Friday, July 20, 2018

From the rise of the Fed to Donald Trump... 100 years of Populism may find us full circle from central banks to the return of the gold standard

President Donald Trump has not been shy about speaking out his thoughts on Fed policy, and indeed has broken a great deal of tradition by the Executive Branch in recent years not to interfere with the 'independent' central bank.

Presidents never, or rarely, comment on monetary policy or currency market moves for that matter (ex, the hackneyed meme “a strong dollar is the best interest of the United States.”) 
President Trump hit them all in this interview, from the Fed to the Euro and Chinese RMB (“dropping like a rock”).  It doesn’t surprise us. 
Recall our March 21st post, The Biggest Risk At The Fed.But this doesn’t concern us as much as the Fed’s independence.“Just let it rip”That is we are worried more about the freedom from White House pressure and interference in conducting monetary policy than getting a few bps wrong on the Fed Funds rate.   This is especially true and relevant given the strongman tendencies and  lack of respect for institutional norms of the current president.Here is Larry Kudlow, the president’s new chief economic adviser: Kudlow said of economic growth in the U.S., during a more than hour-long interview Wednesday on CNBC. “The market’s going to take care of itself. The whole story’s going to take care of itself. The Fed’s going to do what it has to do, but I hope they don’t overdo it.”  – CNN– Global Macro Monitor,  March 21, 2018  - Zerohedge
Yet while there have been a number of times in the central bank's 105 year history where administrations have butted heads with Federal Reserve, for the most part the bank has remained the authoritative body for all monetary policy.

What is perhaps most interesting is that the creation of the Fed occurred during the nation's last great populist movement (1900 - 1920), and ironically during the same two decades 100 years ago in which we are experiencing a revival of that same movement.  And where the original idea for our current central bank took place after a banking crisis in 1907, the rise of the latest populist movement appears to have also occurred almost exactly 100 years later following the Credit Crisis of 2008.

In fact you can almost pinpoint where this movement started in the month's long protests from what would become Occupy Wall Street, and where this would subsequently evolve into the TEA Party movement, the Ron Paul Revolution, and the rise of Donald Trump and Bernie Sanders during the 2016 election cycle.  But at the core of both of their ideals (Make America Great Again and the need for Socialism to deal with income inequality) is the fact that the underlying reason for where we are at remains a monetary system that is based on credit versus the tangibility of a gold standard.

And in a new analysis put out here on July 20 by Bank of America's Michael Hartnett, the banker asserts that the end goal of this round of populism is a full circle return to where the central bank ends, and the gold standard reemerges.
In his latest weekly Flow Show, BofA's Michael Hartnett touches on a familiar topic: the rise of global populism and where it ultimately ends: "the end of central bank independence", which he calls the ultimately populist policy.  
Confirming something we have said since inception and explaining - once again - the advent of such phenomena as Brexit, the European backlash against immigrants, and of course, Donald Trump, the BofA strategist writes that "central bank policies of QE, NIRP, ZIRP have unquestionably exacerbated the gap between Wall St & Main St in past decade." 
With the great divide between the haves and have nots continuing to grow - despite the election of numerous populist leaders in nations around the globe, most recently Malaysia, Austria, and Mexico - BofA warns that the inability of monetary & fiscal policy, global synchronized recovery, and record corporate profits to create sustained wage growth, investors must discount more protectionism, redistribution & ultimately debt monetization via central banks in coming years... all trends that a recession would dramatically accelerate. 
Hartnett then present the one asset class which he thinks will be the ultimate winner in the coming class wars:  gold is the secular beneficiary of the War on Inequality - Zerohedge
The two eras in American history where income inequality were at its greatest were both periods of time when the Fed conducted monetary policies of cheap credit (1920 - 1929 and 2009 - 2018).  And while the result for the first was a catastrophic Depression and a near overthrow of the government, the second result still remains to be seen unless the nation's monetary system reverses its course from one where debt and credit is the foundation to that of a gold standard where purchasing power is returned to the people.


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