Trump Fed Nominee Judy Shelton Says "Yes" to 0% Interest Rates and "Yes" to Gold

-edited

In the race to zero and below, the Fed is way behind. Judy Shelton hopes to get there in one or two years.

Shelton Says Yes to Zero

Return to Gold Standard

In addition to wanting 0% rates, Shelton seeks a return to the gold standard and has written that central banks ‘are the world’s biggest currency manipulators’

Her Own Words

Please consider Judy Shelton in Her Own Words.

Monetary Policy

Ms. Shelton argues that central banks’ interest-rate moves cause economic disruptions by manipulating currencies in ways that affect global trade.

Curiously, she must think that 0% rates do not cause economic disruptions.

When asked in a recent interview with the Journal’s opinion page whether the Fed should cut interest rates now, she said, “The answer is yes,” a view that aligns with Mr. Trump’s recent public comments. She said, “When you have an economy primed to grow because of reduced taxes, less regulation, dynamic energy and trade reforms, you want to ensure maximum access to capital.

Monetary Stimulus

Ms. Shelton opposed the Fed’s efforts to stimulate the economy in the aftermath of the recession, arguing that the central bank’s low interest rates and asset purchases enriched the wealthy while putting everybody else at risk of a sharp increase in inflation or a new asset bubble. “It is ironic that concern for wage earners serves to justify money pumping by the Fed that ends up largely benefiting people who have hefty stock-market portfolios, especially at a time when “income inequality” is a major White House theme,” she wrote in a 2014 Journal opinion article published after then-Fed Chairwoman Janet Yellen had addressed Congress. “Perhaps one of our elected representatives on Capitol Hill can explain to Ms. Yellen that when the low-grade fever of perpetual inflation becomes a full-blown economic malady—when the next financial bubble bursts with horrible consequences for the real economy—average Americans will pay the biggest price.”

Once again this is peculiar because 0% interest rates also cause bubbles.

The Gold Standard

Ms. Shelton has repeatedly called for a return to the gold standard, a monetary regime that pegged the value of the dollar to the value of gold. That would make it impossible for the Fed to affect the strength of the dollar through monetary policy, she writes. “For all the talk of a “rules-based” system for international trade, there are no rules when it comes to ensuring a level monetary playing field. The classical gold standard established an international benchmark for currency values, consistent with free-trade principles.

Sorry Judy. You cannot peg the dollar to the price of gold. It does not work.

You can however, make the dollar redeemable in a fixed amount of gold as long as these conditions hold.

  1. The dollar is 100% gold back.Banks cannot lend money into existence.
  2. There is no fractional reserve lending nor MMT madness.
  3. Banks cannot lend money for terms that exceed deposit rights (e.g. Issuing a 2-Year CD and making a loan for 10 years)

The Dollar

Ms. Shelton favors a hard dollar, by which she means one whose value doesn’t fluctuate depending on monetary policy.

Sorry Judy, this is also impossible as stated. The three conditions above again apply.

Think Back to Nixon

For those who do not understand why you cannot peg the dollar to the price of gold, think back to Nixon.

He ended convertibility of dollars to gold because the Bretton Woods agreement pegging an ounce of gold at $35 blew sky high in a mass flight of gold to France.

You cannot have a fixed price of gold with budget deficits and monetary printing out the wazoo.

You can, under strict conditions noted above, allow a dollar to represent a fixed amount of gold. That's the correct way.

The dollar will then buy what it does. Yes, it will be very stable.

Convoluted Thinking

Shelton has clearly convoluted thinking, but arguably she is no worse than anyone else on the Fed.

I welcome the choice if for no other reason than to get gold back into discussion.

Mike "Mish" Shedlock

Comments (28)
No. 1-18
Stuki
Stuki

You don't have to ban fractional reserves. Nor even be aware of whether it occurs or not, as being so aware is no legitimate government's business anyway.

Just ensure all official payments are made in nothing but hard bullion, get rid of any "Central Bank" and other asymmetrically privileged actors, and let free people sort the rest out among themselves. If someone fancies the convenience of accepting IOU's from a potentially fractionally reserving bank, they can have at it. If it works out well, fine. Otherwise, that's fine as well. Just remove all possibly conduits by which those who gambled and lost, could even theoretically drag third parties into it.

Stuki
Stuki

Neither do you have to bother with which terms banks lend on. Just keep third parties out of it, and let those who fancies hanging themselves do so without intervention.

Once you start dragging government into all manners of nonsensical areas they have no business even being aware of, all you end up with, is more Newspeakian attempts at "yes but, but this dimwitted derivative is somehow OK per the rules...... But yet you still end up with duration mismatches." IOW, you end up with a lobbyocracy.

Instead, just don't get in the way, ever, specifically by avoiding having any institution with the ability to possibly getting in the way; when people make arrangements that lead to their kids starving to death in the streets. Then, sit back and watch, as people suddenly "magically" figure out a way to not leave their children starving.

Sechel
Sechel

Money should cost something. Businesses need a riskless rate of return to base capital market decision making lest we get mal-investment. Savers should be permitted to get a market rate of return, free of Fed intervention and one that hopefully earns them a positive real rate of return. Fed policy time and time again uses savers to subsidize and bail out the economy , a constant source of wealth transference.

The only parties that benefit from distortive Fed policy of zero rates are those with primary access to money such as banks and companies that issue their own debt in the capital markets like IBM , GE & Exxon

Matt3
Matt3

I agree with getting back to a discussion with respect to gold. Sounds like she is only half crazy. I still think that that 0% and lower is insane. It punishes savers and promotes bubbles. I would say it is unsustainable but It appears that it can last a long time (Japan, EU). How long can the monetary policies last? I have no idea.

KidHorn
KidHorn

Sounds like a nutcase to me. I think reducing government deficits would do more to restore normalcy than anything else.