July 11, 2019

The Curious Case of the ZIRP NIRP Gold Bugs

President Trump recently nominated Judy Shelton to the Federal Reserve Board of Governors. She is the United States director for the European Bank for Reconstruction and Development, which I had never heard of until her nomination.

Shelton is a Republican and believes in the adoption of a gold standard. She currently believes in lowering interest rates, after spending the Obama years criticizing the Fed for lowering interest rates.

You may wonder how a person can be in favor of a gold standard and also for lowering interest rates at the same time.

I am wondering that, too.

I think some folks had fun with Dr. Shelton’s Wikipedia page, because it says: “Before Trump became president, she was a longtime advocate for free trade, but after he became president, she supported his administration's trade war with China.”

We seem to have a case of someone being ideologically inconsistent in order to secure professional advancement. The slang for this is “selling out.”

Or, maybe she had an ideological transformation—maybe she really does believe in zero interest rate policy (ZIRP) and negative interest rate policy (NIRP) and a gold standard all at the same time.

But that would be impossible.

The confirmation hearings are going to be interesting.

Of Course

Of course, failed Fed nominees Stephen Moore and Herman Cain also believed in hard money and soft money simultaneously. Where do these people come from? They didn’t exist a few years ago.

Go back to the days of Thomas Hoenig. He was another champion of gold, but also a big-time interest rate hawk on the FOMC, back in 2010. Now that is someone who believes in hard money.

Real interest rates are zero and Trump thinks they are too high. I have been saying in The Daily Dirtnap for some time that Trump thinks Fed funds should be zero or negative, and he won’t stop criticizing the Fed until he gets what he wants.

He might have to replace the Fed chairman in the process. Judy Shelton and Christopher Waller (decidedly a soft money advocate) are both chairman material. My guess is that it would be Richard Clarida, who has the resume for it and also has been very malleable to Trumponomics. This goes back to what I wrote about two weeks ago: Trump is an unstoppable force that is going to change the face of macroeconomics for decades.

I don’t believe in soft money. I believe in metallic monetary standards and persistently high interest rates. I really am curious as to the psychology of Judy Shelton, Cain, and the rest of them. Did they really change their minds? Or are they really that cynical?

I suspect it is the latter.

Inflation

In Trump’s defense, it hasn’t really made any sense to be vigilant about inflation. We had rates at zero for the better part of a decade, and we didn’t get inflation.

Unless of course, you’ve tried to buy a house in San Francisco. Or a stock market index fund. Or a college education. Low interest rates have inflicted just as much economic misery as high fuel and energy prices did at one point in our history.

It is accepted wisdom that Federal Reserve policies have actually exacerbated inequality, by ballooning the prices of financial assets.

Yet the Fed actually believes the opposite—that low interest rates solve the inequality problem. At least, Kashkari does. He’s another ZIRP NIRP Republican.

We used to worry about dovish Democrats taking over the Fed and cutting interest rates and bringing back the inflation of the 70s. Now the Republicans are doing it! A Democratic administration would behave no differently. Sobering thought—we are in for decades of ultra-loose monetary policy.

What do you think is going to happen next?

How would you position your portfolio?

I know there are plenty of stock market bears reading this newsletter. Think of what unlimited monetary stimulus is going to do to your short positions. It is going to hurt like an Alvin and the Chipmunks Christmas CD.

I’m not optimistic on stocks—it’s just the reality of the situation. Unlimited. Monetary. Stimulus. Forever. Those houses in San Francisco are probably not going to get any cheaper.

Who Matters More

One thing I tell people all the time, especially people who are upset about Trump, is that Trump really hasn’t had that big of an effect on your daily lives. Your job is the same, your family is the same, you drive into work in the same car and drink the same coffee. It was the same when Obama was president, and it was the same when Bush was president. Nothing really changes.

Who’s on the Fed matters a lot more than who’s in the White House. That can affect your daily life, from the cost of gas you use to drive into work every day, to the cost of the coffee you drink, to the return on your investments, to the value of your real estate.

What the Fed does has the potential to start revolutions—and this particular Fed just may do that. People should spend less time thinking about whether the US women’s team is invited to the White House and more time thinking about why Judy Shelton is a ZIRP NIRP gold bug.

Jared Dillian

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