Confirm Judy Shelton: She'll Arrest Obtuse Groupthink at the Fed
In The Great Successor, Washington Post reporter Anna Fifield’s very uneven and very poorly edited book about North Korean dictator Kim Jong-un, she indicated that among other things Kim passed his childhood days listening to Whitney Houston while frequently dressed in Nike garb. More modernly, Fifield reports that Kim brings an Apple MacBook with him when he travels on one of his many jets.
About what’s been written so far, some readers might be nonplussed. Didn’t the U.S. long ago impose a trade embargo on North Korea? If so, why does Kim enjoy very American plenty? The answer is simple: there’s no accounting for the final destination of any good. That U.S. companies are forbidden to sell inside North Korea is of no consequence when it's remembered that the feds do not control those whom U.S. companies are free sell to. So long as they’re selling their wares, U.S. companies are ultimately selling to North Koreans who desire U.S. products, and who have the means to purchase them. And how do North Koreans exchange goods and services, including that which is U.S. produced? According to Fifield, “the U.S. dollar is still the preferred currency for North Korean businessmen since it is easier to convert and spend.”
You read that right: the economy of one of the U.S.’s foremost “enemies” is liquefied by U.S. dollars. That the dollar facilitates exchange in Pyongyang, and that it does so without the help of the Federal Reserve, is a statement of the obvious. Simply stated, money is a consequence of production, not a driver of it. Individuals produce in order to exchange what they produce with others, which explains why the dollar factors into so much global trade. Precisely because the dollar can be exchanged for goods and services the world over, its role in global trade and investment is of the 90%+ kind.
All of which brings us to Judy Shelton’s nomination to the Federal Reserve board. Up front, what’s previously been said should exist as yet another reminder that the Fed’s presumed ability to influence economic outcomes is exponentially more theoretical than real. That the U.S. dollar liquefies the economy of this most econmically isolated country speaks to how overstated the Fed’s power is. Credible money finds production, period. That the Fed can’t limit dollars flowing to their highest use in North Korea should have even the mildly sapient questioning why so many pundits, politicians and economists focus so much on the Fed stateside. If the central bank can’t keep dollars from refereeing trade and investment in a police state, does anyone seriously think the Fed can “tighten” or “loosen” access to dollars in the U.S.? The question answers itself.
So while all this breathy excitement about the Fed is silly, and something that future historians will marvel at, it’s still easy to energetically support Shelton for the Fed board. The Fed employs more economists than any other entity in the world, these economists almost unanimously believe that economic growth causes inflation, so it will do the Fed good to have someone inside who thinks differently. Shelton knows well that economic growth is actually a consequence of investment, and investment is what brings about falling prices. How fun to see what’s calcified and ludicrous (economists also almost unanimously think that empowering Nancy Pelosi and Kevin McCarthy to spend with abandon is the path to prosperity) to be shaken up by the unafraid Shelton. She should be confirmed yesterday. Thank goodness Shelton doesn't think like economists.
Thinking about the nominee more broadly, the discussion of Shelton within the pundit class would be quite a bit more productive if those who presume to talk money understood that no one trades it, or exchanges it. Underlying all transactions that involve money is the exchange of real goods, services, and labor. Always. Money is merely an agreement about value among producers that facilitates the exchange of actual things, thus explaining yet again why the dollar is the currency of choice in a country whose official currency is the won. The problem is that the won commands little in North Korea, and nothing outside of it. Since financial transactions are yet again always about the exchange of goods and services for goods and services, the currency refereeing these exchanges must once again be seen as exchangeable for market goods.
All of this rates stress given Shelton’s past support for a gold-defined dollar. To be clear, she’s long been a supporter of just such a currency. As she put it in her classic 1994 book Money Meltdown, “Going on a global gold standard would provide a much more democratic international monetary system than the one that exists today…..” Statements like this are all over the book. That they are speaks to Shelton's possession of common sense; the latter something that's very challenging to find inside the Marriner Eccles building on Washington D.C.'s Constitution Avenue, or for that matter any of the other Fed branches around the country. Shelton's support for stable money is an explicit statement from her that she understands money’s sole purpose as a medium of exchange, nothing else. Shelton’s support for a gold-defined dollar is an acknowledgement of a simple truth previously stated: no one trades money. Currency exchanges signal the exchange of goods, services and labor. Let’s say it again: always. Given this statement of the supremely obvious, it’s only natural that the goal among serious people when it comes to currencies is that they be as stable as a measure of value as possible.
And for those who say a gold-defined dollar, or a stable dollar (pick your commodity) would limit the ability of the Fed to act during recessions, you’re showing how little you understand money. To say that a dollar with a stable definition exists as a barrier to central bankers, politicians and economic growth is the equivalent of some dope saying that a “slow second” keeps his 40-yard dash times at 6 seconds, and is keeping him out of the NFL as a consequence. Seconds measure objectively. Money measures objectively. Nothing else.
Of course, this too is a pointless discussion when it’s remembered that the Fed’s policy portfolio doesn’t include the dollar’s exchange rate. In short, Shelton’s support of the gold standard and dollar-price stability would only be relevant if she were being appointed Treasury Secretary. And for those readers absolutely convinced the Fed manages the dollar’s value despite all evidence revealing the exact opposite, don’t forget that the Fed operates under an implied consensus rule. 4-3 votes, or even 5-2 votes by Fed board members are the major exception to the rule. Shelton would be but one believer in a gold defined dollar. Translated, even if it were true that the Fed controlled the dollar’s value, the Fed is short about four or five Sheltons if the goal is a return to the gold standard. This is true even if Shelton ultimately replaces Jerome Powell.
Some object to Shelton because her views have “evolved” with those of the man who appointed her. This is true, but it’s also irrelevant. About it being true, in a Wall Street Journal interview from 2019, Shelton recalled U.S. auto workers telling her in the 1980s "that ‘we can compete against the best in the world, but we can’t compete against the central bank of Japan.’” In particular, Shelton made the point more than once that currency devaluation by countries makes their products more competitive globally. In Shelton’s 2019 words, “nations gain a price advantage over competitors by devaluing their currencies.” That’s what she was referencing while discussing Japan.
Except that what she referenced isn’t true, and the source supporting the previous claim is Shelton’s previously mentioned 1994 classic, Money Meltdown. Contrary to modern commentary from Shelton about Japan’s central bank devaluing the yen versus the dollar, the Fed nominee knows well what really happened. And the truth will inform her thinking while at the Fed. Or it should. Writing about the 1985 Plaza Accord in Meltdown, Shelton observed that if the success of it were “judged by the steep descent in the dollar’s value as measured against other currencies in the ensuing months, there can be no denying that the plan worked.” 36 pages later Shelton noted that the “yen was at 358 to the dollar in 1970, 265 yen to the dollar in 1973, 184 in 1978, 129 in 1988, and 105 in 1993.” Shelton described the dollar’s steep drop against the yen in the 1980s as a “final outcome of the deliberate government effort engineered by Baker and Darman to lower the value of the dollar against the yen.” Baker was Treasury secretary at the time, and Darman was his #2. Translating all this, Shelton has tailored her views to fit those of the president appointing her, and Trump incorrectly believes that the dollar has soared against the yen since the 1980s. No. Not at all.
Arguably something similar is at work with interest rates, or the Fed’s role. Shelton is too smart to believe that price controls work. That’s why her modern stance in favor of so-called Fed ease is so easy to read as politics in play. If we ignore what’s true, that the Fed can’t control access to credit in the first place, the idea that it could expand credit access by lowering the Fed funds rate is as silly as the belief that artificially low apartment rent controls will lead to apartment abundance. No, not at all. And the Fed can’t create easy credit. Shelton knows this. Politics is once again at work, and that’s ok. The Fed has long been a politicized institution, and so it remains under President Trump. It says here that Shelton doesn’t need to compromise her views on the dollar and interest rates, but she knows her own situation better than yours truly.
Furthermore, her compromises or evolving opinions that have some up in arms are a distraction from the much bigger truth about the economics profession: it’s populated by the near monolithically incorrect. It’s not just that they believe against all evidence that growth causes inflation, or that government spending stimulates growth as opposed to it being a consequence of it. Economists also near unanimously believe World War II ended the Great Depression. Yes, they believe that maiming and killing boost economic progress.
The economics profession is increasingly ridiculous, and so is the Fed ridiculous when it’s remembered how many economists are in its employ. Shelton will greatly improve an institution and an economics discussion that’s degenerated into the wildly silly, and that can’t hurt. Her existence will surely trigger some on the left, and that can’t hurt either. All that, plus she’s a remarkably gracious person. Confirm Judy Shelton at the Fed!
