Kevin Warsh is married to the daughter of Ronald Lauder, the cosmetics billionaire. Warsh himself earns enormous sums on the speaking circuit, he’s got a top designation at one of the world's most prestigious think tanks (Hoover Institution), and assuming he hasn't done so already, he could enter any investment bank, hedge fund, or private equity fund in a heartbeat at MD or partner level, all based on the high position he formerly held at the Federal Reserve.
So why on earth he would sacrifice whatever economic principles he possesses to be picked by President Trump for the job of Fed Chair. Seriously, why?
Stop and think what Warsh is putting himself through ahead of maybe being picked. His recent interview on Fox Business News with Maria Bartiromo looms large here. Warsh had to say so much that he likely wouldn’t have felt compelled to say were he not vying for the Fed job.
This included his assertion that government spending causes inflation. It doesn’t. Even if people want to believe that higher prices are evidence of inflation (frequently they're not), government spending doesn’t have any price impact exactly because governments can only spend insofar as we have less money to spend. Translated, ALL demand is preceded by production and governments produce nothing.
Looking at the yield on the 10-year Treasury note alone, in 1980 it was 11% and today it’s somewhere in the 4% range despite $37 trillion (in 1980 it was $900 billion) in total federal debt. There’s quite simply no correlation between government spending, deficits, debt, and inflation. Quite the opposite, logically. Rare is it that those with title to money lend it to entities intent on devaluing it.
From there, Warsh asserted that “printing” causes inflation and that we’ve been “printing.” Oh stop. If the U.S. ever needs to print to fund government or to pay off debt, rest assured that either scenario will be preceded long before by surges in Treasury yields that will make the 11% paid out by Treasury in 1980 quite small by comparison. The yield surge will also correlate with a cessation of loans to Treasury.
Not surprisingly, Warsh told Bartiromo that the Fed should reduce its Fed funds rate. There was no surprise there because regardless of what Warsh actually believes, those who aspire to the Fed Chair must say what Trump wants to hear. Rather than muse about Fed "independence," it's better to ask if Warsh truly beieves he, Jerome Powell, Kevin Hassett, or anyone could possibly know what any interest rate should be. Don't Republicans disdain centrally planned prices as is?
It all speaks to what none dare say: the Fed's powers are mythical, and always have been. If the Fed could really centrally plan credit costs, the U.S. economy would be in pathetic shape and Warsh most certainly wouldn't want the job.
Which brings us back to the initial point of this write-up: Warsh doesn’t need the job. What he does need is his good name, a name that won’t soar if he’s known to have gotten a job not because he spoke the truth, but because he said what Trump wanted to hear. Worse, since the Fed doesn't control anything, Warsh's good name will be needlessly besmirched if and when the economy does as it does occasionally, and shrinks.
In return for sacrificing much that he believes for a job that will be worth much less due to the sacrifice, Warsh will eventually find himself unable to do as Trump wants not because he won’t try to, but because market forces decide prices, including interest rates. Who would want this job?
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