Fed independence is already dead: Trump will get his monetary bailout

Telegraph

18 hours ago

Central banks have no God-given right to independence. Nothing in the US constitution authorises the US Federal Reserve to act as a shadow government, and nor should it have such powers under any theory of accountable democracy.
One can admire the gentlemanly altruism of Fed chairman Jay Powell, and one can deplore the motives and methods of Donald Trump, while also conceding that Trump is accidentally right on the perils of overmighty technocrats. The Fed has slipped its leash.
It is not alone in that. Central bankers have been calling the shots across the advanced democracies over the last 30 years, elevating this priesthood to the status of Nietzschean rock stars.
Sir Paul Tucker argues in his exposé, Unelected Power: The Quest For Legitimacy in Central Banking, that they have become the 'third great pillar of unelected power', akin to the judiciary but without the constraints.
The Bank of England veteran says the fraternity has strayed a very long way into 'quasi-fiscal' intervention, picking winners and losers in what amounts to a revolution in the system of government.
There is a case for zero rates and quantitative easing in a crisis, but these policies were pursued for too long and have led to a vast transfer of wealth from wage workers to the owners of capital. The central banks unwittingly became agents of extreme inequality.
Trump has purged the top echelons of the US military, the CIA, the NSA, the FBI, the justice department and every agency that stands in his way. It would be out of character if he spared the Fed.
His war of words against Jay Powell is in full flight: 'Low IQ ... a very stupid person, actually … terrible … a major loser … Mr too late ... a total and complete moron.'
Needless to say, Trump's determination to get his hands on the machinery of interest rates and bond purchases is an admission that his 'big, beautiful bill' is pushing the limits of US debt sustainability.
The Congressional Budget Office (CBO) says the draft will add $3.3 trillion (£2.4 trillion) to deficits by 2034, mostly from rolling over the Trump 1.0 tax cuts that were never affordable in the first place.
The US is in a runaway debt compound trap. The budget deficit is 6.7pc of GDP at full employment. The next recession will push it into double digits.
Interest costs were 1.6pc of GDP in 2018, during those halcyon days of free global money. They are 3.2pc this year and rising fast. 'The federal budget has become highly sensitive to interest rate dynamics,' said James Knightley from ING.
The US is also about to breach the Niall Ferguson rule: that great powers go into terminal decline once interest costs exceed military spending as a share of GDP.
Net public debt was 54pc of GDP at the turn of the century. It is now 121pc, rising by two points a year even in good times, and heading for 140pc in short order.