While awaiting Jerome Powell’s appearance before the Senate, some thoughts on partisanship and policy rates…

The only interest that the Republican and Democratic parties have in monetary policy are how best to weaponize interest rates to justify reckless spending and oppressive taxes. Low interest rates allow the U.S. Treasury to issue bonds in return for cash that is less expensive to service. The Federal Reserve Bank of New York places these IOUs into the market where commercial banks and other accredited market participants buy these IOUs and hold them in their portfolios as collateral in order to support their own future borrowing needs.

Democrats would like to see the interbank, overnight lending rate stay low. A low overnight rate incentivizes banks to lend money in the credit markets, theoretically putting credit and capital into the hands of end users who can deploy that money into productive and non-productive use. Of course, not all this cheap money goes into the hands of entrepreneurs but also into the hands of end-use consumers that want to leverage a trip to The Bahamas now and pay for it later out of their future income. In addition, Democrats can create and subsidize programs aimed at meeting short term electorate needs i.e. stimulus, or subsidize larger projects like renewable energy, which may assist some consumers but is really aimed at Democratic donors in the energy industry that may need R&D and other funding to aid their industry’s development.

Republicans, for all their smaller government rhetoric, don’t get off the hook. Although increased rates could help their banking industry constituents increase their income, low interest rates means corporations can get the cheap financing that enables business expansion.

The battle between Democrats and Republicans boils down to which constituency benefits the most from government’s overall need to expand.

During today’s Senate hearing where Federal Reserve chairman Jerome Powell presents the Fed’s semi-annual monetary policy report, you will notice that none of the banking committee members will call for an abolishment of the central bank. As much as elected and central bank officials reiterate the Federal Reserve’s political independence, the reality is that the Federal Reserve operates in a political environment, navigating that channel between both sides of the political spectrum. All one has to do is look at its increasing foray into social issues including climate change and racial equality in credit access to see that the Federal Reserve is influenced by the political climate.

Both sides of the aisle during today’s hearing will wail on about the obvious elephant in the room: inflation. If the Democratically-controlled Senate and House are so concerned about inflation, then they should not oppose a decline in the demand of the M2 money supply caused by an increase in the use of alternative currencies that transfer economic energy between autonomous individuals. The increase in money supply is the result, in part, of politicized demand which encourages low cost money which in turn moves toward low return, unproductive activity. Just go on the internet and you see plenty of examples.

The best inflation fighter in the short term is the use of alternative currencies for payments. Increasing the supply and use of alternatives decreases demand for a central bank’s credit-fiat currency.

Alton Drew


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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.