The Substantial Nothingness To the Revelation About China Spying On the Fed

When it was long ago revealed that an instigator of the Watergate break-in was a desire to bug the office of DNC Chairman Larry O’Brien, the joke at the time was something along the lines of “What for?” The question was self-explanatory. O’Brien’s emptiness of mind made those who knew him wonder why the desire to know what was on his mind.

The quip about O’Brien came to mind while reading the front-page headlines about China allegedly spying on Federal Reserve officials. Really, what for? What useful information could be gained from spying on these mediocrities? Still, the hope here is that nothing much was gleaned, though not for the reasons some might think.

For now, it’s useful to point out that much of what the Fed does is already spied on; albeit much more effectively by market actors. If anyone’s interested in having a reasonable chance of understanding what’s ahead from the central bank, all manner of research outfits (Medley Global Advisors comes to mind) already provide this. From there, there are deep markets that trade based on probabilities of what the Fed will do next. No need to spy.

After which, the question about spying has to revert to wonderment about what could be learned from the charitably average minds at the Fed. The latter is the world’s biggest employer of economists, and it shows. The thinking inside the Marriner Eccles Building is nothing short of mindless.

As longtime Fed Vice Chairman Donald Kohn confidently asserted about the Phillips Curve sometime in the early 2000s, the latter is “at the core of how most academic researchers and policymakers—including this one—think about fluctuations in inflation.” Former Fed Chairman Ben Bernanke expanded on what passes for thought at the Fed more clearly, that there is a “highest level of employment that can be sustained without creating inflationary pressure.” Translated for those who require it, most economists at the Fed believe that economic growth causes inflation.

About this, if we ignore that rising prices frequently aren’t a signal of inflation as is, rooted in what Kohn, Bernanke and others deeply believe is that booming economic growth brings on labor and capacity shortages that push up prices of both. Except that they don’t. For one, Kohn and Bernanke’s core beliefs presume that the U.S. is an autarkic island of economic activity, as opposed to what it is: an integrated part of a global whole. Everything produced and/or simply designed in the United States is a consequence of global economic cooperation. In other words, U.S. producers are in no way limited by the supply of workers and factories in the United States.

What Fed types believe also presumes that demand can outstrip supply, that economic growth creates demand that suppliers can’t meet the needs of. Consider a speech Bernanke gave in 2007 at the Stanford Institute for Economic Policy. While rhetorically a fan of globalization and trade, Bernanke observed “there seems to be little basis for concluding that globalization overall has significantly reduced inflation,” and that, “Indeed, the opposite may be true.” To Bernanke, the arrival of new consumers signals demand outstripping supply, thus higher prices. Except that all demand begins with supply. It’s the provision of market goods and services that drives the demand for same.

We could get into the robotization of “hands” in the economy, something that is a direct result of economic growth producing resources that enable further automation, but brevity gets in the way of too much ink being spilled about the certain truth that the surest sign of soaring economic growth is falling prices. That is so because growth is a consequence of investment, and the basis of investment is the creation of exponentially more at prices that continue to fall.

What do economists believe powers economic growth? They think it’s consumption. It hasn’t dawned on them that consumption is what follows production. How we know something so obvious hasn’t dawned on economists is the consensus inside the Fed that 2% inflation (whatever that is) is a desirable outcome. To Fed officials, persistently rising prices will cause people to consume more, thus buoying the economy. You can’t make this up! Don’t worry, it gets more ridiculous, and sad.

Fed officials broadly believe that the answer to slow periods of economic growth is money creation from the Fed, and spending from Congress. The economists get it backwards. Money in abundance is a natural market phenomenon. Implicit in the belief that it’s not is that the Fed chose abundant “money supply” in Palo Alto, CA but very little in El Monte, CA. Actually, prudent financiers brought about this outcome. And it would be no different if the federal government had no role in money at all. Money is a consequence of economic growth, not a driver of it. Fed officials think they can create growth by “gunning” the “money supply.” They can do no such thing. If they could, West Baltimore would already be booming.

When they think the central bank overburdened, Fed officials call for government spending to boost growth. Except that government can only spend insofar as the economy has already grown, or will grow. Here Fed officials double count when they imagine that spending by Nancy Pelosi and Mitch McConnell will have a multiplicative effect.

Oh yes, there’s also the one about war. Ask a Fed official what ended the “Great Depression.” You’ll be told the maiming, killing and wealth destruction of the 2nd World War was the source of our revival. The very humans that power all growth apparently need to be exterminated when times are tough.

All of which brings us back to China. What on earth could they get of value from the Fed? It makes you wonder….about the sanity of the Chinese. How could they be a threat if they think the thoughts of Jerome Powell valuable? Which is why one hopes their spying didn’t bear fruit. That is so because Chinese growth redounds to us. Since it does, let’s hope they stop spying on an entity that knows nothing about prosperity.