Questions from a Central Bank Skeptic

[Questions from a Central Bank Skeptic](#) Well, maybe I should answer some questions about what the Federal Reserve really does... because it appears not too many people at CNBC or Bloomberg seem to understand it. Garrett {NAME} OCT 28 [Icon]([Icon]([Icon]([Icon]( Dear Fellow Expat: Grab your pitchfork. We're about to dissect everyone's favorite monetary overlord - the Federal Reserve. After watching my daughter's [soccer game this weekend]( (where monetary policy wasn't on anyone's mind), I've been thinking about questions few people seem to ask. I want this to be the Monday structure for this letter. With Apple ([NASDAQ: AAPL]() earnings on deck (you know, that little company that makes up 7% of the S&P 500), a jobs report that will move markets, and inflation data that will make headlines, we're kicking off a busy week. But let's focus on the elephant in the room: The Federal Reserve. Next week, markets expect the Fed to cut its Fed Funds rate by 0.25%. However, a red-hot jobs market or a surprise uptick in core inflation could stop the Fed in its tracks. You've got to be watching the Fed and asking questions. I've said it before... and I'll repeat it... Presidents come and go; Wu-Tang is Forever; and a central bank's inflation targeting is the tax that goes on long after death. The Federal Reserve's decisions have a lasting impact on our lives and finances, often more than the outcome of any election. Let's ask some critical questions to start the week... Question 1: Dear Federal Reserve, What Would You Say You Do Here? Do you know that Office Space scene where they ask Tom Smykowski what he does? [undefined] More people should ask the Federal Reserve and Chairman Jerome Powell this question. But those who do—like certain skeptical congressional officials—get an answer that could put a baby to sleep in the middle of a Metallica concert. Only a tiny percentage of Americans can explain the Fed's dual mandate, which tells you everything you need to know about transparency in monetary policy. [Writes Ipsos]( (in a survey run every few years): - “Only 7% say they know much about the Fed’s responsibilities. - Fewer than one in ten (8%) correctly identify the Federal Reserve is tasked with maximizing employment, while more, though still a minority (34%), correctly identify its responsibility to stabilize prices.” The Fed says it's responsible for "maximum employment" and "price stability." So, it uses monetary policy (raising interest rates, easing and tightening its balance sheet, etc.) to achieve desired outcomes. The price stability mandate calls for inflation to run at 2% yearly (a compounding impact that allows the dollar's purchasing power to weaken over time). In addition, the Fed attempts to reach an official unemployment rate between 4% and 5%, which is where we currently sit. Of course, the inflation figure is cooked, as is the unemployment rate—a subject for another day. For now... know... that the Fed's dual mandate is to ensure everyone has a job and that the U.S. dollar doesn't turn into monopoly money overnight. So... how's that working out? Gestures broadly at grocery store prices... Question 2: Okay, Fed. Seriously, What Do You REALLY Do? We can stop pretending the Fed's job is just its dual mandate. Or we have to look at the mandate it aims to achieve: To create inflation and stop bank panics. The Fed isn't just America's central bank - it's the world's backup generator. Whenever the global financial system hits a pothole, who shows up with a blank check? Our friends at the Marriner Eccles Building. Remember The Great Financial Crisis of 2008? The Fed opened the floodgates. It slashed interest rates to the bone, bought trillions of dollars in bonds to stabilize the financial system, and pumped "liquidity" into the world. It also helped stabilize the banking system with massive bailout packages. How about the COVID-19 crash in March 2020? Same story. How about March 2023? They were johnny-on-the-spot with emergency support when regional banks started wobbling. They're more concerned about protecting banks than protecting the value of your savings account. (Why is that…) Well, price stability is part of the mandate. And price stability goes both ways. Fighting inflation... but also fighting DEFLATION. The central bank is woefully more afraid of deflation hitting the global economy than inflation. If there's deflation in a debt-based system, there could not be enough money to pay off that debt or refinance the world's debt. Tens of trillions of dollars around the world must be refinanced every year. The numbers are so big that no one wants to think about them. But they need to... because it affects everything. The Fed runs the world's largest insurance policy for the banking system. This is why - whenever there's a bailout - you should buy AIG ([NYSE US Comp: AIG]() stock - because the flood of bailout money drastically reduces default risk (and AIG insures companies against default risk). That said... guess who pays the Fed premiums? You do, through inflation and currency devaluation. Do you understand why I used to curse so much after my grad school classes? Question 3: Is There Any Alternative to the Federal Reserve? Historically, we've tried a few things... Even with the Federal Reserve in existence, we had a gold standard (which had its own problems but at least kept monetary expansion in check). However, the challenge with a gold standard is twofold. If you allow someone to redeem your currency with gold, as we did, it can lead to nations like France making a run on America's holdings. (Thanks, Charles De Gaulle. I hope you like your Paris airport.) On August 15, 1971, President Richard Nixon eliminated the ability to convert the dollar into gold. This ended what was known as the Bretton Woods system, the monetary system that dominated the world after World War II. Nixon feared rising inflation and the threat of a gold run. But by letting the currency float (all while engaging in massive government social program expansions and fighting wars abroad, etc.), we saw considerable upticks in inflation and a swell in gold prices in the 1970s. One other issue—when you price your currency in gold, rivals could undermine your currency's value by flooding the global markets with the yellow metal. Who are the two largest producers of gold in the world today? Russia and China. Chicago Fed Bank President Austan Goolsbee pointed this out in an interview with me before the 2016 election. What other alternatives are there? We've had periods without a central bank (and somehow survived). But like any other crisis in history—like bank panics and manias—the result of crashes tended to surround speculation on assets that many people perceive to be safe: land, sovereign debt, commodities, and equities. We had severe financial panics in 1837, 1857, and 1873, all periods where we lacked a central bank or a lender of last resort. The National Banking System (1863–1913) didn't create a Federal Reserve but acted as a way to boost trust in currencies. Again, the issue was that a central authority could not act as a lender of last resort. Deflation was a serious problem in the post-Civil War and Reconstruction era. When the Panic of 1907 happened, JPMorgan acted as the lender of last resort, setting the pathway for the Fed's arrival in 1913. Fast-forward 111 years, and the Federal Reserve has fueled a financialized system so much that it's like removing a Jenga piece from the bottom of the tower. This is going to go until it breaks... and it can go a lot longer than we expect. The Fed's inflation target of 2% has been a major contributor to the appreciation of assets like equities and housing, making it increasingly difficult for younger Americans to keep up with runaway prices. You will never hear anyone at the Fed explain this... until they are either retired or giving a speech 6,500 miles away like former Fed Chair [Arthur Burns did in 1979 in Yugoslavia](. Question 4: Who Bails The Federal Reserve Out? This is where it gets fun. The lender of last resort... really isn't the lender of last resort in this system. You should know the truth: You're the actual lender of last resort. The Fed doesn't need a bailout because they can literally create money out of thin air. But who pays the price? Every single person holding U.S. dollars. Since the Fed's inception, the dollar has lost over 99% of its value. Think about that. And their precious "inflation targeting" since 1993? It's helped slash the dollar's value by 54% in just 31 years. Question 5: How Does No One At the Fed Understand the Problems You Cause? The Fed employs hundreds of PhDs who apparently refuse to publicly admit that “inflation is always and everywhere a monetary phenomenon,” to quote Milton Friedman. Even worse, they've built inflation into their mandate - targeting 2% annual destruction of your purchasing power. It's the silent tax nobody voted for, justified by the belief that Americans would panic more about deflation than watching their savings evaporate. While the dollar's purchasing power fell 54% in the last 31 years (since the inflation target started), the stock market is up 886% (and 1,400% with dividends), according to some math I did on the back of a cocktail napkin. Median housing prices have been up 229% in 30 years, aided not only by supply constraints but also by two decades of low interest rates and the existence of the 30-year mortgage (which fuels greater demand due to lower monthly payments than 10—or 15-year mortgages). But monetary policy is at the front of all these problems. Higher housing prices? Blame the central bank. Higher food costs? Their policy creates incentives across supply chains and on financial balance sheets. Politicians blame grocery stores (with 1% to 3% profit margins), but no one seems to care that we increased the money supply by more than 30% in less than four years because those politicians are responsible. Massive levels of wealth inequality? The Fed pumped up the U.S. equity markets, and only a tiny percentage of people own the overwhelming amount of U.S. equities. The central bank is fueling those issues. This isn't rocket science. Final Question: What's the Best Way to Protect Against You, Federal Reserve? If you can't beat them, hedge against them. That means owning things the Fed can't print: [gold, Bitcoin, high-quality stocks with pricing power, Class A real estate, and yes, even vintage baseball cards,]( if that's your thing. While the U.S. dollar might be the cleanest dirty shirt in the global laundry, an increasing number of countries are tired of our monetary games, endless wars, and the constant bailout circus. In a world where money printers go brrr, the best defense is a good offense. Own real assets, stay liquid, and... Stay positive, Garrett {NAME} [Icon]([Icon]([Icon]([Icon]( [Logo Image](#) Postcards from the Republic 1125 N. Charles St. Baltimore, MD 21202 This email was sent to you because you subscribed to this publication via FinPub. To stop receiving these emails from Postcards from the Republic, Please click [unsubscribe](. © 2024 Postcards from the Republic, All Rights Reserved. Any reproduction, copying, or distribution, in whole or in part, is prohibited without permission from the publisher. Financial Disclaimer: Nothing in this email should be considered personalized financial advice. 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