Powell Must Be Jealous

As the government debt/debt ceiling issue gets all the headlines, poor Jerome Powell, the head of the Federal Reserve, must have been feeling left out. The Fed has nothing to do directly with national debt so Congress and the President are getting all the attention. Sort of like you getting jealous when your brother gets a spanking. 

Powell and his monetary genius friends told us last week that they can save the day. Reminds me of Micky Mouse flying in to save Minnie in the nick of time. Except in the case of these famous mice, it usually works. Mickey really is the Mouse!

Powell is no Micky Mouse. But he thinks he is. This may take a bit of explaining so please pour another gin & tonic.  Don't forget the lime. When the government has a deficit it means it has to borrow by printing up brand new shiny government bonds. Okay, they aren't shiny but they are new. 

This borrowing process usually works until the times when the government's debt gets so large that people lose trust in the government's ability to stand behind the bonds. That is, you get a nice new bond and a promise of two things -- each year you will get an interest check and when the bond matures you get the principal back. But what happens when you lose faith in the government's ability to pay back?

You wouldn't loan money to Uncle Charlie if you were pretty sure he was not going to pay you back. The same goes for loans to Uncle Sam. All this razzamatazz with government debt and debt ceilings calls into question the government's ability to pay us back. So, of course, we would be reluctant to buy government bonds. 

How do we get to the Fed and Jerome Powell from all this? The answer is that the Fed has a "money printing press." Wouldn't you love to have your own dollar printing press? Well, Powell has one. And that means he can play Micky Mouse saves the day. How?

Suppose none of us want to buy the government's bonds. We think they stink like seaweed. We think we won't get our money back. Well, guess what? If you had a printing press, you wouldn't care about being paid back. So the Fed and Mr Powell will crank the money machine a bit and buy some of those stinky government bonds. Mr Powell will go to Pelosi and say....are you having a nice day dear? How much money do you need? Just say the word and we will buy trillions of dollars of those nice new bonds you are cranking out. Don't worry about selling them to the suspicious and cranky private sector. Old Jerome will buy them all. No questions asked. 

Wow. That sounds really cool. The government incurs a debt and we don't have to worry a bit about it. Pelosi + Powell. Go team. 

What could go wrong? For one thing, it is pretty much illegal. The Fed is supposed to be an independent institution. It is not supposed to have financial handshakes with Congress. Of course, Jerome and friends are pretty sneaky and they can make it look innocent and legal. 

What else could go wrong? Let's think about the incentives created. Mom, I gambled away my allowance last night. Oh, don't worry honey, here's more money. Please don't gamble again. Okay mom, sure. Thanks. Right! If the Fed steps in and buys those government bonds this time -- what about next time? What's to stop the process?

And that leads us to the third problem with the Fed's bailing out the Congress. It means you get a double whammy of stimulus. You get the government spending stimulus and then you get a huge monetary stimulus. Wow. Wave after wave of stimulus when the economy already seems to be healing. That cannot spell anything good for inflation, interest rates, and whatever policy has to be enacted to offset all that.

Powell is not Micky Mouse. His rescue is fake. His rescue will make us all worse. We don't need Micky Mouse. What we need are leaders in Congress and at the Fed who understand economics. Perennial huge debt doesn't work for you, me, or our government.  Instead try reasonable debt. No debt ceilings. No monetizing the debt. No roller coaster economy. Simple.