Monetary Policy
Economics has never been my forte. If you read any of my articles you know that power, wealth, adulation don’t interest me in the least. Peace, however, is an idea that I would gladly spend my life pursuing. Sometimes that pursuit requires filling in the gaps of missing knowledge to see a larger picture. Since I like simple ideas, clean lines, and uncluttered spaces I’m going to simplify my ideas as much as possible. Over the last few months, I’ve been trying to get a handle on economics as I see it. Our mandate should be a monetary policy that fulfills a social contract to people that are in an ecosystem, taking into account, ethics, environmental, and social justice. Money should be seen as a means to create a richer society not an endgame in itself.
I’m admittedly just feeling my way into this arena and have a lot of ground to cover before I comprehend the interconnected subtleties of economic theory. As always, adaptability, flexibility, and the necessity of being able to pivot according to circumstance should be a fundamental facet of those that are chosen to govern. Dogmatic loyalty to any party should never supersede what circumstances require. In writing this I’m just trying to build a framework that creates resilience concerning broad monetary policy as I understand it, similar to the checks and balances brilliantly created by the constitution. The best analogy is an economic constitution with fluid safeguards.
Macroeconomics is the study of the economy as a whole while economics is the study of how people allocate resources for production, distribution, and consumption. So it’s really about all the trade-offs we make on a personal level, to the communal level, to the government and international level. I should also state that I’m not a Keynesian (follower of John Maynard Keynes). I don’t believe in large scale interventions by the government in economic affairs, unless necessary. Complex systems often self correct effectively given the opportunity. That is particularly true at the current level of globalized economic complexity. I doubt the most brilliant minds can anticipate or drive desired outcomes. Nor can we currently reach consensus on what those desired outcomes should be.
I strongly favor the Austrian school of thought advanced by Freidrich August Hayek, Milton Friedman, and Henry Hazlitt, that stated large scale interventions in business cycles would simply delay a day of reckoning (psychic huh?). Keynes had a more mechanistic top-down approach to the economy while Hayek had a more grassroots, bottom-up approach. “Too big to fail” only gets bigger, more consolidated, and undemocratic with government interventions. This type of social welfare system for the corrupt and wealthy is not an idea I favor.
Fun fact: Silly videos are awesome, so watch this to understand further the differences between Hayek and Keynes. It really might just mean the difference between crony, racial, exploitative capitalism compared to genuine economic capitalists. In looking at the economy several factors have to be considered. The following ideas and concepts build a framework for long term accountable monetary policy, not impulsive band-aid solutions.
I think most sane Americans are starting to understand the economic plight we face and I’m going to assume that the rest of the world understands that when large economies suffer in a globalized system there are ripples effects. Errors of +/- 10% aren’t going to affect gross trends and the reality of people on the ground. Between 2000–2020 we’ve had three asset bubbles, creating dysfunctional economic conditions. The tech bubble, the US housing bubble, and our current (about to crash yet to be named, we just don’t learn from our past mistakes) COVID bubble. Housing prices are still ridiculously unaffordable, wages are stagnant, billionaires have increased their wealth by 640 billion during COVID while millions cannot afford healthcare. Over a thousand private equity firms have received PPP loans, about 30 million people are collecting jobless benefits, stimulus is being pilfered by politicians as well as big business, and wealth is increasingly getting consolidated. I’ll take a breath here for a second….
These are some main concepts that need to be reformed to have a streamlined, functioning economy that represents people. Complexity makes tracking the flow of money a daunting task. Let me stand on my soapbox and highlight some concepts I think are of paramount importance regarding economic policy. I’ll start with profiteering.
Profiteering
“Profiteering refers to taking advantage of unusual or exceptional circumstances to make excessive profits. It is the generation of disproportionate or unfair profit through manipulation of prices, abuse of dominant position, or by exploiting a bad or unusual situation such as temporary scarcity. Usually, there is no governmental control over profiteering unless it involves any illegal means. Sale of scarce goods at inflated price during war is an example for profiteering.” — USLegal.com
These are strange times indeed. Corporations having GDPs the size of small nations can purchase militias, bunkers, and whole other nations while making billions of dollars in four months. That’s magical and utterly surreal. While I abhor the idea of taxation for the sake of taxation I believe firmly in supporting my fellow man. We have consolidated wealth into a small number of hands. How can you possibly reset such a mess? One possible way is by taxing a chunk of that consolidated wealth rather than printing money. People might be able to afford healthcare and not have to line up at soup kitchens. Go figure.
The Federal Reserve
If I remember correctly the Fed was created in 1913 and has evolved into a central bank whose purpose is two-fold. The fed has a board of governors consisting of seven members with twelve regional banks.
‘Since1977, the Federal Reserve has operated under a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates” — what is now commonly referred to as the Fed’s “dual mandate.” — The Fed
I don’t feel equipped to criticize or critique the central bank of the largest economy in the world other than I wish it showed more transparency to the public in the interest of fostering trust between people and the institutions that serve them. I will however take a run on a couple of ideas that have always bothered me. Primarily, inflation and unemployment.
Real Inflation
Statistics can be manipulated in a myriad of ways. I’ve lost count how many times I’ve read about changes concerning the methodology in calculations of inflation. Frankly, it’s always been a tad insulting to my intelligence that inflation has hovered around 2% when monetary supply has fluctuated so wildly over the last twenty years and housing prices and food have skyrocketed. Perhaps the math is too difficult for me to understand?
Real Unemployment
When statistics are offered to the public like candy to create illusions of safety and comfort it would be important to use real data. If governments want to retain the trust of their citizens it would be in their best interest, to tell the truth. Stop manipulating the data to suit a narrative. We are are not children and choose representatives to speak on our behalf, so please be the adults in the room. Trust is a two-way street. The average citizen is fully aware of how high unemployment is. Your reality seems far removed from the rest of us at times.
Glass-Steagall/ Dodd-Frank
In 1933 after facing a world war, the Spanish flu, Black Tuesday, massive inflation, and tragic human suffering the Roosevelt government enacted a prescient piece of legislation that still holds immense value today.
The Glass-Steagall Act was enacted to firmly separate commercial banks from investment banks that typically participate in higher-risk behaviors. The intent was to create a more robust, stable economy. However, in 1999 the Clinton administration repealed the law sighting it’s restrictive nature. I’m going to assume that the wealthy just weren’t making enough money and the three boom-bust cycles we’ve had in the last twenty years were of no consequence to those breathing such rarefied air. This law makes sense, power resides with money, not political structure, and the actors behind the scenes are often anonymous. We look to blame our local politicians who are indeed there to serve their constituents but we also need to step back and see a larger picture that requires our participation, education, and balanced judgment.
Dodd-Frank, legislation passed to regulate the banking system after the housing crisis, is considered to be a convoluted piece of law. This aids in the consolidation of wealth to larger banks while failing small commercial banks. The intent was certainly honorable but the results created a tangled mess requiring teams of lawyers to do business. I believe it was Alan Greenspan who stated that capital requirements for banks should be increased. A simple measure that forces accountability. Capital requirements are simply asset/equity ratios that indicate how leveraged business is. Or an easy way to look at it is how liquid or indebted an institution is. There most certainly must be a bottom end ratio that is unhealthy hovering somewhere around eight percent. Capital requirements for banks are difficult to regulate as a nation would want capital to flow freely in prosperous times and have a more balanced conservative mindset during tumultuous times. Investments banks that assume more risk should also have capital requirements.
The most important aspects of promoting democracy, rule of law, and just society are transparency and accountability. Many of the investment banks culpable for the housing bubble were bailed out in 2008. These same institutions are prospering now during the pandemic. It’s something I couldn’t reconcile. How is the stock market so stable when so many human beings are languishing and cities are in such turmoil?
According to the New York Times and several other sources, the wealthiest ten percent own approximately 84 percent of all stocks
‘that includes everyone’s stakes in pension plans, 401(k)’s and individual retirement accounts, as well as trust funds, mutual funds and college savings programs like 529 plans.’ — NYTimes
The game is rigged. As consolidation of wealth continues these individuals look less and less like citizens but start to resemble the oligarchs of autocratic regimes. Since corporations are people they would have ethical and legal obligations to be bound by the same rules regarding corruption that I am. Milton Friedman and Friedrich Hayek were both men of morality. They believed in maximum freedom with the caveat that freedom should not infringe on others' rights.
Tax Havens/Maginstky act/Shell companies
Speaking of oligarchs I happened to come across this brilliant piece of bipartisan legislation that was signed into law by Barack Obama in 2012. It allows the US to sanctions human rights offenders, freezes their assets, and bars them from entering the US. The elegance of this law is that it sanctions individuals as opposed to people. The citizens of corrupt governments suffer at the hands of oligarchs in every nation. It’s important to not punish citizens for the acts of those who hold power with an iron grip. This piece of legislation does that and is being enacted by other nations to encourage transparency.
Oligarchs and investors in questionable legitimate financial schemes result in the misappropriation of over 70 billion dollars a year. According to the Brookings Institute, one out of every six tax dollars is the US is not paid. That is assuredly stealing from your, children, neighbors, and their future. Tax Havens, shell companies, corruption and a lack of political will to enforce our existing laws on the books illustrate where real power resides. It certainly isn’t with the people and it’s not democratic.
Austerity
Governments often employ a set of policies to reduce their sovereign debt which simply means they want to decrease their debt to GDP ratio. Yanis Varoufakis beautifully explained a nuance I was guilty of misinterpreting, the concept of financial austerity. Being risk-averse, I’m a saver. So when I tighten our household financial belt our family has a little more liquidity. I have traditionally applied this same principle to nations and have been proven mistaken in this assumption. When a nation cuts its expenditures or investments cutting their effective GDP, sovereign debt increases. It seems counter-intuitive but I see the clarity of it now. I’m just mulling over possible ways to effectively implement austerity without cutting GDP. Here’s a simple visual of the debt amassed from 2000 to 2020 in the US. It’s a global theme and a dispiriting one.
Public debt has ballooned over the last twenty years. This doesn’t bode well for future generations. It’s a moral imperative to get our financial house in order. To paraphrase Dr. King, political will should bend towards the arc of justice for future generations.
The US dollar as Reserve Currency
The Breton Woods conference of 1944 established the US dollar as the world's reserve currency backed by gold. Nixon decoupled the US dollar from the gold standard creating free-floating exchange rates based on economic strength, perception, and trust. If the US amasses too much debt or lacks the trust of the world to promote democracy that could change. Having the dollar as the world preferred currency offers Americans several advantages but also poses hefty responsibility. It requires leading by example and meeting the moment. Economic fluctuations in any large economies have cascading effects. Currently, central banks hold about 60% of their reserves in US dollars. We are in this together even if the game is rigged.
Shadow Banking/M2
Lastly, I just wanted to touch on shadow banking, M2, and the concept of unlimited growth. Measures of global money supply or M2 are indicative of the real economy beyond creative pyramid schemes. M2 is all the cash, checking, savings accounts, money market deposits, and short term deposits signaling liquidity. For example, the world GDP has increased by 40 trillion dollars over the last twenty years. It’s difficult to discern where that growth is coming from.
Shadow banking encompasses all the institutions that perform tasks similar to commercial banks but without the regulation. That inherently implies assuming more risk placed upon the consumer dealing with such institutions. These organizations include mortgage lenders, investment banks, hedge funds, and insurance companies. Systems that can circumvent regulation, will take on higher risk and look like gamblers peddling in power dynamics. These individuals should be held accountable for their corporate predatory behavior.
Even with the expansion of global GDP the lifespan of the average citizen in the US has gone down. The economy of a nation should always have the health of its people, including the entire ecosystem in mind when creating policy. Currently, the US spends almost twice per capita on healthcare than other nations with poorer outcomes. There is a cost and a benefit that most assuredly affects the overall well being of communities.
I’m sure that some of those trillions of dollars have trickled down to mitigate global poverty, literacy, and health initiatives. If the economy is simply all the trade-offs to enhance the well being of individuals and nations, global health, education, and poverty should have some quantifiable value that factors into all of our budgets and public policy initiatives. In short, the single role of a democratic government for the people by the people is to take the financial, health, and educational needs of its people into consideration when creating economic policy. The health of any economy depends on the health of its people and resources. The land we live on is a part of an ecosystem that sustains us. That same reasoning can be extended nation by nation, people by people around the world. These factors are intricately interwoven and nations cannot succeed without integrated approaches towards the economy and each other. People are the focus and the growth of citizens in all aspects of life ensures a prosperous nation and democracy.
References:
Economics in one lesson, Henry Hazlitt
Addressing another COVID Crisis: Corruption
Shadow Banking
COVID Bailouts
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Go forth Break Bread: I haven’t cooked for a week courtesy of the excellent food provided by my niece. Thank you for taking care of us. It means the world to me to be able to recharge my batteries. Try this drink - ‘Classy, Bougie, Ratchet’- 4.5 cups of lemonade, 1 bottle of rose, 2 cans of club soda, garnish with lemon.
