Last week, Federal Reserve Chairman Jerome Powell delivered a speech at the Economic Club of New York luncheon. In his podcast, Peter Schiff broke down some of the Fed chair’s comments and concluded that Powell is not qualified to be a member of any economic club.
Peter opened the discussion by saying Powell is not the person to bring in if you want accurate answers about the economy.
He doesn’t know what’s going on. And if he does, he’s not going to be honest. He’s going to lie. He probably doesn’t know. He’s clueless. And he lies on top of that.”
Peter said that if the Economic Club of New York asked him all the same questions they asked Powell, all of his answers would be the exact opposite.
I’m sure that most of the members of the Economic Club of New York, maybe all the members, know more about economics than Jerome Powell. Because you have to flunk a test about economics in order to qualify to be a member of the Federal Reserve. In fact, you probably can’t even get to be a Federal Open Market Committee member if you actually know anything about economics.”
There are a number of things Powell said that seem to support Peter’s assertion.
The Economy Isn’t Spending
Powell claimed the Fed needs to weaken the economy in order to bring down inflation. Peter said the notion that economic growth causes inflation is a “complete fallacy” and a “Keynesian myth.”
The problem is that Powell and many others in the mainstream misdefine economic growth. When they say, “economic growth,” they really mean consumer spending. They’re looking at metrics such as retail sales and GDP growth.
That’s not economic growth. That’s just spending. That’s not growing the economy. That’s spending what a growing economy produces.”
When you look at retail sales numbers, much of that increase is due to rising prices. And to maintain the spending spree, Americans are borrowing a lot of money. In fact, the “unsinkable” American consumer is growing in debt. Meanwhile, many people have taken on second and third jobs just to make ends meet.
If you’re just looking at the spending, and you think, ‘Oh, we have this really strong economy,’ No! It’s not a strong economy. You’re looking at inflation! … Inflation is driving this spending.”
That means you don’t have to “weaken” the economy to reduce inflation. You just need to reduce spending. You certainly don’t want people to stop working. If they aren’t working, they aren’t producing.
That means there’s less stuff. That puts upward pressure on prices. We want everybody to keep working. We just want them to stop spending everything they earn. They need to take some of their paychecks and save it — put it in the bank.”
But Powell thinks spending is the economy and the consumer drives things by buying stuff.
No! The consumer is the caboose. He’s driven by the real engine of the economy, which is production. That’s what we need more of. We need a stronger economy, but we need less spending, less consumption, more savings, more investment.”
The Pandemic Caused Inflation?
Powell also claimed the pandemic caused price inflation. He acts as if everything was fine until the pandemic and then prices just started going up.
The pandemic is not why we have inflation. The Fed is why we have inflation. Congress, the president are why we have inflation. And not just Biden, but Trump and the presidents before him. They were all contributing to the inflation problem that we’re dealing with today.”
It is true that the inflation problem got worse during COVID. But it wasn’t the pandemic. It was the government response to the pandemic.
The pandemic was a health problem. What the government did was turn it into an inflation problem. Because they overreacted, number one. They forced people to stop working. And then they ran huge deficits to send people stimulus checks to buy stuff that they weren’t making. It was the worst combination of monetary and fiscal policy ever devised.”
That raises a question. If Powell doesn’t know where price inflation came from, how is he going to get rid of it?
The Banking Crisis Isn’t Over
Referencing the collapse of Silicon Valley Bank and other financial institutions last spring, Powell was asked if the banking crisis is over. He said we handled it and it’s basically behind us.
Peter disagreed.
It’s just getting started. That was the tip of the iceberg.”
Peter said all you have to do to see the underlying problem is to look at how much value banks of lost on their mortgage-backed securities and Treasuries since the March bailout.
It’s been an enormous collapse. And so the banks today are in far worse shape than they were back in March when Silicon Valley Bank failed. The Fed should know this because the Fed is the biggest loser of them all. The Fed has more Treasuries and mortgage-backed securities on its balance sheet than anybody else. So, the Fed is the biggest loser, and somehow they think the crisis is behind us when it’s all out in front of us, and it’s about to be playing out in front of their eyes.”
The “Problem” of Low Inflation
Powell worried out loud that inflation could potentially get too low. He said that was the problem in the past and now we have the problem of high inflation.
Peter said “low” inflation was never a problem.
That was a made-up problem so they could have an excuse to create more inflation. Now we’ve got a real problem of inflation being too high.”
In 2020, Powell started talking about inflation averaging. Instead of targeting 2%, Fed officials pivoted to an average 2% target over time.
They wanted to justify letting inflation get to two-and-a-quarter, two-and-a-half. They didn’t want to have to put in the brakes when we hit two. They wanted to make up for all the years where we were below two. So, they redefined their target to an average inflation rate of 2%. No one talks about that now. I mean, they haven’t officially changed that, but how many years are we going to have to have 1% inflation to average it down to two?
In fact, we really need falling prices in order to get the average back to 2%. But the central bankers never want to do that. They just want to average up.
Powell Doesn’t Consider Fiscal Policy
When asked about government borrowing and spending, and the massive budget deficits, Powell said he doesn’t consider fiscal policy at all when developing monetary policy. He also insisted the Fed doesn’t change monetary policy based on fiscal policy. He talked as if fiscal policy isn’t part of the central bank’s mandate.
Peter said it has everything to do with their mandate.
Where’s the inflation coming from? It’s coming from the budget deficits that he monetizes. And government spending is driving inflation. If you’re trying to ‘slow down’ the economy, or just trying to cool consumption, if the government is increasing spending, that is counteracting what you’re trying to do. How could you avoid that? How can you not care about that?”
Peter said the whole idea behind Fed independence is so the central bank can push back against reckless fiscal policy.
The Fed is supposed the be the chaperone here at this spending party, and if Congress is spending too much money, well, jack up rates. Make it harder for them to do that. Raise the cost of borrowing so that they cut back.”
Peter said it’s like a doctor ignoring a patient’s symptoms and prescribing whatever treatment he fancies.
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