Anyone spending time divining Fed speak implicitly understands the significance of the monetary summit at Jackson Hole, Wyoming. Its a time for central bank board members, academics and monetary journalists to review the performance of the U.S. Central Bank.
This year, the complete lack of candor regarding Fed performance was astonishing. The only professionals who came close to an advocacy grounded in realism was David Malpass, president of Encima Global. His op-ed published in the Wall St. Journal titled More Fed Bond Purchases Are the Wrong Answer remains a perfect antidote to the groupthink that dominates monetary policy, and Dr. John B. Taylor from Stanford University. Dr. Talyor’s blog is titled Economics One and his review of this summit is noteworthy.
To the vast majority of American citizens, the central bank seems committed to two unpardonable sins, eroding the interest people accrue on fixed income and asset inflation. The observation isn’t wrong or misplaced, its just that this White House, Treasury and Central Bank have denied what Reagan’s team knew each Presidential administration must accomplish: a policy mix. Reagan’s team knew that timing and legislation matter. His Treasury team implicitly knew the interior relation between fiscal policy and monetary. What the American public knows is strangely prudent; that this Central Bank is out of ammunition; that monetary policy alone remains insufficient; thrift matters.
What team Obama has delivered are transfer policies, cash injections, zero interest rates; all to sustain what cannot be sustained, namely deficit spending. What team Reagan knew is an insight that team Obama ignores: one cannot directly observe the neutral rate of interest. Monetary economists fumble with non-eucledian math expressed in linear equations to communicate an unhistorical postulate: the price of money reflecting the productivity of capital, technology, and household shopping. What all this mathematical fumbling cannot embody are unquantifiable powerful political, social sentiments of trust between the governed and government. This is the source of our secular stagnation.
Jackson Hole was the place to address the political foundation of our Republic, instead, what we got was groupthink cavorting as justification.
What Paul Volcker knew when he was hired by President Carter was this: credibility matters.
Janet Yellen call your office.