Among Donald Trump’s multitudinous sins, his stacking the Fed with even more clueless Keynesian money-printers ranks near the top; and, in particular, the appointment of Richard Clarida as Fed Vice Chair was downright unforgivable.
The man is such an incorrigible paint-by-the numbers monetary central planner that the Donald would have been better advised to randomly pick a name from the Bronx phone book. At least a plumber or cab driver would not have come to the Eccles Building barnacled with an academic career focused on a giant bit of nonsense called DSGE (dynamic stochastic general equilibrium) theory.
Indeed, we’ll take a monkey-wrench wielder over this professorial king of DSGE every day of the week and twice on Sunday.
After all, DSGE is essentially the conceit and folly that the blooming, buzzing mass of the $21 trillion US economy—-which is infinitely interconnected to the $85 trillion global economy through massive trade, capital and financial flows—can be reduced to quantity-based equations which reliably predict the future path of economic activity; and that the resulting macro totals measured by GDP and its components resemble a giant bathtub, which can be expertly filled to the brim via the interest rate pegging and fiat credit injections of the 12 monetary wizards who comprise the FOMC.
Not only that. Clarida is also one of the leading proponents of an academic humbug called r-star. The latter is purportedly the fixed short-term money-market rate consistent with both full-employment and stable inflation, and therefore effectively the policy northstar for monetary central planners.
Well, there wouldn’t be any such thing on an honest, price-driven free market. Short-term interest rate levels and the yield curve shape would be a function of infinitely complex supply and demand factors with respect to saving and investment flows. The resulting market clearing interest rate at any point in time, therefore, would be all over the lot and over the longer-haul would average out to noise, not some kind of golden constant.
By contrast, in the central bank fostered world of pegged, manipulated and falsified rates and financial asset prices, r-star is just a convenient fiction. It has no economic legitimacy or substance and was not “discovered” ala the natural rate of interest theory but merely invented concocted by a tiny cadre of academics and contract economists on the Fed’s payroll.
Moreover, as shown in the chart below, r-star is the very opposite of a north star guiding the way forward. It’s actually a tail-light that has been constantly redefined and manipulated for the purpose of justifying after-the-fact the twists and turns of the Fed’s massive intrusion in financial markets and systematic falsification of the price of money, debt and all other financial assets.
Yet in today’s central banker puzzle palace, this fictional, policy-tracking construct has become the excuse for claiming that r-star (r*) based money-pumping is obligatory because it marks the spot where the Fed’s Humphrey-Hawkins “mandates” on employment and inflation can be optimized.
You really cannot make this stuff up. Central bankers and their Wall Street acolytes have become so ensconced in nonsensical groupthink that the actually believe the fraudulent back-dating of their money-pumping actions shown below is, well, “the science” of monetary policy.
Indeed, the implication of the chart below is truly mind-boggling. The claim is that drastically slowing economic growth (red line) in recent years means that the requirement for investment capital has declined proportionately, thereby implying that the market would clear at a lower interest rate owing to excess savings.
For crying out loud, let’s try some double-entry bookkeeping. If the rate of output growth materially slows, so does the income growth it generates. Ipso facto, at the same savings rate there is no excess aggregate savings at all; and, if anything, central bank interest rate repression owing to this purported fall in r* would result in a diminished savings rate from diminished aggregate income, and therefore an aggregate savings shortfall, not a surplus!
Average r-star Estimates and Trend Growth for Four Economies
Richard Clarida is truly among the most mendacious of these r-star charlatans. He even claims to have been the first to introduce (in 2014) the concept of a “new neutral” for Fed monetary policy. That is, the utterly baseless claim that there has been a substantial decline in the invisible, immeasurable academic ether called r* per the chart above, such that before the crisis r* was thought to be above 4 percent but by Clarida’s lights is now closer to 1 percent or even less.