Mattis vs. Powell – Tyranny of the Unelected

 

This week General Mattis, Secretary of Defense, resigned citing differences between his world view and that of President Trump. It caused consternation in US Think Tanks, left of center media and commentators. People who had criticized General Mattis for the past two years jumped to praise him and condemn President Trump.

But, despite the media attacks, the core principle was not touched – that the President has the absolute right to choose his cabinet and that every appointee serves at the pleasure of the President. A corollary is that an appointee who disagrees with the President’s views has no real recourse except to resign.

This is just as true during war as it is during peaceful times. Presidents generally leave conduct of war to the US military and sensibly so. But if the President is unhappy about how his Chief of Staff is conducting the war, he has the obligation & the right to remove that Chief General and replace him by another General of his choice.

The best example of this is from the most destructive war fought on American soil, a war for the existence of the Union. During that war, President Lincoln fired Generals George McClellan (1861-1862), Ambrose Burnside (1862-1863), Joseph Hooker(1863), George Meade(1863-1864) before choosing Ulysses S. Grant who won the war. Nothing is more important than the conduct of war in times of war and it is the absolute right of the President to choose the Commander he wants.

But what is important in peace time? What is the one function that enables all others during peacetime? The conduct of the economy. If the economy is growing, if people are making money, the nation becomes stronger and capable of providing for just & equitable needs of the American people. Managing the economy is the responsibility of the Secretary of the Treasury who is appointed by the President and who serves at the President’s pleasure.

And what is the most important factor in the economy? The amount of money in the economy, known as liquidity. When liquidity is increased, you get growth and if too much liquidity is injected, you get high inflation. Conversely, when liquidity is decreased, you get lower growth and if too much liquidity is removed from the economy, you get a recession.

Since liquidity is of paramount importance to the economy and to the economic well being of the American people during peace time, you would think the management of liquidity would be the responsibility of the Secretary of the Treasury who serves at the President’s pleasure.

You would be wrong. The management of liquidity in the US economy is in the hands of a separate unelected body named the Federal Reserve. And it is virtually a dictatorship under the Chairman of the Federal Reserve. Yes, this Chairman is appointed by the President and confirmed by the Congress. But after that, the Chairman of the Federal Reserve (“Fed”) is virtually a dictator who is answerable to no one.

How weird is that? In the greatest democracy on earth, the most important function that determines the prosperity of the nation & the economic well being of 320 million Americans is in the hands of a person who is unelected by the people and answerable to no one in America. Yes, the Fed Chair is theoretically answerable to the Congress, meaning in reality the Chair is not answerable to any one.

And what could possibly happen when this Czar, this sole decider of liquidity in the American economy proves obdurate or even possibly incompetent? We don’t need to ask. Just look at the damage done to the US Stock Market from October 3, 2018 – Dow Jones Industrial Average down 17%; S&P 500 down 17%; Nasdaq 100 down 20%;

 

This loss is probably in the neighborhood of $4 trillion, yes trillion with a “t”. That means $4,000 billion dollars. Compare that with the figure of $5 billion for the border wall over which the US Government is being shut down. Yet you have not heard any comments from the Congress about the incredible loss of the US economy, a loss that could have paid for 800 walls. 

So what happened in October? One trigger for the above decline was the loose-lipped comment of Fed Chairman Powell who said they are “long away from neutral”, meaning they have many rate hikes to go before they can stop. Mind you, this was after 8 rate increases already.

But the bigger reason is what began in October. What was it? The Fed began removing $50 billion dollars in liquidity from the US markets on October 1, 2018. This is an incredible figure, especially when you realize the Fed is removing money that could pay for 10 walls a month when the US Government is being shut down for one wall.

So in the past 3 months, the Fed has removed $150 billion of liquidity from the US markets. AND this will continue on AUTOPILOT into all of 2019. That statement was made in an arrogantly casual manner by Fed Chairman Jay Powell on December 19, this past Wednesday after he raises interest rates by 0.25% (25 basis points) in the 9th increase of this cycle. 

This means $600 billion will be removed from the US markets in 2019 by this Federal Reserve, a body of unelected people who is practically answerable to no one. At least, the previous three Fed Chairmen listened to what the markets were telling them. But Jay Powell, the current Fed Chairman, talks & acts as he has nothing but disdain for the markets. And the markets are now showing utter disdain for him. It got so bad that during his press conference on Wednesday, as CNBC’s Sara Eisen reported, traders on the New York Stock Exchange were yelling “make this guy stop talking“.

And no one can make this Fed Chairman stop causing so much destruction in the US economy. Not the President and not a Congress that is so bogged down in dealing with a $5 billion wall. Meanwhile, Fed Chairman Powell will be removing $50 billion every month as he confirmed publicly this week.

And “we the people” are not even aware of so much money being removed from our economy. So if the Fed does  convert a strong growth economy of 2017 into a recession in 2019, no one but “we the people” will be responsible.

Now compare what the numerically largest democracy on earth did 2 weeks ago. As we wrote last week, the Head of India’s Central Reserve Bank was being obdurate & hell bent on starving the Indian economy of liquidity. But the Indian Government forced him to resign and appointed a sensible, balanced governor in his place who is known for building a consensus. And look what the Indian Stock Market did in the last two weeks when compared to the US stock market:

What an incredible outperformance in the Indian Stock market vs. the US? And all because the Indian Government was able to force the incompetent Central Bank Governor to resign and appoint a sensible Governor in his place?

So what can the US Government do to rescue the US economy & the US markets?

The solution is simple – persuade Fed Chairman Powell to resign and appoint economist Larry Kudlow as the new Fed Chairman. Not only will the US stock market go up 10% but the US economy will breathe a sigh of relief and stop its march into a recession. 

The big question is whether the President of the United States can fire a man he appointed to run the Federal Reserve. Yes, he can fire the Secretary of Defense who runs the huge US military, he can fire the Secretary of Treasury who runs the US budget, spending and manages the US Dollar, the Reserve Currency of the World.

But he may not be able to fire the Fed Chairman he appointed despite the damage Chairman Powell is doing to the US economy. Yes, it is a case of a President growing the economy and a Fed Chairman destroying it. And “we the people” can’t do anything about it because our elected representatives are busy squabbling about a $5 billion wall while $50 billion is being removed every week from our economy.

God Save US from the tyranny of the unelected.

 

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