A comment to my article "Grading Janet Yellen After Seven Months at the Helm" was posted by Frank Zinni that contained some issues I would like to respond to.
The article graded Ms. Yellen and several other Fed chairpersons relative to what happened to the value of the US dollar in the foreign exchange markets during their tenure as the chair. If the value of the US dollar declined during the time they were leading the Fed, then they were not given a very good grade. If the value of the US dollar rose, then they were given a good grade.
Over the past forty-some years since the value of the US dollar was floated in foreign exchange markets, the trade-weighted value of the dollar has fallen by almost 28 percent since this series was started in January 1973, not too long after the dollar was floated.
Only during two periods within this time frame did the value of the US dollar rise. The first was during the time Paul Volcker was the Fed chair when he oversaw an extreme tightening of monetary policy during the early 1980s. The second was during the Clinton administration as it moved to produce four years of federal deficit budgets from 1998 through 2001.
Mr. Zinni has two issues that he brings up, a short-term issue and a longer-term issue. The first has to do with the Congressional election cycle. He writes, "I remember the Volcker era and it was hard and painful-I really like and respect what he did, but it was very hard on the average person."
Congress runs on current issues and a very tight monetary policy can raise interest rates…the effective Federal Funds rate got up to 19.0 percent in the summer of 1981…cause a slowdown in economic growth…the year-over-year growth rate hit a negative 2.8 percent in the summer of 1982…and unemployment increases…the unemployment rate rose to almost 11.0 percent in late 1982. This is not a good environment for elected officials to get re-elected.
The federal government has a goal to maintain high levels of employment. The relevant laws are the Employment Act of 1946 and the Humphrey-Hawkins Full Employment Act of 1978.
The federal government, I have argued, has been very persistent in supporting this goal since the early 1960s. The credit inflation that has been created by this effort has resulted, first, in the United States floating the US dollar August of 1971, and then, the decline in the value of the US dollar since then.
Since elections for the House of Representatives come up every two years, followed by Presidential elections every four years, and Senatorial elections every six years, it is vitally important for officials to take positions that will either get them into office…or keep them in office.
That is, the goal is to insure, as well as they can, that if people become employed, they are put back, as soon as possible, into the jobs that they were formerly employed in. Politicians don't like economic policies that create a dissatisfied electorate that might prevent them from getting re-elected. Thus, the Fed…and the federal government…face short-run pressures that cause them to fight against economic upheavals that produce angry voters.
Mr. Zinni's other concern is that even if the Fed…or, the government…follows a policy that does not allow the value of the US dollar to decline and produce an environment where "we may all be better off" that this will be "really hard to accomplish." The reason for this is that "for many Americans" he feels that "financial institutions have no claim on the good will of American voting age public." The concern here is that "to articulate policies that appear to guard the wealth of these institutions" will be hard for politicians…or the heads of government agencies…to bring about.
The problem is that in creating an environment dependent upon credit inflation, one creates incentives for people…investors…to take advantage of the opportunities that are created within such an environment. As the deficits started to pile up in the 1960s, financial institutions started to innovate. This happens to be one of the major consequences of an environment that comes to depend upon credit inflation.
Commercial banks created the one-bank holding company where banking entities could issue commercial paper. The Eurodollar came into being along with other changes that allowed banks to become liability managers rather than just asset managers.
Interest rates began to rise. I had a broker call me late in the summer of 1968 and tried to get me to purchase a top-grade corporate bond. He told me, "I can get you a yield of 6.0 percent…and you won't see a yield like this for a long time."
He was right! In about thirty years, the Ass corporate bond rate got back DOWN to a 6.00 percent rate after rising to around 15.0 percent in early 1982.
And, people invested in houses, gold, paintings, and other things…like the new financial assets that were being created…as the credit inflation continued. Who got very wealthy off of this credit inflation? The wealthy and the financially sophisticated…and the income/wealth inequality of the United States rose dramatically.
Let's go back to the employment situation and talk about governmental programs that put "people back, as soon as possible, into the jobs that they were formerly employed in." The government wants people to be as fully employed as possible, but is it right to always want to put people back into the jobs they were formerly employed in? What if technologies change? What if markets change? What if educational and training needs change?
What incentive do people have to change if people expect to just be re-employed into their old jobs or employers know that the government will support programs that put people back into the jobs they were laid off from? Workers won't keep up the continuing "life-time" education that seems to be needed to continue to be employed in the 21st century. And, employers won't change the way they operate as rapidly as they might need to until they must "jump" to a new technological framework.
And, one wonders why the labor force participation rate has dropped below 73.0 percent, the lowest level it has been at since the late 1970s as more and more women were entering the work force.
Bottom line, in a world that is rapidly changing in a technological sense, people have to train and re-train over time. Back in the 50s and 60s, the business technologies changed slowly enough so that the idea of putting people back to work in the jobs they had been laid off from was not such a bad thing. Today, trying to achieve yesterday can be devastating. On the other side, getting back to the short run issue, politicians are always going to be concerned about getting re-elected. The pressure will always be for them to produce programs that will help those that are unemployed even though the programs they design may be detrimental for these people in the longer run.
In terms of producing credit inflation that will result in a decline in the value of the US dollar, I believe that the government will continue to cause the value of the dollar to decline. Yes, I am a long-term bear when it comes to the value of the dollar, given current attitudes.
In terms of doing the best thing we can for the less-well-off, I believe that attitudes must change and efforts must be directed to longer-term goals and longer-term processes. I will continue to advocate for this.
I don't see "populist" attitudes changing about the Fed and about financial organizations in general being institutions that exist so that "the wealthy remain wealthy and the poor remain poor." It seems to be an historical prejudice that those that handle money, do so that the "wealthy remain wealthy and the poor remain poor." I guess I don't see this attitude changing.
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