EPISODES / WEEKLY COMMENTARY

The FED Is Now The Fourth Branch of The U.S. Government

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Nov 26 2019
The FED Is Now The Fourth Branch of The U.S. Government
David McAlvany Posted on November 26, 2019
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  • Unelected power of central bankers challenges representative government
  • Is there a way to limit the continually growing leviathan of centrally managed markets?
  • Technocracy & the “overmighty citizen”

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

The FED Is Now The Fourth Branch of The U.S. Government
November 27, 2019

“We have what was the end of the first central bank and the second central bank here in America as a result of populism and distrust in government. I wonder how the general republic responds to the next crisis. That is where most agencies see their opportunity to intervene and ratchet to an even more significant role, never to cede that role in the future.”

David McAlvany

Kevin: Looking back at governments and societies through time we have elected governments and then we have tyrannical governments, but oftentimes we have unelected governments and it is usually in the form of the military. These days, Dave, it seems it is not the military that has made the coup her in America, but actually, the unelected power of the central bank, itself, the Federal Reserve. Last week you said it was costing us $183 per person per day for the 60 billion dollar insertion that is being called “not QE.” I don’t remember voting for that.

David: Well, no, there are so many things that we don’t vote for anymore and are not really represented in terms of who is putting it in motion. Are they our represented elected officials or not? So there are two veins of thought on my mind presently. One relates to the markets. We have had a number of multiple Hindenburg omens in the last few weeks, and the divergences we spoke of in the marketplace with declining volumes, even as prices increased. A number of things are on my mind in that regard.

But also, toward the sort of tendency to delegate power in a democracy, and again, this is, as you mentioned, the unelected officials. I am laboring through a nearly 600-page book by a retired central banker and self-acknowledged technocrat who now teaches at Harvard. I guess that is where all good technocrats go (laughs) after they have spent some time out there in the working world.

I guess before we get too far into our conversation today, Kevin, we could have probably had last week’s comments on stuffed turkey, our Nassim Taleb reference. Maybe that would be better suited for this week, at least for our North American audience. So happy Thanksgiving to all of you are in the habit of gathering and spending time together as a family this week, or wherever you may be. I hope that the wine flows, as well the conversation, and that tryptophan brings you great rest (laughs).

Kevin: Truly, we do have so many things to be thankful for, and I think it is important that we do focus on that which we truly should be thankful for. But going back to what we were talking about here, obviously, there is some control that needs to be maintained, but not everything is going to be electable. We have seen military coups in the past where everyone who was elected got thrown out. Now, in this particular case, like I brought up with the central bank, the Federal Reserve, and actually if we were to look around the world, Europe is definitely like this as well, you have people who are very, very powerful in the room and you could say, “Well, gosh, who made you boss?”

David: Right. And it’s pretty ordinary to have delegated power in some places, so for instance, you mentioned the military. That’s fairly common. That is power that is not elected. You rise in the ranks, it’s a merit-based process, and the accountability is generally to, at least as structured here in the United States, the Commander in Chief, that is, the president.

Kevin: And actually, this country was designed to have some unelected power that would be a balance. Looking at the judiciary, our judges in our legal system are not elected necessarily, but they do exercise one-third of the power.

David: That’s right. Here you have a group of people who are outside of any sort of political volatility, or supposed to be, as long as they are not legislating from the bench, so to say, but we have that unelected power in the judiciary. Judges are appointed, not elected. There are reasons for that, being very core to our governmental system.

Kevin: And obviously, at the local area we do elect judges, but as you move on up, the Supreme Court is not elected, it is appointed.

David: Today we even have sort of an unofficial fourth branch, or arm, of government, and that is the central bank. And that is the primary point of interest for me. That is where my interest lies here when I think about unelected power. U.S. history, I think, is helpful here. We have our central bank which came into existence through a unique set of circumstances and it actually preceded what became a more common – again if you back there is a very, very common period where we had sort of an explosion of an alphabet soup of independent agencies, the New Deal, and then all kinds of unelected power delegated to these independent agencies. Today you have things like the EPA or the FEC or the FTC, and that are the kind of iterations that you see around, but the central bank was a pretty key one that got launched back in the early teens, the 20th century, about 1913.

Kevin: So our country has changed. Is that the cost of empire, where you start having less and less electable government, and more and more appointed government?

David: Well, it certainly is a reflection of the [unclear] and of the detailed involvement of government in lots of aspects of our life. Delegation is sort of this process of “I have too much on my plate. We need a specialist who can take this on.” So, infinite agencies and delegated power. One of the things that struck me recently were comments from a State Department official. This was in the recent impeachment inquiry. The tone was fascinating. The tone was as if the president’s agenda in Europe was not the agenda of the State Department overseas.

I thought it was fascinating because not only does the president, that is, the executive branch, appoint each of these country leads, that is, our ambassadors, but the agenda is set by each successive administration, and is a unique agenda emanating directly from the executive branch. This ambassador was expressing great disrespect and sort of a direct opposition to the Trump administration’s goals and objective, which I thought reflected a very technocratic attitude, this kind of attitude of “We know better.”

But it reminded me that there is this class of unelected officials that can at times be so close to the trees they forget the forest. It’s not that you can’t have your own opinion. You can have your own views, but as a diplomat, you represent the country, and you represent the president that appointed you.

Kevin: It reminds me of illumined leadership by an illumined few. When you listen to people who are talking about something other than an elected government they will use the term, illumined leadership by an illumined few. But that is not the government that we have in place.

David: No, and I am comfortable with, and I grant you these are typically very qualified diplomats. They have studied. Whether they have studied or have direct experience in international relations in order to be familiar with a particular context, but they arguably could be better qualified to represent our interests abroad than the president, but, and here is the critical point – the chain of command includes the executive branch and the priorities of each administration are expressed in practical terms through our diplomats overseas.

So again, it is this idea that, yes, we have delegated power, but you need to understand from where that power emanates, and there is the tendency amongst those who have been delegated power to almost forget who gave them the power in the first place, and for whom they speak. Let’s call it the temptation of the technocrat.

Kevin: It reminds me of what you have talked about, a lot of our foreign policy is actually dictated not by the military or administrated by the military, but by the U.S. treasury and how we control the flow of funds through SWIFT or just access to the liquidity markets.

David: (laughs) Again, we have our foreign policy and most people do think about that best expressed through the State Department, but you’re right, and if you follow Juan Zarate’s argument in his book, Treasury’s War, that is really what you have in motion. My friend who was in Saudi Arabia working for the Treasury Department was actually appointed by Juan Zarate, again, back to appointments versus elected leadership, and played a very critical role in that country for a good seven-year period, and I think was probably more effective there in Saudi than the State Department.

But the underlying issue here has been described by academics, and it has been described by practitioners. When you get into this diplomatic role or this appointed role of power as an independent agent or agency, you can be described as an over mighty citizen. Does that make sense? An over mighty citizen. And it sounds a little bit like, if you go back to 1945 when George Orwell was writing his book, Animal Farm, all animals are equal, but some animals are more equal. And that is kind of the sense that I get, that a technocrat see themselves as a more equal animal.

Kevin: And you know, when you see that, you’re talking about more equal than others, I think about people who work eight hours a day, five days a week, for a certain amount of money. There is scarcity of money, a limited amount of money. And then you have another group of citizens – you brought up the citizens, over might citizens, that can print money out of thin air to the tune of $183 per head, per man, woman and child in America every day, to smooth out markets, or whatever. Those are still just citizens, aren’t they? They are not elected officials. This is a power that I haven’t been asked if they could have.

David: Yes, you are referencing the QE-4 which is in motion now with that 60 million figure just divided by 327 million citizens here in the United States. Yes, that does give us the rough cost of what the current initiative is. There are other initiatives, so there is more money involved, but these are people like you and me. They are citizens who really stand outside the normal legislative process, and in some instances they create rules and laws which carry the same consequences if we ignore them, as if they were legislators, as if they were determining the law of the land.

In other words, these are agencies which have the power to constrain, they have the power to coerce, by a statute, by the rules that they create, as if they were elected, as if their rules or laws followed a normal legislative procedure. And here is the rub. This last aspect is not true. In the process of delegation – you have the executive, you have the legislative, you have the judicial branches – government has ceded power and has ceded authority to the over mighty citizens to do what they, the branches of government, were originally mandated to do by framers of the constitution, again, two-thirds of which were elected to represent us. Remember, the judges are not elected at the highest level.

I think central banks fit this bill and they are in that category of the over mighty citizen. I think, as we explore on our commentary, a lot of the monetary policy critique that we have comes from the perspective of seeing a mandate which was originally implemented 106 years ago, and that mandate continues to grow, it continues to creep beyond the original dictates of the Federal Reserve Act and facilitate what, ultimately to us, is destabilizing to the financial markets, like we talked about last week with that Minsky instability thesis, again, where what is meant for good doesn’t always end with good things.

Kevin: Many people would look back at the Revolutionary War and see a different reason for the war, but a big part of the war was a fight against the Bank of England, the debt that England had built up, that it was actually moving over to the citizens of this new colony system over in America. A number of the patriots were vehemently against having a central bank here in America because of this over mighty citizen problem.

David: Yes. And just like we hear from the revolution, the tag line, taxation without representation, this is a point that was made over and over again in Paul Tucker’s book, Unelected Power, you’re talking about legislation without representation. In the case of the Federal Reserve, in that instance it was a very practical issue. You had problems of liquidity that emerged following the 1907 market panic, and there was a drain of liquidity from the New York financial markets to San Francisco.

You might recall there was a massive fire in San Francisco about that time, and the rebuilding of the city required a lot of liquidity . So it left bankers in New York scrambling for an improved means of managing liquidity. First they came up with the Aldridge-Rieland (sp?) Act, and that was one of the first run at it that allowed them to create the National Monetary Commission, and then finally, a few years later they had the Federal Reserve Act which gave birth to the Federal Reserve, our central bank.

Kevin: And they had to sneak that in, if you recall. They snuck the Federal Reserve in on a Christmas holiday when there were just a few guys there to vote.

David: Yes, exactly, because in 1911 legislation was put in place, but there was no political will to actually give birth to the Fed. There was a pretty big struggle there. And by 1913 they did get it done, but as you say, it narrowly passed. Most of the legislators who were slotted to vote against it had already headed home for Christmas, both sides of the aisle were thinly represented, and yes, it created one of the great delegated powers of the 20th century here in America.

That’s not the case if you want to go across the pond, the Bank of England, the Swedish Riksbank, both preceding our central bank, they have a history back into the 17th century and they had inspired Alexander Hamilton’s views on central banking, on centralized control. He was kind of the boy from Nevus (sp?) who was forever and anglophile, he loved the Bank, of England, affectionately known as the Old Lady of Dread Needle Street, and he loved that old lady.

Kevin: And Andrew Jackson hated the same old lady of that street, so we had earlier iterations of central banks where they tried to get these things through, and the populist movement, or whatever you would have, people just said no.

David: That’s precisely right, Andrew Jackson, and kind of an expression of populism. We had earlier iterations of the Fed. We had two earlier central banks, both of which were allowed to go the way of the dodo bird. This populism crushed them both. And in those earlier iterations, it became clear to voters that both the first and the second U.S. central banks were not adequately serving the common good, or the greater good. And I think it is noteworthy that during periods of populism there is greater scrutiny about what is considered essential to governance, and what is considered excessive interference, maybe even what is considered inappropriate in terms of – how should we say it – being one-sided in the benefits that it confers.

Kevin: Let’s look at that, because the Federal Reserve is like anything else, it starts small and it grows and grows and grows, these unelected citizens that have too much power. It grows to the point where you can’t shrink it anymore. Originally, the Fed had two mandates, did it not?

David: Yes, that’s right. To be precise, it was a one-mandate institution until 197y when that second mandate got added, and it was really because of a lot of conversation that started in the 1940s following the employment act of 1946. So 1913, in the case of the Fed, now we have two mandates. As I said, the first one was price stability, then in 1977 maximum sustainable employment became the second mandate, and they amended the Federal Reserve Act to include that in the 1970s, and they can use any monetary policy to get those things done – price stability and maximum sustainable employment.

Today, following the global financial crisis there are blurred lines between monetary policy and fiscal policy. You have debt commitments and the price of debt being established by the Fed, and you really can’t hardly tell who is who between the Treasury and the Fed in terms of the roles that they originally played. But the Fed mandate has now expanded. It expanded to banking supervision. And again, following the global financial crisis we have macro-prudential financial system management.

And the macro-prudential piece – again, it is just this migration, slowly but surely the idea of price stability, and that, too, has sort of morphed over time. It once was just consumer prices, that is, the inflation question, and that was the focus. And now, it’s not just consumer prices, but in terms of “price stability” it is as if they have adopted asset price stability or market management as an unofficial mandate.

Kevin: That’s why the stock market is so completely comfortable with the Fed having their back, because at this point the Fed has turned that into their own mandate.

David: That’s right. So now the financial market question about price stability, in many respects, is being ruled by the Fed, and it pertains not to the currency stability as originally understood back in 1913, but with stabilization of asset prices, kind of like the Greenspan put. And has you suggested, Kevin, it is just something that underscores confidence among speculators who ultimately feel like there is only upside, no downside, because the Fed has their backs in terms of asset price stability.

Kevin: It amazes me that we have slowly accepted the fact that our dollar can lose 2-3% of its buying power per year, and that’s a good thing. That inflation stability. I would think, and we have talked about this before, zero is the number we should really be shooting for. It would be nice if our currency could actually hold a buying power. And now we are told that they are working to a 2% inflation rate. That is what their goal is, to have the dollar lose 2% of its buying power per year, and they tell us that is a good thing.

David: It comes back to something very basic. What are they managing? If they are managing price stability, what are they managing? Is it a number? Is it an ideal? Or pragmatically, are they managing us? Because there is now a general acceptance of inflation targeting. That is anything but consistent with the original idea of price stability. But as long as inflation remains below the liminal level, that is, what some people call subliminal, that is, the range at which we as ordinary citizens cannot, or do not, detect it. And maybe it’s a good thing. We don’t understand it, but we can certainly detect it.

You and I know when there is inflation. But what they are trying to do is twist the understanding of inflation such that we no longer have concerns. And if we don’t have concerns, then our behavior doesn’t change and they can get away with doing what they do, managing an inflation target as a part of that “price stability mandate.” What are they managing? They are managing us. They are managing us when they jump around from CPI, to core inflation, to chained versus unchained, the PPI, the PCE – these are all measures of inflation and by the end of this litany of measures you say to yourself, “I don’t know what we’re even talking about.”

Kevin: Yes, they are continually managing perception by confusing us. Let’s face it, they are trying to confuse the audience. Again, this goes back to, “Who made you boss? I don’t remember electing you, I don’t remember voting for you.” And that they are saying is, “We’re the experts. Trust us.”

David: So acceptable inflation is not zero. It is not less than zero. In the 19th century we actually had periods of huge economic growth and a deflationary monetary contraction in play. It is really now today is, any positive number that the Fed can get away with. It is any number that does not negatively impact consumer behavior.

Kevin: And keep the stocks rising, right? You said price inflation. Keep the stocks rising. If they are raising asset prices and continue to hold that and everyone knows that the Fed has their back, they are probably more likely to accept a little bit of an inflation, or even a little bit of instability in other areas, as long as their 401k looks like it is going to make money thanks to the Fed.

David: That’s right. So that is that conflation, or confusion, of what price stability means. At the same time asset price inflation then melded into that Fed mandate, for price stability, and the implication of financial market instability which comes when you have the opposite. Here is the key. This is really what I’m kind of getting at. When you promote economic growth via credit growth, which is our current addiction, you must by necessity become more sensitive to asset price because any decline in asset prices upsets the apple cart.

Again, what is the context we have here? We have an over-leveraged world where you can no longer afford to have oscillating prices. You have the over-leveraged individual, the corporation, bank, even government, the balance sheet issues, where when assets shrink, if you have asset prices shrink relative to liabilities, you have a big, big problem. So now all of a sudden when you look at what the Fed has become in terms of managing “macro-prudential” issues, macro-prudential management, what we are talking about is controlling a business cycle, smoothing it, and becoming more and more pro-cyclical with their policy choices. You can even describe it as their mode of operation, or credo, as extend and pretend.

Kevin: We were talking about elected officials, but we do have an elected official who is asking for some of that money. Trump had tweeted that he wanted to see negative interest rates, he wanted to see the Fed loosen up quite a bit, and we’re seeing that now in asset prices rises in the stock market. We’re above 28,000 on the Dow. So obviously, the Dow loves having a little bit more of that money.

David: Oh, absolutely. So there are these broad issues of governance. We have rules and we have responsibilities which are not a part of the original legal framework, but pragmatically have become a part of the activities of this independent agency we know as the Fed. And today it feels a little bit like central banks are almost like the zoo-keepers of the credit world. You have to feed the beast. You have to feed the leviathan. You keep them fed, you keep them healthy, you keep them happy.

Kevin: In the old Hebrew text, the Old Testament, Leviathan is seen as a chaos monster – large, undefeatable, and ultimately it brings chaos. Just the very opposite of order and a creator. It reminds me, Dave, do you remember someone that we have both read and actually had on the commentary, Robert Higgs? When he wrote the book, Crisis and Leviathan, one of his main points was this this leviathan just continues to grow. It doesn’t really shrink.

David: That’s right. I think that is a must-read for anyone who has not seen it. Robert Higgs, Crisis and Leviathan. I think it was Cambridge University Press, if I recall correctly. He is not covering the issue of delegated powers of unelected over mighty citizens. That is not his point. What he is recounting is the ratchet process whereby the backdrop for greater intervention and involvement by government, and in this case, government-created agencies, springs to life in the midst of crisis and very rarely recedes when the crisis is past. Thus, with each successive period of stress and strain, the cycles of life and the markets and things like that, you know what you end up with. You have larger government there which remains even after they were created to solve the temporary. Now you have the enduring issues of governance and control, even though the justification was just kind of a temporary fix.

So what was temporary becomes part of the permanent framework, largely through the delegation of power to independent agencies. “We need to get an expert in on this. What do the experts say? This is my area of expertise, I’m just a legislator. I’m just a this or that. What does the expert say?” Our minds were opened after the New Deal to a process for an even broader range of delegation to occur. But here today we have the interplay between the capital markets, the credit markets, the scope of government, and now this facilitating role which central bankers play, which to me is just utterly fascinating.

Kevin: I look at the Constitution. If we go back almost 250 years, at this point the Constitution doesn’t look the same way it did when it was written before. Actually, the Constitution was written so that these leviathans could be contained in a cage, that they would have limited growth. At this point, it seems that the cage doors have been opened.

David: The heart of the issue from the standpoint of political science is whether such delegation is appropriate, if it is workable. If you go back to Madison, if you precede him with Montesquieu, you have representative government, a balance of power, three parts of government. These are, again, elected representatives under the rule of law for aspects of the Constitution. One of the issues of legitimacy remains in terms of mandates that are given, results that you see flowing from the operations of government. To me, this is really at the heart of this delegated issue. Can you even have a representative government when you have laws that are being made that nothing to do with elected officials?

Kevin: What is striking is, this book that you are reading by Paul Tucker – Paul Tucker is a technocrat, he admits that himself. This is a guy who has been operating as an over mighty citizen himself. Now he is writing a 600-page book saying, “Hey, this thing has probably over-reached and now it needs to be controlled.”

David: I get the sense when I read through Paul Tucker’s book, Unelected Power, that as a veteran central banker from the Bank of England and the Bank of International Settlements in Basel, Switzerland, and now he is working as a Fellow at Harvard’s Kennedy School. He is the chair of Systemic Risk Council. I think he sees the over-reach, and I think he wants a well-defined role for the over mighty so that the roles are not ultimately eliminated or restructured back toward total obscurity.

There is a case to be made that our central bank community has gotten off the leash, and unless they voluntarily put themselves back on the leash, with a well-defined contribution, with a clear mandate, with the legitimacy of the power they have been given, maybe even that power that they have taken, maybe that legitimacy comes into question. And his book is first and foremost an apology for unelected power. Not a justification for delegated dictatorship, but just an apology for a technocratic contribution, consistent, he believes, with democratic and representative government.

But as I said earlier, this is where it gets really interesting. During periods of populism, there is greater scrutiny of what is considered essential – essential to governance, essential, or perhaps even what is considered excessive in terms of interference in the natural processes of the market economy, banking, of human interaction. And Tucker, it would seem, would like to govern the discourse on the topic and I think he raises some great points. And in the course of 550 pages, I wish it was a little shorter (laughs).

Kevin: I think it is striking, too, that this is coming from a European. Europe is known for being run by technocrats. This is not a book being written by a U.S. citizen. This is a book that is being written by a man who is not just critiquing the Federal Reserve, but he is also looking worldwide at this over-reach.

David: Right. If you look at its latest iteration there in Europe, you have this vast technocratic non-representative government of administrative elite there in Brussels. If you look back at the history, there is a long history in the U.K. and in Germany and in France of technocratic administrators, going back several centuries. These are not new issues, but describing what is legitimate, what is not legitimate, what are the rules of the road, there are unique applications as the modern era chooses greater and greater professional specialization.

Look at our academics today. Look at our educational system today. You are forced to specialize, choose one area where you know something, but then that leaves a broad array of other things where you don’t know, and so you have to delegate. So we all delegate. We do this on a daily basis, a weekly basis, and our government also delegates to experts. And so I think this is very appropriate in terms of the conversation. What are we delegating? Why are we delegating it? Is it appropriate to delegate? And are there ways of maintaining accountability and transparency with these processes that are delegated?

Kevin: There would be some, and I would probably be included in this, that would say, “Just get rid of the Fed. Get rid of these guys. Let’s start over. Let’s go to real money where everybody is playing on the same type of playing field, whether it is backed by gold or some other commodity that there is equal access to but no one can print it out of thin air. That is what I would say, but I’m thinking probably, from a practical standpoint, Tucker is writing this book to say, “Okay, that’s probably not going to happen. What are the boundaries?” If we’re going to have a central banking system, how far can they reach?

David: Well, exactly. That’s why I think he wants to define what is the discourse, and do we understand the nuance so that we can continue to legitimize and justify why we have a technocracy today? And what are the boundaries that ensure legitimacy for technocrats going forward? How do these agencies avoid political capture, where basically, you have an alliance with a particular constituency. You are basically working for that constituency, or a deep-seated alliance with a particular political party where in your role as head of an agency, you are basically like an ideological mafia and you get to operate as such, but under the protection of the law. So it is a really important thing to recognize the role of a technocrat, and how do they do that and avoid political capture?

Again, this comes to mind particularly in the case of central banks. How do you avoid moral hazard? This has allowed a conversation that has led us to a series of crises, and I think we’re getting closer and closer to the next one, again, where central banks have promoted a world of perfect peace and calm in the market, and the unintended consequence is, again, going back to Minsky’s Instability Thesis, the more stability they create, the greater the instability they ultimately create as well, and so the scale of stability today, also the mirror image of that is the scale of instability tomorrow.

And this is something that I think we also have in mind, in the context of a freefall in the stock market, or what have you, does the legitimacy of government ever come into question when you have delegated power, for instance, the Federal Reserve, sitting on a less than ideal outcome? The flip side of this, is this one of the reasons why politicians like delegating power? Because one of the key benefits for those that are elected is that it allows you to closely identify with successes and then scapegoat in the event of failure. “It’s not my fault. This is the person. We need to elect somebody who will do a better job.” It always put the politicians on the side of the popular without having to take responsibility for failures. In that sense, does delegation remove our ability as citizens to maintain that accountability structure with our elected officials?

Kevin: Aren’t we seeing that to a degree, because Trump comes out and just vocally criticizes the Fed and then two weeks later he will come back out and say, “I love these guys, I love these guys. They’re doing the right thing.” When he was campaigning for president he was very concerned about the Federal Reserve and now he is wondering why they are not giving more money. So there is a distance. He can distance himself and continue to maintain political credibility, so to speak. But can we say end the Fed, or are we just too deep in this?

David: Yes, I think we have to go beyond that. To adequately critique today’s monetary policy we cannot simply say end the Fed. It seems like a form of elegant solution in its brevity, but it is one thing to critique your interventionist monetary policy, and I think there is plenty of room for that, particularly in an era that has witnessed very unconventional policies in Europe, and in America, and around the globe. There is a broader context for unelected power and central banks that fit into that.

So when we look at what we have in the markets today, we’re reminded, we see the fragile nature of our financial system when the repo markets have been essentially nationalized. As we talked about last week, 11½ trillion dollars’ worth of cumulative intervention to keep the repo markets alive, but the bigger picture is how we arrived at this delegation. We asked them to do this. Dysfunction is now normal to us. And what was the justification, and is it still justified, this sort of delegation, in the first place?

Kevin: It goes back to, do you shrink the leviathan? It doesn’t seem that you can. Four trillion dollars sounded incredibly large 10 or 11 years ago when we had the global financial crisis. Now you’re talking 11½ trillion dollars. We have this QE going on again in a non-crisis period of time. Going to these boundaries that Tucker is talking about, Dave, we have had other central bankers on the show and it has been incredibly enlightening. I’m just wondering if we shouldn’t have Paul Tucker on and have him explain to us why he wrote a 600-page book.

David: Yes, I think to discuss the quest for legitimacy in central banking, and the quest for legitimacy in our regulatory state, and to be honest, it is not the most comfortable conversation for me, but it is an important one. It is one with lots of nuance. I’ve got some things I would love to share in terms of the markets, but this is a pretty quiet week for the financial markets with the holidays anyway, so I’ll just hold those for next week. It makes me think, here we are at the intersection of monetary policy and fiscal policy, and the central bank is being asked to kind of sit the fence and govern both to a degree, at least perform an enabling function where we can’t afford what we’re spending on the fiscal side, but that’s not a problem because our central bank will make it all affordable. So we have Medicare, Medicaid, Social Security. Add defense spending and interest on the Federal debt, and that adds up to 112% of our current federal tax receipts.

Kevin: In other words, we’re spending more than we’re making. Let’s face it, every household has to come up with how to spend less than what they bring in on a monthly basis. What you’re saying is, we’re at 112% of what we’re bringing in. So, we need the Fed, right? The Fed will make it all better.

David: Exactly. This is where, again, the lines are obscured between monetary policy and fiscal policy because on the one hand, the only way that we can make this work is through controlling the interest component. We were at 103%, those five budgetary line items, just 15 months ago. We were at 95% of total tax receipts two years ago. And if they can control interest rates, or take them negative, then it all works out, no big deal, because the key variable line item interest on the national debt can be managed to method.

Again, what haven’t we included? We haven’t included agency budgets, we haven’t included the expense of running the government outside of Medicare, Medicaid, Social Security and defense. But that is 112% of tax receipts for (inaudible) 39:14. The big one, yes, I grant you that. Does that argue for shrinking government back to what we can afford. As a citizen, I might as that, and you might ask that, but if you are talking to someone in government, it’s an absurdity. To me, this is how gold fits into the picture of delegated power, monetary policy and those mandarins determining what is best for us, and ultimately performing an enabling function through fiscal policy initiatives as well. This last week the Financial Times ran an article, the title of which was “Gold Is Looking More and More Attractive.” The article detailed this point – Rising U.S. liabilities for entitlements could undermine the dollar. I read that and I think, “You think so?” The answer, to me, is obvious. How did we get here and where do we go from here? Power struggle? We have what was the end of the first central bank and the second central bank here in America as a result of populism. We had rising populism around the world. And distrust of government, so some degree, when populism is in play. What does this look like for the financial markets? You have a massive power struggle. I wonder how the general public responds to the next crisis, where again, as Robert Higgs would argue, that is where most agencies see their opportunity to intervene and ratchet to an even more significant role, never to cede that role in the future.

Kevin: So if the listener is wondering whether this system of paying more than what you are taking in will work, run by a crew of over mighty citizens, if a person is asking that question, does it work or not, they probably ought to hedge on the other side just in case it doesn’t. And what you’re saying is, Financial Times, even, is thinking gold.

David: (laughs) Gold is looking more and more attractive, the article details. And that is the main point. U.S. liabilities and entitlements could undermine the dollar.

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