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Fed Chair Powell’s Solution Is the Root of the Problem

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Federal Reserve Chairman Jerome Powell went negative in a webcast speech on Wednesday, May 13.

I’m not talking about negative interest rates, although that could be coming down the pike as well. Powell went negative on the prospects of a quick economic recovery.

He’s right about the prospects for the economy, but he’s wrong about the solution. That’s because he doesn’t even realize it’s Fed policy at the root of the problem to begin with.

A lot of pundits and politicians have assumed that the economy will just snap back to normal once governments open things back up. Powell dumped cold water on that notion warning that the US could face a “deep, prolonged” recession. He said, “The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II.”

We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased. Since the pandemic arrived in force just two months ago, more than 20 million people have lost their jobs. A Fed survey being released tomorrow reflects findings similar to many others: Among people who were working in February, almost 40 percent of those in households making less than $40,000 a year had lost a job in March. This reversal of economic fortune has caused a level of pain that is hard to capture in words, as lives are upended amid great uncertainty about the future.”

Powell warned, that “the path ahead is both highly uncertain and subject to significant downside risks.” He added that “A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement. The result could be an extended period of low productivity growth and stagnant incomes.”

He’s right about all that. But he got just about everything else in his speech wrong.

After painting a gloomy picture, Powell called for more government spending and more extreme monetary policy.

We ought to do what we can to avoid these outcomes, and that may require additional policy measures.”

Powell promised that the Fed will “continue to use our tools to their fullest until the crisis has passed and the economic recovery is well underway,” but emphasized there is only so much the central bank can do. He practically begged Congress to borrow and spend more money.

Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”

Costly seems like a bit of an understatement. The US government has already committed to spending trillions of dollars and Democrats in the House just proposed a spending bill with $3 trillion more. The budget deficit in April was a staggering $738 billion — and that’s just the tip of the iceberg. The Treasury Department already announced plans to borrow $2.99 trillion in the second quarter.

Powell said we can worry about the debt in the good times, but where was he when the Trump administration was running a trillion-dollar deficit before the pandemic? Powell was telling us the economy was great then – even as he cut interest rates and launched QE.

Therein lies the ugly truth: Powell’s prescription for low interest rates into perpetuity, quantitative easing, money-printing, and government borrowing and spending, are the very same medicines that already had the economy teetering on the brink of a meltdown before the coronavirus pandemic.

Keep in mind, everything Powell talked about was already happening before COVID-19. The economy was riddled with debt and was already being propped up by extraordinary Federal Reserve monetary policy. We had three rate cuts in 2019. The Fed was running repo operations to stabilizing the financial markets and the central bank had already launched quantitative easing, even though Jerome Powell and Company refused to call it that. The US government was on track for a $1 trillion deficit in FY2020 even before the government passed trillions in stimulus spending. The coronavirus just put everything into hyperdrive.

And now Powell wants to go into triple-warp speed.

It should come as no surprise that Powell is clueless about how we should move forward because he’s clueless about how we got here. The man displays no self-awareness whatsoever.

During his speech, he noted that past crashes happened after asset prices “reached unsupportable levels” or after “important sectors of the economy, such as housing, that boomed unsustainably.” Not this time, though.

There was no economy-threatening bubble to pop and no unsustainable boom to bust. The virus is the cause, not the usual suspects—something worth keeping in mind as we respond.”

Come on, Jerome! The air was coming out of your unsustainable stock market bubble before coronavirus. That’s why you were cutting rates last year and launching your little QE programs.

Yes, the coronavirus government shutdowns have created unprecedented disruptions in the economy. That’s not debatable. But that economy was rotten to the core before the pandemic due to the very policies you now want to ramp up in order to save the economy. It was a great, big, fat, ugle bubble blown up by debt. Powell’s prescription is not going to save the economy. At best, it will save the bubble – for a little while longer.

Maybe.

Peter Schiff hit the nail on the head in a recent podcast.

Nobody really cares at this point about the data or how weak it is because they simply attribute it all to the coronavirus. It’s a self-inflicted wound. Forgetting about the fact that we were actually wounded anyway. People don’t appreciate the problems that the US economy had – the very deep-seated structural problems that lay beneath that bubble that people still haven’t come to terms with. They’re still focusing on the effects of the coronavirus and not realizing that the economy was very sick long before we got infected with the coronavirus.”

And it was Powell’s policies – the ones he wants to triple down on today – that wounded the economy to begin with.

There is no easy path forward. The bubbles need to deflate. The distortions and misallocations in the economy need to reset. But that would create a great deal of pain that the political class isn’t willing to face. Instead, they will kick the can down the road by repeating the same mistakes of the past on a larger scale.

Peter said as somber as Powell was, he’s still too optimistic, and “his advice that the Federal government spend massively financed by deficits monetized by the Fed, guarantees the worst possible outcome.”

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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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