Stockman Misses the Boat: We Don’t Need to Get Rid of Yellen; We Need to End the Fed

This article was submitted by Addison Quale, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

Perhaps you are familiar with David Stockman and his mind-bogglingly long in-depth economic analyses topped off with blustery bombastic titles. Clearly, he’s an incredibly smart guy, and he’s produced some great stuff. But something is off in this recent article, and unfortunately, it betrays a fundamental lack of understanding of what’s really going on in the financial system.

It only took the first two paragraphs of his tirade for him to go astray:

Simple Janet should have the decency to resign. The Fed’s craven decision last week to punt on interest rate normalization is not merely a reminder that she is clueless and gutless; we already knew that much. That’s right. In the midst of vastly inflated and combustible financial markets, the all-powerful Fed is being led by a Keynesian school marm stumbling around in an explosives vest. She apparently has no idea that a 38 bps money market rate is not a pump toggle on some giant bathtub of GDP; it’s an ignition fuse that is fueling the greatest speculative mania in modern history.”

Essentially, Stockman is calling for Yellen’s resignation because all the economic data is pointing toward the appropriateness of a Fed rate hike after almost a decade of ZIRP. Instead, at the latest Fed meeting Yellen, “paused” the rate normalization, and, as such, is merely fanning the flames of the current speculative bubbles at work in the economy that will inevitably burst.

Stockman makes two errors in his analysis.

First, Stockman presumes that Yellen actually has control over the interest rate—that she and her cronies at the Fed actually have the ability to start a rising trend in rates now.

The fact is, however, that rates have been falling pathologically for over 30 years now. And the truth is they are going to follow the rest of the world’s central banks inexorably into negative rate black-hole territory – from which there is no turning back. The Fed is going to suddenly be able to reverse this course on a dime?

No.

The Fed cannot raise rates for a couple of reasons – outlined expertly here by Keith Weiner, noted gold economist.

First, it would cause a massive cash flow problem for the central bank, which currently makes a nice profit borrowing short term at ZIRP (say .25%) and then lending long term at higher rates (say 2.65%, the current rate on the 30-year bond). Should ZIRP end and borrowing rates for the Fed normalize to 4.0%, you can kiss that fat profit margin goodbye and say hello to billions of dollars in negative cash flow.

Second, the Fed holds a lot of bonds as assets on its balance sheet. As everyone knows, as interest rates rise, the value of bonds fall. So if rates return to 4.0%, the Fed is looking at a massive loss in its bond portfolio value. As Keith writes: “On top of its cash flow problem, the Fed will have a solvency problem.”

For these two reasons it appears the Fed can’t afford to raise rates—even if it wanted to.

Considering these facts, Stockman’s claim that Yellen should have raised rates is like criticizing someone for not sticking their hand out in order to stop a tsunami from crashing over the land. It’s going to be 100% ineffectual – and it might result in drowning if they don’t get out of the way.

And just to offer some easy proof, Yellen and the Fed did go ahead and raise the federal funds rate in December. Yet since then, market rates still managed to fall! Clearly any control they seem to have is just an illusion.

Stockman’s second error is that he presumes that Yellen’s resignation as Fed Chair would actually cure what ails our current monetary system.

This is like the proverbial band-aid to treat the severed limb. Or perhaps you’d prefer “re-arranging of deck chairs on the Titanic” analogy. To wit, it accomplishes nothing.

The Fed doesn’t need a new leader. It doesn’t need a reformation job – or even, dare I say, a glorious “return to the days of the gold standard where our dollars would be backed by physical gold.

No.

Rather, the Fed needs to be blown to smithereens. Figuratively, of course.

Clamoring for a new Fed Chair is akin to the prisoners at a forced labor camp arguing that replacing their current overlord-warden with a different one will somehow loosen their shackles and set them free. It won’t. And replacing Yellen won’t loosen the monetary shackles that grip American citizens either. (By the way, if you don’t think you’re wearing monetary shackles here in America, just try paying your income taxes in any currency other than the USD.)

What is needed, then, is an end to the Fed—and monetary freedom instead. The real solution to this mess is a new monetary system, one not imposed by coercion upon us all from above, but one determined by the voluntary and ethical forces of the free market and adopted by free agents voluntarily as well.

Across the millennia of human history the money of choice for humanity has inevitably been gold and silver. What is needed, then, is an “unadulterated gold standard.”

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