Yellen’s Appointment As Treasury Secretary Raises Five Critical Questions

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By Michael Every of Rabobank

The official US presidential transition process has belatedly begun, in part, and the key slots in the provisional Biden administration are now being filled: this is despite sustained Trump court challenges (and a painfully-slow partial ballot recount in Wisconsin, and a second recount that may or may not include matching signatures to ballots in Georgia). On those slots, as the old joke goes, it’s déjà vu all over again.

Most important for markets, at Treasury we have none other than Janet Yellen. This means she will be the first person to have held the troika of US economic positions, from running The Council of Economic Advisors, to running the Fed, to now running the US economy. Obviously, this is once again the promise of a ‘safe pair of hands’ likely to see the financial markets smile. No boat-rocking likely on that particular watch.

However, it does raise some interesting questions/points.

  • First, what does it say about the US that it is becoming such a gerontocracy? Alongside Biden (78), on the climate crisis it’s John Kerry (76) who leads the ‘charge’, while Yellen is 74 – and Nancy Pelosi in the House is 80. On the other side Trump would be 78 if he runs again in 2024, which seems almost certain in what the market takes as the certain event that his legal challenges fall short; Wilbur Ross (82), who is still ‘running’ Commerce; Larry Kudlow (73); and Ruddy Giuliani (76). This all seems akin to the original cast Star Trek movies (or even the reheated Picard series recently released), where much of the special effects budget was spent on wigs and trusses. (OK, not so much the wig for Picard, but you catch my drift.)
  • Second, what does that say to the younger and/or more progressive political voices pushing for fresher thinking? Yellen’s long career arc from academic economics to economic advisor to presidents, then to Fed chief, and now to economic chief for a president, has not exactly overlapped with a concurrent period of relative American economic ascent – or at least not for the majority of its population. Yellen of course expressed her concerns over inequality as far back as September 2014: yet the central conclusion of that speech was that the poor would be less poor if only they had more assets, and her term at the Fed was yet another episode of the US melodrama that has been running nearly as long as Star Trek: ‘Asset Rich, Income Poor’. So one sees why Wall Street will cheer this Biden appointment: let’s also not forget that Yellen infamously stated in June 2017 that she did not expect another financial crisis in her lifetime.
  • Third, while having a Treasury secretary who knows the Fed inside out ‘has its advantages’, central banks and finance ministries are increasingly joined at the hip around the world. Yet wouldn’t the appointment of Yellen pry the door of politicized central banking open even wider? After all, a Fed board member may now consider that not only can the decisions they make while in office earn them up to $250,000 for an after-dinner speech after they retire, they could also now lead them to High Office too. (And the after-dinner speeches after that.)
  • Fourth, instead of sitting as Fed Chair and impotently wishing the government would do more fiscally, Yellen will now perhaps get to sit as Treasury Secretary… and wish the government would do more fiscally. There is no guarantee that the US House, with its slim Democrat majority, or the Senate, with its two Georgia run-off elections on 5 January, will be willing to provide the huge stimulus the US may well need.
  • Fifth, and more an observation, at least Yellen will know what the Fed is going to do: zilch. Evans yesterday stated that he doesn’t see rates moving until late 2023 at least and maybe 2024. One could argue that the second 2 could be a 3 and it would still be true. Look at Japan.

Anyway, don’t expect any serious discussion of any of these issues in the financial press right now. The Great Restoration is in full swing* (*legal challenges pending): Laisses les bon temps rouler! Stocks up; bond yields down; USD down; risk on; Party on, Wayne; Party on, Garth; we are not worthy!

However, sticking with the serious discussion and the theme of politics and central banks, there is news from New Zealand, a small country with big ideas – recall it was the first to start independent, inflation-targeting central banking. On which note, new Finance Minister Robertson has proposed adding house prices to the central bank’s remit. In other words, not only would the RBNZ have to keep CPI around 2%, but it would also have to keep house price inflation stable.

Obviously these two forces pull in completely different directions: lower rates are needed to try to keep inflation up….but lower rates push house prices through the roof, and so the opposite is needed. What’s a central bank to do? Of course, there are always macro-prudential measures to limit mortgage lending. Yet then one ends up flattening the property market and/or reducing first-time buyers’ ability to get a home loan, and a lot of the time the property market IS the economy, meaning that rates then need to go even lower,…and macroprudential measures become even tighter. This speaks to another aspect of our global problems that markets, basking in The Great Restoration (Party on, Garth; Party on, Wayne), refuse to see.

You can go the neoliberal route, as we have for decades,…and you end up with an oligopolistic, plutocratic, distorted global economy dripping with populism, or worse.

You can try to stay neoliberal and micromanage parts of the economy to get the series of contradictory outcomes you want (e.g., low and stable inflation AND high-but-not-too-high and stable house prices), but it ends badly: a few years ago it was using interest rates to target inflation and the exchange rate – see how that ended in Asia.

Or you can realize this whack-a-mole sees one have to become ever-less (neo)liberal on all manner of fronts and just cut to the chase and go back to Bretton Woods, or worse – if that were even possible.

Yellen faces all these problems too. We all do. But in the short term, expectations of negative RBNZ rates have withered and NZD is up, as it logically should be – which is just what exporters don’t want to see, of course, and leads to even more reliance on domestic demand and the housing ‘wealth effect’.

Frankly, one sees the appeal of The Great Restoration.

Yes, neoliberal economics doesn’t work in the long run: we are currently playing out that heuristic all over again even if it looks Yogi Bull-er right now. But then again, nothing really works, or for long; and neoliberal economics is at least a deliberate reassuringly simple answer to a very complicated set of problems – and there are always those $250,000 after-dinner speeches (and High Office).



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