Fiscal and Monetary policy enjoys a symbiotic relationship. Both the fiscal side of the house as well as the monetary side believe (in true Keynesian fashion) that spending is the answer to nursing the U.S. Economy back to health. This shared philosophy ensures that fiscal and monetary policies – State-Led Capitalism – will be coordinated for years to come.
Whether Trump wins re-election or Biden wins office, both assuredly will continue the big government spending policies that have plagued the economy since FDR’s New Deal. Trump took Federal spending to new levels with COVID as the excuse for exercising zero fiscal restraint. These expansionary government policies would not be possible without a complicit Federal Reserve. After all, only the Fed is capable of monetizing debt-funded fiscal policies at scale.
The Federal Reserve hasn’t exactly exercised restraint. It is unclear why the Fed believed it was necessary to overstep its original mandate in order to support the economy as a result of the COVID pandemic. There is a lack of evidence as to why it was necessary for the Fed to invest in High Grade and High Yield ETFs rather than stick to precedent and transact only in government agency securities. The various credit facilities where the Fed is investing in individual debt securities is a whole new game of Fed Mission Creep. The Fed has over-stepped its mandate, has created asset bubbles, has encouraged moral hazard and has ensured the interest rates remain at ground floor levels for years to come penalizing savers, debt investors and the U.S. Dollar in the process.
The math is simple. The fiscal and monetary sides will each pursue expansionary policies. This can only mean that 1.) the Fed will maintain low interest rates so as to minimize the debt service cost 2.) the Fed will continue to print money to fund expansionary initiatives. Chairman Powell and his White House counterpart better hope that the U.S. Dollar maintains reserve currency status for a long time. My bet is that China’s RMB becomes the world’s reserve currency within the next 20 years.
Had former N.Y. Federal Reserve Chairman Benjamin Strong lived another 2-3 years perhaps the 1930 run on the banks could have been avoided. Strong was an advocate of the Federal Reserve buying government securities to provide liquidity to the financial system.