America’s “Unhinged Monetary Politburo”

Left: FOMC Chair Powell answers a reporter’s question at the September 18, 2019 press conference. Right: Chair Yellen responds to questions during the June 17, 2015 FOMC press conference. Photos courtesy of the Federal Reserve.

In David Stockman’s Contra Corner, David Stockman unleashes an epic fusillade against the Federal Reserve monetary policy mismanagement, writing:

These people have to be stopped!

We are talking about the nation’s unhinged monetary politburo domiciled in the Eccles Building, of course. It is bad enough that their relentless inflation of financial assets has showered the 1% with untold trillions of windfall gains, but their ultimate crime is that they lured the nation’s elected politician into a veritable fiscal trance. Consequently, future generations will be lugging the service costs on insuperable public debts for years to come.

For more than two decades these foolish PhDs and monetary apparatchiks drove the entire Treasury yield curve to rock bottom, even as public debt erupted skyward. In this context, the single biggest chunk of the Treasury debt lies in the 90-day T-bill sector, but between December 2007 and June 2023 the inflation-adjusted yield on this workhorse debt security was negative 95% of the time.

That’s right. During that 187-month span, the interest rate exceeded the running (LTM) inflation rate during only nine months, as depicted by the purple area picking above the zero bound in the chart, and even then by just a tad. All the rest of the time, Uncle Sam was happily taxing the inflationary rise in nominal incomes, even as his debt service payments were dramatically lagging the 78% rise of CPI during that period.

Inflation-Adjusted Yield On 90-Day T-bills, 2007 to 2022

The above was the fiscal equivalent of Novocain. It enabled the elected politicians to merrily jig up and down Pennsylvania Avenue and stroll the K-Street corridors dispensing bountiful goodies left and right, while experiencing nary a moment of pain from the massive debt burden they were piling on the main street economy.

Accordingly, during the quarter-century between Q4 1997 and Q1 2022 the public debt soared from $5.5 trillion to $30.4 trillion or by 453%. In any rational world a commensurate rise in Federal interest expense would have surely awakened at least some of the revilers.

But not in Fed World. As it happened, Uncle Sam’s interest expense only increased by 73%, rising from $368 billion to $635 billion per year during the same period.  By contrast, had interest rates remained at the not unreasonable levels posted in late 1997, the interest expense level by Q1 2022, when the Fed finally awakened to the inflationary monster it had fostered, would have been $2.03 trillion per annum.

In short, the Fed reckless and relentless repression of interest rates during that quarter century fostered an elephant in the room that was one for the ages. Annualized Federal interest expense was fully $1.3 trillion lower than would have been the case at the yield curve in place in Q4 1997.

Alas, the missing interest expense amounted to the equivalent of the entire social security budget!

So, we’d guess the politicians might have been aroused from their slumber had interest expense reflected market rates. Instead, they were actually getting dreadfully wrong price signals and the present fiscal catastrophe is the consequence.

Read more here.