The Fed Plays Politics

www.americanthinker.com

In his July 4, 1832 veto of the renewal of the Second Bank of the United States President Andrew Jackson made these statements:

To acknowledge its force is to admit that the bank ought to be perpetual, and as a consequence the present stockholders and those inheriting their rights as successors be established a privileged order, clothed both with great political power and enjoying immense pecuniary advantages from their connection with the Government.

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Is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country? The president of the bank has told us that most of the State banks exist by its forbearance. Should its influence become concentered, as it may under the operation of such an act as this, in the hands of a self-elected directory whose interests are identified with those of the foreign stockholders, will there not be cause to tremble for the purity of our elections in peace and for the independence of our country in war? Their power would be great whenever they might choose to exert it; but if this monopoly were regularly renewed every fifteen or twenty years on terms proposed by themselves, they might seldom in peace put forth their strength to influence elections or control the affairs of the nation.

The Second Bank of the United States worked differently than the Federal Reserve, and Jackson spent a good amount of time railing against the fact the BUS sold stock to foreign investors -- something that cannot happen with the Federal Reserve, which only sells to American banks -- but his secondary point was absolutely correct; the bank was unaccountable to political pressures and had the power to influence and tamper with elections.

But Nicholas Biddle, the head of the Second Bank of the United States, refused to take the termination of his cash cow lying down. When Jackson removed U.S. funds from the bank, he raised interest rates, and since other banks borrowed from the BUS that meant interest rates across the country rose. Farmers and manufacturers were squeezed. The economic damage done by this was called "Biddle's Panic."

Biddle was trying to hurt President Jackson politically by crashing the economy.

Which brings us to the matter at hand: the Federal Reserve has quietly been doing very similar things, undoubtedly to influence the upcoming midterm elections. For example, it has been pumping up the money supply in an orgy of Qualitative Easing and has, up until now, refused to cut interest rates, which would stimulate growth. Increased money means increased inflation, and there is nothing at all Donald Trump can do about it. Unless the Feds change course -- something they have signaled they would do at their meeting happening right now -- inflation will continue. The war in Iran is being blamed, but in reality, it's the Fed that is causing this.

The Fed has signaled in the last quarter that it might end QE but not cut interest rates -- something Trump has hounded them to do for months, which they refuse to do out of concerns for inflation. But inflation is not caused by an "overheated economy" as the Keynesians at the Fed would have us believe, but rather by an increase in the money supply caused by the Fed itself, by and large. Yes, the war has triggered some price growth, but that will be temporary. Sadly, the real inflation we've seen is systemic and out of Trump's control -- exactly as the Fed wanted it.

Inflation was one of the central issues that brought the Democrats down in the last election, and I rather suspect Jerome Powell -- who has been at war with President Trump since Trump's re-election -- was pulling a Nicholas Biddle, trying to keep inflation rising so the Republicans take the blame for it and the Democrats win the mid-terms. With a hostile Congress, Trump will be finished, and so will all of his policies.

The public is still angry about inflation and is now blaming Trump. Polls show that the Democrats enjoy a sizable lead over the Republicans on economic issues. 38% of respondents to an Emerson poll said the problems with the economy are the top issue of concern. That economy is being hurt by Federal Reserve inflationary policy and refusal to lower interest rates at a critical time.

This is not about unemployment, which is fairly low (and it only rose under Trump because he kicked the freeloaders off the dole and they suddenly had to find work, thus putting them in the job market) nor is it about low wages, which have risen along with inflation, if a tad less. It's inflation that makes everyone think the economy sucks. And it is Jerome "Biddle" Powell and the board of the Fed who have been advocating for an increase in money throughout a period of growth.

People vote their pocketbooks. The Fed -- like Nicholas Biddle -- knows that.

So don't expect inflation to drop any time soon, even with the end of the war and the opening of the Strait of Hormuz. Only a portion of the inflation (like fuel costs) will drop -- the rest will remain high until the Fed reins in the money supply -- something they are not going to do for Pres. Trump.

Jerome Powell may be gone as head of the Fed, but he's refused to quit the board, and I have little doubt he's going to continue to act as a shadow chairman and do everything he can to thwart the incoming Kevin Warsh. And we do not as yet know where Warsh stands on these issues. After all, Powell was appointed Chair of the Fed by Donald J. Trump. Warsh is an avowed inflation hawk, but his idea of how to fight inflation may well be the same tired Keynesianism that has worked so poorly over the years.

The Fed continues to Biddle and the nation may well burn for it.

Image: Tony Webster