March 26, 2025 • 18 mins
ARE WE HEADING FOR A RECESSION ANYWAY? I've got Alexander Salter, an economics professor at Texas Tech University’s business school and researcher at TTU’s Free Market Institute, on to discuss the Federal Reserve's latest move and why he thinks they need to try to do LESS for the economy than they are currently tasked with. He's on at 1p. Read his work here and here.
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Episode Transcript
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Speaker 1 (00:00):
I am like you, always wondering what is the Federal
Reserve going to do next? And my next guest knows
a little bit about that.
Speaker 2 (00:08):
He happens to be.
Speaker 1 (00:09):
An economics professor at Texas Tech University's Business School and
a researcher at Texas Texas free Market Institute. It's refreshing
to know that Texas Tech has a free market Institute,
first of all, So how long has that been around
and how long have you been a part of it?
Speaker 3 (00:26):
That's really exciting to be a part of the Free
Market Institute. We've been around for more than ten years now.
Is officially kicked off in twenty thirteen with full operations
beginning and a twenty fourteen and we're dedicated to the
study of the free enterprise or capitalist system. We of
course all have our preferences for what kind of economic
system we'd like to live under, but we are first
(00:46):
and foremost a scholarly research institute, and it's been just
an intellectual treat to be here.
Speaker 1 (00:52):
So I could ask a follow up question about those
other forms of isms that people would like to live under,
but I want to stay focused here on what we're
talking about, and that is a Federal Reserve, And on
the face of it, to me, the Federal Reserve seems
like an institution that is by its very design anti
free market.
Speaker 2 (01:09):
Am I right or wrong?
Speaker 3 (01:12):
It depends on what you compare the next best alternative to.
So if you think that we should have a completely
free market and money in banking and finance, a position
that I actually subscribed to, then yes, the existence of
a central bank is a move towards a more status
economic arrangement for governing the supply of money and credit.
I myself am much more of a fan of what
(01:33):
economists call the classical gold standard, the system that prevails
from roughly eighteen seventy nine up until the start of
the First World War in the United States. Some economists disagreed.
I think that system didn't work very well. I think
it was too unstable, and so they're happy that that
is here. I think they're misreading the historical data. When
I look at economic growth, when I look at prices,
I see some pretty good stuff. In the late nineteenth
(01:55):
century that was an economic cornucopia that we would do
well to try and recreate.
Speaker 1 (02:00):
So when we're talking about the Federal Reserve, first of all,
I want to do a little bit of a history lesson.
Speaker 2 (02:04):
And I just told Alex this off the air.
Speaker 1 (02:06):
I know everybody in this listening audience knows the Federal
Reserve is incredibly important because they set interest rates, and
interest rates determined mortgage rates and car loan rates and
business loan rates and all of that stuff. But I
think a lot of people don't understand how the Federal
Reserve even came into being. So we can do a
little bit of the Creature from Jekyl Island, which is
a phenomenal book written about the formation of the Federal
(02:27):
Reserve that most people look at the number of pages
and go a hard pass. I'm not going to read it.
But why do we have this system in the first place.
Speaker 3 (02:36):
We have the system in the first place because in
the early twentieth century there was a growing consensus among legislators, policymakers,
business executives, bankers, financiers, but the monetary system of the
United States just wasn't working. It was very fragile, and
that perception was true. The US system was needlessly crisis throne,
and that was a matter of design, and the US
(02:58):
system was actually design to be fragile. For various reasons,
they go to satisfying political constituencies. And so finally the
moment for reform came about, and the question was going
to be are we going to embrace a more free
market system for money in banking and finance, a system
that in the early twentieth century countries like Canada or
(03:18):
Great Britain had, or is it going to be the
case that we're going to embrace a more top down,
hierarchical arrangement for the governance of money and credit. And
I don't think that everyone who was responsible for the
creation of the Federal Reserve realized that they're picking option two.
At the time, they probably thought that they were just
shoring up the weaknesses in the US banking system. But
they created this new institution that ultimately would grow to
(03:41):
have major powers over money, credit, and interest rates. And
that was ultimately a move from a decentralized, market based
arrangement for money and banking.
Speaker 1 (03:49):
So there is I saw something today which was kind
of unusual where the Fed Chairman said something along the
lines of that the government needed to get it spending
in check. And reason why that was noteworthy is because
the Federal Reserve is supposed to be non political. I
personally don't believe any organization could be truly non political,
(04:10):
because whoever is working in that organization is going to
bring their their own biases with them when they come
to work. But how has the FED maintained that sort
of separate status.
Speaker 2 (04:20):
Have they done a good enough job?
Speaker 3 (04:23):
It's the difficult balancing act, especially when you consider that
the Federal Reserve does not, have, as the financial press
frequently says, a dual mandate. They have a triple mandate.
You always hear that the FED has two jobs given
to it by Congress maintain maintain full employment and stable prices.
But if you actually go to the Statute to the
law which authorizes what the FED is supposed to do,
(04:45):
there's a third point to that mandate, which is maintain
moderate long run interest rates. And so that's what I
think the Federal Reserve is trying to do. When as
top officials start to warrant about the US fiscal trajectory,
they realize that if our debt and deficit path is
un sustainable, that's going to mean interest rates are going
to rise pas the point where they can be reasonably
called moderate. And so, while I understand that people are
(05:08):
worried about the Federal Reserve meddling in fiscal politics. That
seems like a step into the partisan arena that we
don't want our central bankers to make. The fact of
the matter is the law of the land requires them
to care about interest rates. And if we don't want that,
we should change the law, something that I add, I
would be very much supportive of. We should change the law.
Speaker 1 (05:26):
So what would you see the preferred law in this case?
Speaker 2 (05:29):
You want to narrow the mandate of the Fed.
Speaker 3 (05:31):
Right absolutely, price stability. Only. The only thing the Federal
Reserve can reasonably control in the long run is the
dollars purchasing power. Giving yet responsibility for promoting employment, for
promoting moderate long run interest rates, messing with labor markets,
with capital markets, that's just the recipe for money mischief.
Over it's more than one hundred year history, the Federal
(05:51):
Reserve has quite frankly, gotten a lot more wrong than
has gotten right. And so I would like to see
the Central Bank forced by Congress that it ultimately answer
to focus on the one thing that we know that
monetary policy can really control, which is the general purchasing
power of the dollar. Give the Fed a much more
narrow mandate, focus it on a more attainable goal, and
(06:13):
let's put aside all this other stuff that the FED,
quite frankly, has proven not very good at. I think
that that would be the best that we can do
at this point.
Speaker 1 (06:19):
I found it a little bit outrageous that the FED
was sort of, you know, taking the government to task,
although I agree with the entire concept. Right, it wasn't
wrong to say the government needed to bring spending under control,
But it was the FED that printed a whole bunch
of money that allowed the government to keep spending and
spending at absorbit at rates. So it's almost like, wait
a minute, aren't you part of the problem here.
Speaker 3 (06:42):
That's right. The Federal Reserve did intervene in the aftermath
of the COVID economic crisis to stabilize the market for
government debt by doing what by ensuring that treasury rates
didn't rise too much, making sure that Uncle Stam could
still borrow and spend. The perception was at the time
that they needed the capacity to meet the emergency, and
the Central Bank was going to help them do that.
But you're absolutely correct that came with a flood of
(07:05):
new money. We're talking trillions and trillions of dollars of
new liquidity, and the eventual consequence of that was predictable
to anybody who's read as Milton Friedman inflation. We still
haven't gotten to the point where price growth has moderated
back to what we like to see historically. Usually the
FED wants to see about two percent annual inflation. We're
still hovering somewhere between two and a half and three.
(07:26):
That might not seem like a lot, but it means
that prices over the long haul are rising much faster,
and that's something that ordinary Americans are understandably frustrated about.
Speaker 1 (07:36):
It would be, you know, one thing, to say that
if prices go up and incomes go up to then
it would balance out.
Speaker 2 (07:43):
But we're not seeing that yet.
Speaker 1 (07:44):
Here's my question about the decision makers at the FED
to your point, obviously they had never read anything about
how periods of inflation are always preceded by periods of printing.
Speaker 2 (07:56):
Too much money.
Speaker 1 (07:57):
And why is it that we seem to only have
one kind of economists in the Fed making decisions that
seem to do things like allow government to get bigger.
Where are the where are the Austrian economists in the
Federal Reserve.
Speaker 2 (08:09):
Do we have any balance?
Speaker 3 (08:12):
That's a great question. Two great questions. Actually. The first part,
I think comes from the fact that about a generation ago,
twenty ish years ago, monetary economists became disenchanted with using
the money supply to gauge the stance of monetary policy.
And on the surface, it sort of seems like they
had a case. The rate of money growth really stopped
predicting the rate of price growth as well as it
(08:34):
had in the twenty thirty forty years prior due to
financial innovations in the banking sector. But really, if you
use the right measure of the money supply, if you
use broader, more liquid measures of the money supply, the
relationship between money on the one hand, and prices in
general on the other hand, are pretty stable. So I
would actually say that economists needlessly moved on from an
(08:55):
older consensus that was more right than it was wrong.
The question of why don't you get any more restrained
people at the FED, I think that there's a selection effect.
The Federal Reserve actually has an outsized influence in hiring
PhD macroeconomists and monetary economists. Many people who work at
the Fed or gatekeepers at scholarly journals. People who are
(09:15):
professors and the academy also sometimes have joint appointments at
the FED. And so this gives rise to a system
where the only people who really go into monetary economics
and macroeconomics are already predisposed to liking the FED, to
liking central banking, and to want the institution to grow
in importance. I don't think it's anything so crass as
(09:35):
the FED paying them off or anything. I think that
they're actually true believers. But the selection effect is such
that young, upwardly mobile economists only go into study monetary economics,
only write their PhDs on monetary topics if they already
think the FED is the greatest things on slice bread
and they want to continue to support it. And so
that's sort of how you get this arrangement where everybody
(09:58):
who's into central banking is pros banking. So I don't
think it reflects a true consensus, it's more a selection effect.
Speaker 1 (10:04):
Would it be fair to say that someone who was
more open to free markets in the Austrian school of
economics will probably be happier in the private sector as well.
Speaker 3 (10:14):
You have a lot more people who are sympathetic to
Austrian economics, a lot more people that are sympathetic to
Chicago style macroeconomics, the kind of economics that built in Friedman,
who popularize the link between the money supply and inflation.
That kind of economics again tends to not get a
seat at the table when big decisions are made by
central bankers. Who are the people who really want to
be central bankers, people who think that we need an activist,
(10:37):
top down control of the economy using the levers of
policy that Congress has granted the Federal Reserve, or at
least has not punished the Federal Reserve for using. And
so in that sort of a framework, you're just not
going to get the free market restraining type people at
the table to offer their opinions. You get some smattering
of hawks and doves, and it's nice that we have
(10:58):
some inflation hawks on the Federal Reserve Board of Governor
is the Federal Open Market Committee, But really that's not
that big of an intellectual range. Would you consider all
the things that are important for understanding how monetary policy
works to affect the economy, I, for one, would like
to see a much broader view range of views represented,
but it's not clear that we can get that given
(11:19):
how the FED is currently constituted.
Speaker 1 (11:21):
So if you could, let's just say Alexander Salter gets
to take over the Federal Reserve today.
Speaker 2 (11:26):
We wave a magic one.
Speaker 1 (11:28):
What actions would you like to see the FED take
to finally bring that inflation back down to that two
percent target rate.
Speaker 3 (11:35):
The great Austrian economist ludaigua and Nisus was once asked
how he would reform the economic policy of Austria if
you were a made king for a day. He said,
if I were made king for a day, the first
thing that I would do is advocate. So maybe I
should say the first thing that I would do is resign.
But assuming that I'm not going to resign, assuming that
I don't have that option, I would focus much less
on targeting interest rates and focusing on these intermediate things.
(11:58):
I think that we need deep fundamental reforms. The Federal
Reserve should, as a matter of policy outcomes, target the
growth rate of the price level and inflation index, or
my preferred alternative, which is something that economists call nominal
income targeting, basically stabilizing total dollar spending in the economy.
It sounds complicated, But it's actually much more modest than
(12:20):
what the FED tries to do right now. Right now,
they're always trying to get just the right interest rate target,
just the right balance between capital supplying capital demand that
gets interest rates exactly where they want them. We're giving
this thing called forward guidance, where we're trying to convince
markets about what interest rates are going to be next
quarter or a year from now. Think about how complicated
global capital markets are. There's really no way that we
(12:43):
can convey that information credibly, and so I just don't
think that we should be trying. The most that the
FED can do is ensure that the demand side of
the economy is stable, and actually I think that we
can do that by intervening much less. We don't need
to intervene more, we need to intervene less, just credibly
commit to saying, Look, the sole focus of our policy
(13:04):
is going to be keeping the dollars purchasing power on
this path. Tell them what the path is, tell us
what index you're targeting, and then hit it and then
break for the day. We really don't need the Federal
Reserve doing anything more than that, as far as its
monetary policy powers are concerned. I think that financial journalists
and economists have made central banking much more complicated than
(13:24):
it needs to be.
Speaker 1 (13:25):
So what mechanism specifically would you use to make those
things happen? I mean, we're all trained, right, Society is
trained that when you hear Federal reserve, your interest rates
right after. So if they're kind of overshooting using interest
rates or focusing like a laser on that, what other
mechanisms are available to achieve that sort of demand side stability.
Speaker 3 (13:45):
The most obvious one is the money supply itself. Again,
economists are skeptical of that because the narrow measures of
the money supply don't tend to predict inflation very well,
but the broader ones still do, and I think that
that relationship still does hold. Again, the conceptual way that
this works is still I think the world that we're
living in, right, you print up more money, you're going
to get prices everywhere going up. And so what the
(14:08):
Fed should be doing is trying to keep the money
supply growing to meet increases in money demand that come
from one normal increases in population population growth, and two
increases in real economic activity as the economy actually churns
out more cars and suit jackets and laptops and houses.
(14:28):
The money supply should keep up with that to facilitate
those additional transactions, So that could be one intermediate measure
the FED actually starts to pay more attention to something
that the vulgar FED did pay attention to for a
while back in the nineteen eighties that I would actually
credit it with ending the Great inflation. So I think
that this is something that has a proven track record.
It's much more modest than what the FED is trying
(14:49):
to do right now, but I think that we could
use some modesty and some humility in central banking. Of course,
we would need to have an entirely separate conversation when
it comes to the FEDS regulatory oversight duties over the
financial system when it comes to fighting financial panics and
stemming bank failures. Even there, I think that they're trying
to do too much, which is why it's not working
so well. In general, with these things, monetary policy and
(15:13):
financial regulation are pretty blunt instruments, and so we should
try and pursue broad based goals and simply not try
and find tune things too much because it's just not
going to work.
Speaker 1 (15:23):
It's my understanding, and I could be wrong, because God knows,
we've passed new regulations since I learned the statistic. But
the financial services in banking industry is the most highly
regulated industry around. I mean, so, are you talking about
not deregulation but maybe streamlining processes or moving that investigative
arm away from the FED?
Speaker 3 (15:43):
I would like to send to focus solely on ensuring
banks that are subject to its regulations maintain adequate capital
against short run liabilities. Just make sure banks have a
basic buffer stock right, make sure that they have enough
capital on hand to meet extraordinary events. Beyond that, let
markets do their thing. When you get more complicated than
(16:04):
that one you try and dictate to banks the quality
of capital. When you have all these complicated formulas that
try and weight capital by perceived safety, well, that presumes
that regulators are really good at distinguishing safe assets for
safe assets from risky assets. Who remembers two thousand and eight,
to set all those subprime mortgage assets that went belly up,
We're triple a safe according to the regulators and credit
(16:26):
rating agencies. So it's not clear to me the regulators
have got this at all.
Speaker 1 (16:30):
That's another conversation though about those ratings agencies and how
they absolutely failed spectacularly, maybe on purpose, maybe on accident
in two thousand and eight, So it's kind of like
who do you trust?
Speaker 2 (16:42):
At that point?
Speaker 1 (16:43):
I got a text message that said, Mandy, what did
your guests think about going on the gold standard? That
from Jim.
Speaker 3 (16:51):
Great question. I really like the gold standard historically. I
think it was a mistake getting off it. Just because
something was great one hundred years ago doesn't mean that
it's feasible to return to it today. I'm not sure
what a path back to the gold standard actually looks like.
And sometimes you might think it's pretty simple, right The
United States government owns so much gold, there are so
(17:13):
many dollars outstanding, Divide one by the other. That's your
new gold exchange rate, and boom, you're done. The problem
with that is that the global financial system is really
set up for the US to constantly export dollars in
export US treasury debt, because that's the global reserve currency
and the global reserve asset dollars in US Treasury debt, respectively.
(17:35):
And the faster the developing world grows, the more safe
US assets they demand. If you pull the rug out
from that demand process by restricting the money supply and
treasury supply to whatever's going on in gold markets. I
worry that the short run effect might be so shocking
that it would actually erode whatever good a stable monetary
(17:57):
system could deliver. I could be wrong about that, maybe
to your pessimistic But the way that I approach these
questions is show me what the plan is right to
actually return to a commodity system or even a bitcoin system.
Who cares what the underlying commodity is. Show me the plan,
and then we can discuss the cost and benefits of it.
Because I have a hard time thinking about whether these
(18:18):
things are worth doing in the abstract.
Speaker 2 (18:20):
Doctor Alexander Salter.
Speaker 1 (18:22):
He's an economics professor from Texas Tech University's Business School,
also a researcher at Texas Tech's pre Market Institute. Fascinating conversation.
I'd love to have you back on in the near
future to continue more nerd conversation about the Federal Reserve
and everything else. Thank you so much, alex for your
time today.
Speaker 3 (18:42):
Absolutely MANDI, you have a good one, all
Speaker 2 (18:43):
Right, you two that is Alexander Salter
I am like you, always wondering what is the Federal
Reserve going to do next? And my next guest knows
a little bit about that.
Speaker 2 (00:08):
He happens to be.
Speaker 1 (00:09):
An economics professor at Texas Tech University's Business School and
a researcher at Texas Texas free Market Institute. It's refreshing
to know that Texas Tech has a free market Institute,
first of all, So how long has that been around
and how long have you been a part of it?
Speaker 3 (00:26):
That's really exciting to be a part of the Free
Market Institute. We've been around for more than ten years now.
Is officially kicked off in twenty thirteen with full operations
beginning and a twenty fourteen and we're dedicated to the
study of the free enterprise or capitalist system. We of
course all have our preferences for what kind of economic
system we'd like to live under, but we are first
(00:46):
and foremost a scholarly research institute, and it's been just
an intellectual treat to be here.
Speaker 1 (00:52):
So I could ask a follow up question about those
other forms of isms that people would like to live under,
but I want to stay focused here on what we're
talking about, and that is a Federal Reserve, And on
the face of it, to me, the Federal Reserve seems
like an institution that is by its very design anti
free market.
Speaker 2 (01:09):
Am I right or wrong?
Speaker 3 (01:12):
It depends on what you compare the next best alternative to.
So if you think that we should have a completely
free market and money in banking and finance, a position
that I actually subscribed to, then yes, the existence of
a central bank is a move towards a more status
economic arrangement for governing the supply of money and credit.
I myself am much more of a fan of what
(01:33):
economists call the classical gold standard, the system that prevails
from roughly eighteen seventy nine up until the start of
the First World War in the United States. Some economists disagreed.
I think that system didn't work very well. I think
it was too unstable, and so they're happy that that
is here. I think they're misreading the historical data. When
I look at economic growth, when I look at prices,
I see some pretty good stuff. In the late nineteenth
(01:55):
century that was an economic cornucopia that we would do
well to try and recreate.
Speaker 1 (02:00):
So when we're talking about the Federal Reserve, first of all,
I want to do a little bit of a history lesson.
Speaker 2 (02:04):
And I just told Alex this off the air.
Speaker 1 (02:06):
I know everybody in this listening audience knows the Federal
Reserve is incredibly important because they set interest rates, and
interest rates determined mortgage rates and car loan rates and
business loan rates and all of that stuff. But I
think a lot of people don't understand how the Federal
Reserve even came into being. So we can do a
little bit of the Creature from Jekyl Island, which is
a phenomenal book written about the formation of the Federal
(02:27):
Reserve that most people look at the number of pages
and go a hard pass. I'm not going to read it.
But why do we have this system in the first place.
Speaker 3 (02:36):
We have the system in the first place because in
the early twentieth century there was a growing consensus among legislators, policymakers,
business executives, bankers, financiers, but the monetary system of the
United States just wasn't working. It was very fragile, and
that perception was true. The US system was needlessly crisis throne,
and that was a matter of design, and the US
(02:58):
system was actually design to be fragile. For various reasons,
they go to satisfying political constituencies. And so finally the
moment for reform came about, and the question was going
to be are we going to embrace a more free
market system for money in banking and finance, a system
that in the early twentieth century countries like Canada or
(03:18):
Great Britain had, or is it going to be the
case that we're going to embrace a more top down,
hierarchical arrangement for the governance of money and credit. And
I don't think that everyone who was responsible for the
creation of the Federal Reserve realized that they're picking option two.
At the time, they probably thought that they were just
shoring up the weaknesses in the US banking system. But
they created this new institution that ultimately would grow to
(03:41):
have major powers over money, credit, and interest rates. And
that was ultimately a move from a decentralized, market based
arrangement for money and banking.
Speaker 1 (03:49):
So there is I saw something today which was kind
of unusual where the Fed Chairman said something along the
lines of that the government needed to get it spending
in check. And reason why that was noteworthy is because
the Federal Reserve is supposed to be non political. I
personally don't believe any organization could be truly non political,
(04:10):
because whoever is working in that organization is going to
bring their their own biases with them when they come
to work. But how has the FED maintained that sort
of separate status.
Speaker 2 (04:20):
Have they done a good enough job?
Speaker 3 (04:23):
It's the difficult balancing act, especially when you consider that
the Federal Reserve does not, have, as the financial press
frequently says, a dual mandate. They have a triple mandate.
You always hear that the FED has two jobs given
to it by Congress maintain maintain full employment and stable prices.
But if you actually go to the Statute to the
law which authorizes what the FED is supposed to do,
(04:45):
there's a third point to that mandate, which is maintain
moderate long run interest rates. And so that's what I
think the Federal Reserve is trying to do. When as
top officials start to warrant about the US fiscal trajectory,
they realize that if our debt and deficit path is
un sustainable, that's going to mean interest rates are going
to rise pas the point where they can be reasonably
called moderate. And so, while I understand that people are
(05:08):
worried about the Federal Reserve meddling in fiscal politics. That
seems like a step into the partisan arena that we
don't want our central bankers to make. The fact of
the matter is the law of the land requires them
to care about interest rates. And if we don't want that,
we should change the law, something that I add, I
would be very much supportive of. We should change the law.
Speaker 1 (05:26):
So what would you see the preferred law in this case?
Speaker 2 (05:29):
You want to narrow the mandate of the Fed.
Speaker 3 (05:31):
Right absolutely, price stability. Only. The only thing the Federal
Reserve can reasonably control in the long run is the
dollars purchasing power. Giving yet responsibility for promoting employment, for
promoting moderate long run interest rates, messing with labor markets,
with capital markets, that's just the recipe for money mischief.
Over it's more than one hundred year history, the Federal
(05:51):
Reserve has quite frankly, gotten a lot more wrong than
has gotten right. And so I would like to see
the Central Bank forced by Congress that it ultimately answer
to focus on the one thing that we know that
monetary policy can really control, which is the general purchasing
power of the dollar. Give the Fed a much more
narrow mandate, focus it on a more attainable goal, and
(06:13):
let's put aside all this other stuff that the FED,
quite frankly, has proven not very good at. I think
that that would be the best that we can do
at this point.
Speaker 1 (06:19):
I found it a little bit outrageous that the FED
was sort of, you know, taking the government to task,
although I agree with the entire concept. Right, it wasn't
wrong to say the government needed to bring spending under control,
But it was the FED that printed a whole bunch
of money that allowed the government to keep spending and
spending at absorbit at rates. So it's almost like, wait
a minute, aren't you part of the problem here.
Speaker 3 (06:42):
That's right. The Federal Reserve did intervene in the aftermath
of the COVID economic crisis to stabilize the market for
government debt by doing what by ensuring that treasury rates
didn't rise too much, making sure that Uncle Stam could
still borrow and spend. The perception was at the time
that they needed the capacity to meet the emergency, and
the Central Bank was going to help them do that.
But you're absolutely correct that came with a flood of
(07:05):
new money. We're talking trillions and trillions of dollars of
new liquidity, and the eventual consequence of that was predictable
to anybody who's read as Milton Friedman inflation. We still
haven't gotten to the point where price growth has moderated
back to what we like to see historically. Usually the
FED wants to see about two percent annual inflation. We're
still hovering somewhere between two and a half and three.
(07:26):
That might not seem like a lot, but it means
that prices over the long haul are rising much faster,
and that's something that ordinary Americans are understandably frustrated about.
Speaker 1 (07:36):
It would be, you know, one thing, to say that
if prices go up and incomes go up to then
it would balance out.
Speaker 2 (07:43):
But we're not seeing that yet.
Speaker 1 (07:44):
Here's my question about the decision makers at the FED
to your point, obviously they had never read anything about
how periods of inflation are always preceded by periods of printing.
Speaker 2 (07:56):
Too much money.
Speaker 1 (07:57):
And why is it that we seem to only have
one kind of economists in the Fed making decisions that
seem to do things like allow government to get bigger.
Where are the where are the Austrian economists in the
Federal Reserve.
Speaker 2 (08:09):
Do we have any balance?
Speaker 3 (08:12):
That's a great question. Two great questions. Actually. The first part,
I think comes from the fact that about a generation ago,
twenty ish years ago, monetary economists became disenchanted with using
the money supply to gauge the stance of monetary policy.
And on the surface, it sort of seems like they
had a case. The rate of money growth really stopped
predicting the rate of price growth as well as it
(08:34):
had in the twenty thirty forty years prior due to
financial innovations in the banking sector. But really, if you
use the right measure of the money supply, if you
use broader, more liquid measures of the money supply, the
relationship between money on the one hand, and prices in
general on the other hand, are pretty stable. So I
would actually say that economists needlessly moved on from an
(08:55):
older consensus that was more right than it was wrong.
The question of why don't you get any more restrained
people at the FED, I think that there's a selection effect.
The Federal Reserve actually has an outsized influence in hiring
PhD macroeconomists and monetary economists. Many people who work at
the Fed or gatekeepers at scholarly journals. People who are
(09:15):
professors and the academy also sometimes have joint appointments at
the FED. And so this gives rise to a system
where the only people who really go into monetary economics
and macroeconomics are already predisposed to liking the FED, to
liking central banking, and to want the institution to grow
in importance. I don't think it's anything so crass as
(09:35):
the FED paying them off or anything. I think that
they're actually true believers. But the selection effect is such
that young, upwardly mobile economists only go into study monetary economics,
only write their PhDs on monetary topics if they already
think the FED is the greatest things on slice bread
and they want to continue to support it. And so
that's sort of how you get this arrangement where everybody
(09:58):
who's into central banking is pros banking. So I don't
think it reflects a true consensus, it's more a selection effect.
Speaker 1 (10:04):
Would it be fair to say that someone who was
more open to free markets in the Austrian school of
economics will probably be happier in the private sector as well.
Speaker 3 (10:14):
You have a lot more people who are sympathetic to
Austrian economics, a lot more people that are sympathetic to
Chicago style macroeconomics, the kind of economics that built in Friedman,
who popularize the link between the money supply and inflation.
That kind of economics again tends to not get a
seat at the table when big decisions are made by
central bankers. Who are the people who really want to
be central bankers, people who think that we need an activist,
(10:37):
top down control of the economy using the levers of
policy that Congress has granted the Federal Reserve, or at
least has not punished the Federal Reserve for using. And
so in that sort of a framework, you're just not
going to get the free market restraining type people at
the table to offer their opinions. You get some smattering
of hawks and doves, and it's nice that we have
(10:58):
some inflation hawks on the Federal Reserve Board of Governor
is the Federal Open Market Committee, But really that's not
that big of an intellectual range. Would you consider all
the things that are important for understanding how monetary policy
works to affect the economy, I, for one, would like
to see a much broader view range of views represented,
but it's not clear that we can get that given
(11:19):
how the FED is currently constituted.
Speaker 1 (11:21):
So if you could, let's just say Alexander Salter gets
to take over the Federal Reserve today.
Speaker 2 (11:26):
We wave a magic one.
Speaker 1 (11:28):
What actions would you like to see the FED take
to finally bring that inflation back down to that two
percent target rate.
Speaker 3 (11:35):
The great Austrian economist ludaigua and Nisus was once asked
how he would reform the economic policy of Austria if
you were a made king for a day. He said,
if I were made king for a day, the first
thing that I would do is advocate. So maybe I
should say the first thing that I would do is resign.
But assuming that I'm not going to resign, assuming that
I don't have that option, I would focus much less
on targeting interest rates and focusing on these intermediate things.
(11:58):
I think that we need deep fundamental reforms. The Federal
Reserve should, as a matter of policy outcomes, target the
growth rate of the price level and inflation index, or
my preferred alternative, which is something that economists call nominal
income targeting, basically stabilizing total dollar spending in the economy.
It sounds complicated, But it's actually much more modest than
(12:20):
what the FED tries to do right now. Right now,
they're always trying to get just the right interest rate target,
just the right balance between capital supplying capital demand that
gets interest rates exactly where they want them. We're giving
this thing called forward guidance, where we're trying to convince
markets about what interest rates are going to be next
quarter or a year from now. Think about how complicated
global capital markets are. There's really no way that we
(12:43):
can convey that information credibly, and so I just don't
think that we should be trying. The most that the
FED can do is ensure that the demand side of
the economy is stable, and actually I think that we
can do that by intervening much less. We don't need
to intervene more, we need to intervene less, just credibly
commit to saying, Look, the sole focus of our policy
(13:04):
is going to be keeping the dollars purchasing power on
this path. Tell them what the path is, tell us
what index you're targeting, and then hit it and then
break for the day. We really don't need the Federal
Reserve doing anything more than that, as far as its
monetary policy powers are concerned. I think that financial journalists
and economists have made central banking much more complicated than
(13:24):
it needs to be.
Speaker 1 (13:25):
So what mechanism specifically would you use to make those
things happen? I mean, we're all trained, right, Society is
trained that when you hear Federal reserve, your interest rates
right after. So if they're kind of overshooting using interest
rates or focusing like a laser on that, what other
mechanisms are available to achieve that sort of demand side stability.
Speaker 3 (13:45):
The most obvious one is the money supply itself. Again,
economists are skeptical of that because the narrow measures of
the money supply don't tend to predict inflation very well,
but the broader ones still do, and I think that
that relationship still does hold. Again, the conceptual way that
this works is still I think the world that we're
living in, right, you print up more money, you're going
to get prices everywhere going up. And so what the
(14:08):
Fed should be doing is trying to keep the money
supply growing to meet increases in money demand that come
from one normal increases in population population growth, and two
increases in real economic activity as the economy actually churns
out more cars and suit jackets and laptops and houses.
(14:28):
The money supply should keep up with that to facilitate
those additional transactions, So that could be one intermediate measure
the FED actually starts to pay more attention to something
that the vulgar FED did pay attention to for a
while back in the nineteen eighties that I would actually
credit it with ending the Great inflation. So I think
that this is something that has a proven track record.
It's much more modest than what the FED is trying
(14:49):
to do right now, but I think that we could
use some modesty and some humility in central banking. Of course,
we would need to have an entirely separate conversation when
it comes to the FEDS regulatory oversight duties over the
financial system when it comes to fighting financial panics and
stemming bank failures. Even there, I think that they're trying
to do too much, which is why it's not working
so well. In general, with these things, monetary policy and
(15:13):
financial regulation are pretty blunt instruments, and so we should
try and pursue broad based goals and simply not try
and find tune things too much because it's just not
going to work.
Speaker 1 (15:23):
It's my understanding, and I could be wrong, because God knows,
we've passed new regulations since I learned the statistic. But
the financial services in banking industry is the most highly
regulated industry around. I mean, so, are you talking about
not deregulation but maybe streamlining processes or moving that investigative
arm away from the FED?
Speaker 3 (15:43):
I would like to send to focus solely on ensuring
banks that are subject to its regulations maintain adequate capital
against short run liabilities. Just make sure banks have a
basic buffer stock right, make sure that they have enough
capital on hand to meet extraordinary events. Beyond that, let
markets do their thing. When you get more complicated than
(16:04):
that one you try and dictate to banks the quality
of capital. When you have all these complicated formulas that
try and weight capital by perceived safety, well, that presumes
that regulators are really good at distinguishing safe assets for
safe assets from risky assets. Who remembers two thousand and eight,
to set all those subprime mortgage assets that went belly up,
We're triple a safe according to the regulators and credit
(16:26):
rating agencies. So it's not clear to me the regulators
have got this at all.
Speaker 1 (16:30):
That's another conversation though about those ratings agencies and how
they absolutely failed spectacularly, maybe on purpose, maybe on accident
in two thousand and eight, So it's kind of like
who do you trust?
Speaker 2 (16:42):
At that point?
Speaker 1 (16:43):
I got a text message that said, Mandy, what did
your guests think about going on the gold standard? That
from Jim.
Speaker 3 (16:51):
Great question. I really like the gold standard historically. I
think it was a mistake getting off it. Just because
something was great one hundred years ago doesn't mean that
it's feasible to return to it today. I'm not sure
what a path back to the gold standard actually looks like.
And sometimes you might think it's pretty simple, right The
United States government owns so much gold, there are so
(17:13):
many dollars outstanding, Divide one by the other. That's your
new gold exchange rate, and boom, you're done. The problem
with that is that the global financial system is really
set up for the US to constantly export dollars in
export US treasury debt, because that's the global reserve currency
and the global reserve asset dollars in US Treasury debt, respectively.
(17:35):
And the faster the developing world grows, the more safe
US assets they demand. If you pull the rug out
from that demand process by restricting the money supply and
treasury supply to whatever's going on in gold markets. I
worry that the short run effect might be so shocking
that it would actually erode whatever good a stable monetary
(17:57):
system could deliver. I could be wrong about that, maybe
to your pessimistic But the way that I approach these
questions is show me what the plan is right to
actually return to a commodity system or even a bitcoin system.
Who cares what the underlying commodity is. Show me the plan,
and then we can discuss the cost and benefits of it.
Because I have a hard time thinking about whether these
(18:18):
things are worth doing in the abstract.
Speaker 2 (18:20):
Doctor Alexander Salter.
Speaker 1 (18:22):
He's an economics professor from Texas Tech University's Business School,
also a researcher at Texas Tech's pre Market Institute. Fascinating conversation.
I'd love to have you back on in the near
future to continue more nerd conversation about the Federal Reserve
and everything else. Thank you so much, alex for your
time today.
Speaker 3 (18:42):
Absolutely MANDI, you have a good one, all
Speaker 2 (18:43):
Right, you two that is Alexander Salter
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