Doc's Daily Commentary

Mind Of Mav

The Fed Is Doomed To Fail Long Term 

From Martin Luther King Jr.’s Nobel Lecture, 1964:

Modern man has brought this whole world to an awe-inspiring threshold of the future. He has reached new and astonishing peaks of scientific success. He has produced machines that think and instruments that peer into the unfathomable ranges of interstellar space. He has built gigantic bridges to span the seas and gargantuan buildings to kiss the skies. His airplanes and spaceships have dwarfed distance, placed time in chains, and carved highways through the stratosphere. This is a dazzling picture of modern man’s scientific and technological progress.

Yet, in spite of these spectacular strides in science and technology, and still unlimited ones to come, something basic is missing. There is a sort of poverty of the spirit which stands in glaring contrast to our scientific and technological abundance. The richer we have become materially, the poorer we have become morally and spiritually. We have learned to fly the air like birds and swim the sea like fish, but we have not learned the simple art of living together as brothers.

Our scientific power has outrun our spiritual power. We have guided missiles and misguided men.

In the land of the Federal Reserve, the long-range view is left cold and abandoned on the frontier of the future. Preference is given, instead, to the short-term view. The Fed does not gaze far enough into the future and this is a problem — a highly detrimental state of affairs, to be exact.

Lest you quirk an eyebrow over such grave language being applied to the boring technicality of — of all things — time ranges, allow me to explain.

Couched in the context of the Federal Reserve, the“long-term” and the “short-term” are not easily exchangeable outlooks differentiated merely by the mechanistic passage of time. Instead, they constitute disparate philosophical perspectives of surprising significance.

Let me give you an example of what I mean by that, posed in an analogy: the long-term is to abide by the moral principle of monetary prudence whereas the short-term is to tinkering with the elasticity of money to manufacture consumer confidence.

Note that it is the short-term that can be “gamed”; it is the short-term wherein technical tweaks can be made to temporarily alter the present economic state. But the long-term? It’s impervious to being gamed. It is reality incarnate. The long-term is home to a great rebalancing. It sweeps out all economic machinations and forces a recalibration.

No environment can be gamed forever; eventually, economic reality will throw off the fetters meant to suppress or disguise it and show its true face. Seen in this light, the Fed’s long-term is harsh, honest Nature staging a coup. Its short-term is a dubious attempt to mold the environment through various monetary interventions.

You see, as our nation’s central bank and premier administrator of monetary policy, the Fed busies itself with dissecting unemployment percentages, hitting inflation targets, and combing through price index reports. All this conscientious data-accumulation occurs parallel the knowledge that such findings will inform the adjustment of the money supply (usually expanding it) and the tweaking of key interest rates. Sounds like a pretty innocuous and necessary business, right? Not so fast.

Sift through any of the impossibly dull Fed speeches and meeting minutes filled to the brim with detached, academic jargon and if you’re astute, you might notice something interesting: the Fed thinks in business quarters, in months, in a year — maybe two — tops, but never beyond that.

The Federal Reserve possesses one of the most remarkable abilities of any institution in the entire world — to determine the value of money and to influence, even, the economic weather of the entire globe — and yet, on the threshold of the long-term view it freezes in its tracks. It denies the ability to compute.

The Fed is plagued by persistent myopia, and importantly, one of its own choice! This is to say, it leans its full weight on the short-term end of the scale. More specifically, the Fed neglects to peer into the lens of the long-term by its own volition partly because such a maneuver is actually jarringly incompatible with its preferred short-term lens.

How so? Let’s call it The Great Irony. Basically, the Fed has an (erroneous) short-term goal of stability, but when you stretch the time horizon into the long-term, what you actually get from short-term projects of stability is instability instead!

Such irony would be comical were it not also so sobering. In summary, if the Fed genuinely paid attention to the long-term monetary health of our nation, its entire playbook — oriented entirely around short-term technical interventions — would be completely upended.

In a newsletter a long time ago, I made the statement that “money is not thought of in moral, constrictive terms nowadays. Instead, it is thought of in scientific terms.”

What do I mean by that? As the de facto “king of money” in our country, the Federal Reserve goes about all its dealings with money armed with mathematical models. Its purchasing of bad assets, its liquidity influxes, and its inflation-stimulation are all underpinned by a scientific motivation, by a conviction that such things must be done in order to satisfy the models and/or to generate the conditions for “stability”.

For one thing, it is a detached view, one that denies a hand in the creation of the present circumstances. The Fed likes to give the impression that they merely respond to the economic weather, stepping in to tweak things here or there, but the truth is that they are disturbingly active participants in the economic weather.

Here’s the bottom line: the Fed turns a blind eye to the moral responsibility implicit in preserving long-term economic health. Certainly, it does not help that fiscal conservatism is at a slow drip these days; whereas such prudence was able to attract an admirably-sized amount of American devotees back in the day, few care a lick about it now.

And notice my use of the term “economic health” — not “economic stability”. The latter is a misnomer; recall that in a twist of gruesome irony, the Fed’s version of “stability” corresponds to exactly the opposite (long-term instability). I once discussed the moral imperative of economic health and mentioned the following:

“A healthy economy is not the same thing as a “great” economy. A healthy economy has access to undistorted knowledge, periodically tempers risk, and clears deadwood. A healthy economy is one with a long-term vision. [. . .] A “great” economy these days, on the other hand, necessarily has a short horizon. It doesn’t care about truth or actual sustainability (besides a desire to keep itself going via any available artificial means).”

You see, the Fed views themselves as scientific technicians, not moral stewards.

This is a problem when the chief material is money. Modern money does not claim a spot in the periodic table; it is not a straightforward, immutable substance. Instead, it is governed by morals or lack thereof.

Having shucked the moral constraints that a gold standard afforded us decades ago, the Fed spends very little time pondering the merits of maintaining the value of money. This is because such a concern is far too philosophical and long-range and is much too removed from the year — two, if you’re lucky — that the Fed feels safe to hold in its prefrontal cortex.

As it is, the Fed spends very little time pondering its slow crawl to greater heights of centralization and does not seem especially perturbed over its more frequent interventions.

It also does not spill much ink over the consequences of its actions. (This is partly because the Fed rejects having a conscience. So too does it underestimate its impact; it does not patch holes in an environment; it actually creates a slightly new one.)

For example, a policy of dumb silence is adopted when it comes to the Fed’s hand in inflaming asset bubbles. So too is the Fed comically hands-off when it comes to contemplating the endgame of our nation’s gargantuan national debt.

But unfortunately, these are issues that are only thrown into sharp relief when perspectives are swapped: from short-term stability to long-term health.

These are issues that only poke out when the vast, heavy moral responsibility is appropriately shouldered for helming the monetary affairs of a nation.

In summary, the short-term is to the scientific outlook; the long-term is to the moral outlook. One is disingenuous; the other, sorely needed.

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