Powell Hurts Own Cause, Feeds Budget Hawks By Parroting Deficit Myths

At this point, you’d forgive Jerome Powell (and most of his colleagues) for being frustrated with Congress.

After all, the Fed has effectively guaranteed that government borrowing costs will remain low in perpetuity, and while yield-curve control has been shelved for now, there is little question that the central bank would employ it if necessary to ensure yields on the bonds the US chooses to issue to do not rise beyond some acceptable, pre-set level.

Note the emphasis on the word “chooses” there. There is nothing that says the US must issue bonds to “cover” budget shortfalls tied to government spending. That is a choice, and the interest rate the US pays on those bonds is not, contrary to popular belief, determined by China or Japan or any “bond vigilantes” if the Fed doesn’t want it to be.

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Powell obviously knows this, which is what makes it maddening when he pays lip service to the idea that, at some undetermined future date, the US will need to get its budget house in order.

For the duration of the COVID crisis, Powell has been stuck somewhere in the middle — arguing on one hand for massive fiscal stimulus accommodated by the Fed, while inserting what amount to contradictory footnotes during speeches and congressional testimony that nod to the imagined necessity of reducing deficits and tackling the national “debt” later on down the road. (It’s not “debt”, by the way. You can’t properly “owe” a sum denominated in a currency you print. That doesn’t make any sense.)

While the overarching message is abundantly clear (more fiscal stimulus, accommodated by the Fed, is not only desirable, but entirely necessary), those footnotes do not help. They nod to an eventual tapping of the fiscal brakes, even as the Fed promises to keep riding the accelerator. Powell is tacitly condemning himself (and his successors) to the same reality central banks have faced since the financial crisis. That is: Shouldering the entire burden of the economy against the grain of fiscal retrenchment.

During remarks to the National Association for Business Economics on Tuesday, Powell pounded the table some more on fiscal stimulus. To wit:

Taken together, fiscal and monetary policy actions have so far supported a strong but incomplete recovery in demand and have–for now–substantially muted the normal recessionary dynamics that occur in a downturn. In a typical recession, there is a downward spiral in which layoffs lead to still lower demand, and subsequent additional layoffs. This dynamic was disrupted by the infusion of funds to households and businesses. Prompt and forceful policy actions were also likely responsible for reducing risk aversion in financial markets and business decisions more broadly.

He went on to call the recovery “nascent” (one of my favorite adjectives, regular readers will note) before delivering a series of painfully obvious remarks about the outlook.

“There is a risk that the rapid initial gains from reopening may transition to a longer than expected slog back to full recovery as some segments struggle with the pandemic’s continued fallout”, Powell said, adding that “the pace of economic improvement has moderated since the outsize gains of May and June, as is evident in employment, income, and spending data”.

Since employment, income, and spending data pretty much covers everything worth covering, Powell’s remarks amounted to the Fed chair saying that economic momentum has now slowed, and may soon stall.

“The increase in permanent job loss, as well as recent layoffs, are also notable”, he added. As a reminder, permanent job losses are piling up, with the combined total for August and September approaching 900,000.

Powell then spoke in somewhat stark terms about what could happen if economic momentum stalls and stays that way.

“A prolonged slowing in the pace of improvement over time could trigger typical recessionary dynamics, as weakness feeds on weakness”, he cautioned, adding that “a long period of unnecessarily slow progress could continue to exacerbate existing disparities in our economy [and] that would be tragic”.

Yes, it would. And do observe Powell’s use of the term “unnecessarily”. Suffice to say he is not talking about monetary policy when it comes to what might cause the recovery to be inordinately lethargic.

Just in case he wasn’t making himself clear enough, he explicitly called for monetary-fiscal coordination, and said it’s totally fine if policymakers overshoot on stimulus.

“Even if policy actions ultimately prove to be greater than needed, they will not go to waste”, he said. “The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods”.

I imagine this is preaching to the choir for many readers, but for anyone not apprised, Powell is essentially just telling Congress to spend money — lots of it.

That’s because he knows, just like Janet Yellen knew, just like Ben Bernanke knew (when he patiently explained how money actually works a decade ago on national television), that everything the public thinks is true about debt, spending, and deficits is in fact totally fictitious — a lie sold to you by politicians.

And this is what makes Powell’s footnotes (as mentioned above) increasingly irritating.

At some point during Tuesday’s proceedings, for instance, Powell said the “federal budget is on an unsustainable path”.

That is a lie. There is no such thing as “an unsustainable path” for the US “federal budget” because there really is no such thing as a “budget” for a currency issuer. “Budgets” (or at least budget holes) don’t apply in any real sense to the US government. There can’t be a federal budget “hole” denominated in dollars, because the federal government issues dollars.

If Powell wants to make his point about fiscal stimulus, he should stop trafficking in this nonsense, because by paying lip service to what he knows is untrue, he is giving carte blanche to the budget hawks who are standing in the way (and will continue to stand in the way) of the very same fiscal stimulus he’s calling for.

And if you want to know what happens if that fiscal stimulus doesn’t materialize, well, just ask Jerome Powell, who said the following in the same remarks Tuesday:

Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth. By contrast, the risk of overdoing it seem, for now, to be smaller.

Right. Because unlike the federal government, households can become insolvent. Businesses can go bankrupt. And we should avoid that at all costs, considering that, through the lens of a currency issuer, the cost is actually nothing.

Now go think on that.

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