The Clear and Present Danger in the Fed

A proponent of instituting subzero interest rates. A supporter of taxing cash. A hater of gold. These are not the concepts of a socialist, nor are they the ramblings of a big government statist. They are the ideas of  “conservative” nominee for the Federal Reserve board of governors: Marvin Goodfriend.

In November, President Trump tapped Goodfriend to fill a seat on the seven-member board of governors. He is considered a top monetary economist, gaining experience as an economic advisor in the administration of President Ronald Reagan, and research director of the Richmond Federal Reserve Bank for 12 years.

Though Jerome Powell received overwhelming confirmation to become the 16^th chairman of the Federal Reserve, Goodfriend was not extended the same level of support. Last week, the Carnegie Mellon University professor delivered prepared testimony to the U.S. Senate Banking Committee, which prompted a sweat-inducing grilling from Democrats.

Senator Elizabeth Warren (D-MA) is generating business headlines for her questioning of Goodfriend’s record. She stated that she was concerned because of his recommendations to tighten monetary policy when the unemployment rate was at 7%. Sen. Warren told Goodfriend:

"Based on the kind of judgment that you have demonstrated, American families are very lucky that you weren’t on the Fed board over the past several years and I think it would be a mistake to put you on the Fed board now.”

Essentially, the senator is upset that he suggested the central bank manipulate interest rates in a different way than she would like.

Because tweaking interest rates is not a policy that should be embraced, the premise behind Warren’s interrogation is flawed. Indeed, it would be wise for small government conservatives to lend their support to Warren for opposing Goodfriend’s nomination, but for entirely different reasons.

A Very Goodfriend of the War on Cash

In recent years, central banks and federal governments worldwide have waged a war on cash. One way to attain victory in this plight is to impose negative interest rates, something that several jurisdictions have successfully done.  Japan, Sweden, and Switzerland are just some of the nations that have adopted the measure – many more are mulling over the idea.

Advocates of subzero interest rates purport that it would encourage consumer spending, a kind of Keynesian stimulus during recessions. But the central planners haven’t gotten their way: consumers have done the opposite. They have saved more, or even concealed their cash in the microwave or hidden under the bed. The solution for statists? Abolish cash.

Goodfriend wants to kill two birds with one stone: install negative rates to spur economic growth, and to penalize you for holding or using cash, which would gradually eliminate physical money.

In an exchange with Senator Catherine Cortez Mastro (D-NV), Goodfriend alluded to a 1999 paper titled “Overcoming the Zero Bound on Interest Rate Policy.” He told the senator:

“I wrote a paper in 1999 for a Federal Reserve System conference which asked what would happen if interest rates went to zero, and what could the Federal Reserve do. I didn’t propose that, that was an academic paper showing what could be done. It was not a proposal. It was an emergency matter we considered as a matter of thinking about these things before anyone ever imagined anything could happen like that.”

However, as the Mises Institute referred to last week, Goodfriend has mused over the subject on another occasion. Discussing the topic of “Designing Resilient Monetary Policy Frameworks for the Future” at the Fed’s annual Jackson Hole retreat in 2016, Goodfriend expatiated:

"The zero bound encumbrance on interest rate policy could be eliminated completely and expeditiously by discontinuing the central bank defense of the par deposit price of paper currency. The central bank would still stand ready to exchange bank reserves and commercial bank deposits at par; and it could stand ready to convert different denominations of paper currency at par. However, the central bank would no longer let the outstanding stock of paper currency vary elastically to accommodate the deposit demand for paper currency at par.

The deposit price of paper currency would adjust flexibly much as floating exchange rates adjust to equilibrate the foreign exchange market when international interest rates differ from each other."

Simply put: if rates were negative 10%, then your $10 would really be worth $9. It would effectively be a tax on cash. Should he be confirmed by the Senate, Goodfriend would hold his position for a full term of 14 years. Do you feel goose pimples on your skin right now?

Powell was already a stretch for critics of the Federal Reserve System, but Goodfriend is downright terrifying.

Goodfriend Joins Others in Killing Cash

For whatever reason, the war on cash dominated monetary policy deliberations in 2016. Perhaps it was because of stagnant economic growth, or maybe the statists were frightened of the uprising of Trump and Brexit voters – they had to try anything to rein in dissent.

Academics and economists regularly commented on removing physical currency from the marketplace.

In May 2016, in the wake of the European Central Bank (ECB) ending the production and issuance of the 500-euro banknote, former Treasury Secretary Larry Summers lauded the smartest men in Frankfurt. He then urged Switzerland and the U.S. to quit printing banknotes with values greater than $50.

In the fallout of the populist revolt, the World Economic Forum elites championed banning cash. Joseph Stiglitz, Nobel Prize-winning economist, and Mark Pietha representative from the Basel Institute of Governance envisioned a cashless society. Of course, using the same playbook as other big government cohorts, they argued that it would be in the name of security and ensure everyone paid their fair share.

Stiglitz said:

“I believe very strongly that countries like the United States could and should move to a digital currency so that you would have the ability to trace this kind of corruption. There are important issues of privacy, cyber-security, but it would certainly have big advantages.”

Could this be why most Americans think they will see the end of cash in their lifetime?

Subzero Rates and the Death of Cash

In any economy, the market should dictate interest rates, but Americans should be grateful that the Fed is beginning to raise them. If Fed Chair Janet Yellen moved ahead with a subzero rate policy, as she hinted a couple of years ago, then the country would be deeply impacted. Negative rates would, for instance, eat away at your deposits. But if you complement the initiative with a cash prohibition, then you’re trapped.

You can’t protect your wealth. You’re coerced to participate in the banking system. The government enhances its surveillance and tracking of the people. You can’t absquatulate from the state.

Legendary investor Jim Rogers was right in February 2017 when he said governments are infatuated with the war on cash because “they can control you.” He told MacroVoices:

“If you want to go and buy a cup of coffee they know how many you drink, where you buy them etc. if they can all put it into electronic formats and they will the world is all going electronic. My children will probably never go to a bank when they’re adults, maybe never go to a post office maybe even never go to a doctor or rarely to a doctor when they’re adults.

Probably we are not going to have as many freedoms as we have now even though we are already losing our freedoms at a significant pace."

It would be wise for President Trump to rescind his nomination of Goodfriend. If he wants to Make America Great Again, then it would be wrong to have a gold-hating, negative rate-loving, cash-destroying official in the most powerful organization in the U.S. today. Trump once warned about the dangers and failures of the Fed, so this was his opportunity to at the very least revamp a Fed without Keynesians, statists, and central planners – the very ones who have debased the U.S. dollar since 1913.

Do you support or oppose Marvin Goodfriend’s nomination? Leave a comment to ask us a question or tell us what you think!