBig Cycle\u201d debt trap. Dalio\u2019s framework suggests that nations with massive debts eventually run out of good options. They are left with a choice between three politically poisonous options: austerity (massive spending cuts), default (which would be unthinkable for a reserve currency), or inflation (\u201cprinting money\u201d in order to devalue the debt).\u00a0<\/p>\n Dalio has frequently agreed with Cowen that for the United States, inflation is the only path forward, since it is an invisible tax that a democracy will always prefer over the political suicide of massive tax hikes or the gutting of social programs. Speaking with fellow billionaire, Carlyle co-founder David Rubenstein, Dalio recently said, \u201cMy grandchildren, and great grandchildren not yet born, are going to be paying off this debt in devalued dollars.\u201d<\/p>\n Cowen offered a prediction about how what Dalio calls the \u201cugly deleveraging\u201d will look: the U.S. may require half a decade of 7% inflation to erode the debt\u2019s value relative to the size of the economy.<\/p>\n \u201cIt\u2019s highly unpleasant, and a lot of people will be thrown out of work and living standards will be lower,\u201d Cowen said. \u201cBut we\u2019ve already spent that money. We can\u2019t default, and that\u2019s what\u2019s facing us over the next 10 to 15 years,\u201d implying that, while default would ordinarily be a country\u2019s way out of this kind of dilemma, America\u2019s status as the richest economy in world history and the home of the world\u2019s reserve currency make that unfeasible.<\/p>\n The irony, Cowen notes, is that America\u2019s unique status allows it to run higher debt than almost any other nation, even the wealthy ones. That privilege may boost living standards today, but it still weakens political discipline tomorrow, allowing leaders to not only \u201cget away with more debt\u201d but also explicitly destabilize the Fed without worrying too much about market backlash.\u00a0<\/p>\n Although neither Dalio nor Cowen have taken this argument about the debt into the feud between Powell and Trump, at its heart lies a similar dynamic: how can the U.S. improve living standards for its lower and middle class? Trump has been badgering Powell about interest rate cuts that would bring down mortgage rates and ease housing affordability, but that runs the risk of fueling an even higher inflation wave down the road, or sooner.\u00a0<\/p>\n Albert Edwards, an outspoken and eccentric global strategist for Societe Generale, sounded eerily similar to Dalio and Cowen when he spoke to Fortune<\/em> in November. \u201cWe\u2019re going to end up with runaway inflation at some point,\u201d Edwards said, \u201cbecause, I mean, that\u2019s the end game, right? There\u2019s no appetite to cut back the deficits.\u201d<\/p>\n There is, however, a deus ex machina<\/em> that could change the course of things: the productivity miracle that many economists expect to come, driven by artificial intelligence. If AI could boost U.S. GDP growth by a full percentage point per year, Cowen said, the country might grow its way out of the debt trap without resorting to a decade of high inflation. Yet he is skeptical.\u00a0<\/p>\n Roughly half the U.S. economy\u2014government, higher education, much of healthcare, and the nonprofit sector\u2014is structurally sluggish, he argues. AI may save workers enough time in these sectors to \u201chang out more at the water cooler,\u201d but not enough to dramatically raise output. Meanwhile, innovation might just concentrate at already-productive sectors of the economy. Without a radical efficiency gain in the half of the economy that doesn\u2019t produce \u201cwhite or black-belt\u201d AI tools, the debt clock will continue to outrun the AI revolution.<\/p>\n The result is a new, more dangerous era for the U.S. dollar.<\/p>\n \u201cI\u2019m not telling you not to worry\u201d about Fed independence, Cowen said. \u201cI\u2019m telling you should have been worried to begin with.\u201d<\/p>\n And yet, as Morgan Stanley noted in early January, something else appears on the calculus along with the latest rumbles about central bank independence: a 4.9% boost to annualized productivity, as suggested by fresh third-quarter GDP data.\u00a0<\/p>\n \u201cWe believe much of the rise is cyclical,\u201d economists led by Michael Gapen noted, adding \u201cit remains an open question as to what is driving the productivity acceleration.\u201d<\/p>\n<\/div>\n #trillion #national #debt #doomed #Fed #independence #TrumpPowell #drama #top #economist<\/p>\n","protected":false},"excerpt":{"rendered":" When Fed Chair Jerome Powell a… <\/p>\n","protected":false},"author":1,"featured_media":12050,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[2],"tags":[575,8665,6727,2192,901,1542,158,8367,176,2187,166,1108,1980,4394,1491,187,1628,8666],"_links":{"self":[{"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/posts\/12049"}],"collection":[{"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/microvibenews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=12049"}],"version-history":[{"count":0,"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/posts\/12049\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/media\/12050"}],"wp:attachment":[{"href":"https:\/\/microvibenews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=12049"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/microvibenews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=12049"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/microvibenews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=12049"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}A grim echo<\/h2>\n
The god out of the machine<\/h2>\n