Oh No, She’s Back!

When Janet Yellen vacated the Eccles Building in 2018, we inwardly thanked her for her service — for leaving, that is.

Away from the controls… from the dials and switches, from the levers and throttles… she could work no more damage.

No more fidgeting interest rates. No more blowing bubbles.

She could take to the talking circuit… and the “think” tanks.

There she could mumble her hocus-pocus in remotest obscurity, lulling the ears and glazing the eyes of yawning audiences.

But 2020 has proven an unlucky year, an annus horribilis. We should not be surprised then that Ms. Yellen is returning to public disservice…

Mr. Biden will likely win his contested election.

Perhaps charmed by her youth, 78-year old Biden has plucked 74-year old Yellen out of retirement.

If stamped by the Senate, she will be the next Secretary of the Treasury — the first woman ever to man that post.

Yet not the first banality to ever man that post. She would merely be the latest.

This we can safely conclude: She will not take aboard the counsel of Treasury Secretary Andrew Mellon…

Liquidate It All!

After the crash of ‘29, Mr. Mellon advised President Herbert Hoover to:

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people…when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapseeven a panic was not altogether a bad thing.

Fortunately, Dr. Paul Krugman does not read our humble publication. The poor fellow would pass out in faints at Mellon’s savagery.

Contrast Mr. Mellon’s fire and brimstone fiscal religion with Ms. Yellen’s Keynesian social gospel:

There is a huge amount of suffering out there. The economy needs the spending.

Ms. Yellen is a labor economist. It is therefore unlikely that she would “liquidate labor.”

And given her gargantuan exertions to hold up the stock market during her tenure as Federal Reserve Chair… it is equally unlikely that she would liquidate stocks.

Thus she has prodded Congress to spend grandly and voluptuously on additional stimulus.

But why Janet Yellen? Were other worthy candidates — perhaps of less vintage — unavailable?

The Fusing of the Treasury Department With the Federal Reserve?

Perhaps Mr. Biden’s puppeteers instructed him to select Ms. Yellen in order to link Treasury to the Federal Reserve.

Analyst Charlie McElligott claims her nomination amounts to:

1) “lower forever” policy support, big fiscal advocacy (even though the magnitude of that is dependent on the Republican Senate coalescing, which is difficult to imagine at this juncture) and,

2) quasi-debt monetization, as the Fed and Treasury evolve closer to one like-minded entity

Edward Mills — a Raymond James policy analyst — claims Jerome Powell and Janet Yellen would constitute a “compelling dynamic duo.”

That is our central concern.

Dynamism in Washington constitutes a general menace. We would rather bind their hands, glue their shoes and tape their mouths.

The nation’s debt exceeds $27 trillion. The Congressional Budget Office projects this year’s budget deficit at $3.3 trillion. Trillion-dollar deficits stretch to the far horizon.

The dynamic duo will only pile up higher debt.

Misunderstanding Keynes

Each is a disciple of Lord John Maynard Keynes. During the Great Depression, Mr. Keynes put his general theory into general circulation.

Deficit spending can revive the animal spirits, he gushed, set industry’s idle machines whirring… and put the economy back on the jump.

It is the miracle of water into wine. It is the divine multiplication that transforms five bread loaves and two fish into food for the multitudes.

It is something for nothing. It is the free lunch.

This is the promise of the Keynesian multiplier and its devotees.

It may appear miraculous under debt-free conditions. Yet as we have noted before, Keynes himself wagged a stern finger and warned:

Deficit spending is not an open-ended warrant for government extravagance.

Keynes insisted each dollar of de‌bt must yield more than it cost. Else it does not stimulate. It depresses.

Explains Mr. Lance Roberts of Real Inves‌tment Advice:

John Maynard Keynes was correct in his theory that in order for government “deficit” spending to be effective, the “payback” from investments being made through de‌bt must yield a higher rate of return than the de‌bt used to fund it.

But the vast majority of United States government spending fails Lord Keynes’ exacting test.

Not Wine, but Vinegar

Today’s system is so soaked through with debt… additional debt does not yield wine… but vinegar.

It does not multiply bread and fish. It divides them.

Each dollar borrowed since 2008 has yielded under $1 of growth — pennies on the dollar.

It is a sort of miracle in reverse, an anti-miracle.

It merely piles up to unholy levels of debt. Debt drains the future… leaving it barren and empty.

Plunging into debt induces a sort of hand-to-mouth living. It diverts cash flow to the service of existing debt — often unproductive debt.

The tab ultimately comes due. Yet the wherewithal to settle it is gone. It has been squandered.

In days as these, we might recall the bedrock principles of economics…

Quack Panacea for Economic Ills

Here is Henry Hazlitt from his masterly primer on economics, Economics in One Lesson:

Everywhere government spending is presented as a panacea for all our economic ills. Is private industry partially stagnant? We can fix it all by government spending. Is there unemployment? That is obviously due to “insufficient private purchasing power.” The remedy is just as obvious. All that is necessary is for the government to spend enough to make up the “deficiency”…

Here we shall have to say simply that all government expenditures must eventually be paid out of direct proceeds of taxation; that to put off the evil day merely increases the problem… Once we look at the matter in this way, the supposed miracles of government spending will appear in another light.

That light is not a positive light, but a negative light — a black light.

“People Come To Believe What They Need To Believe When They Need To Believe It”

We have little doubt that Janet Yellen will preside over a prodigious spending, a dazzling spree.

We believe equally that it will amount to a colossal waste.

Yet we cannot fault her. What else is she to do? Heed the liquidating counsel of Andrew Mellon?

The resulting flood would drown the entire economy. No, it is too late to turn back. Mr. Mellon is long gone.

They must spend and spend more. In their minds there is no choice.

“People come to believe what they need to believe when they need to believe it,” says our co-founder, Bill Bonner.

Janet Yellen, Jerome Powell, Steve Mnuchin, Donald Trump, Joseph Biden, countless others along the way…

They have all come to believe what they needed to believe when they needed to believe it.

Reality was too harsh to confront.

But let us rejoice — the Dow Jones passed 30,000 today…


Brian Maher

Brian Maher
Managing Editor, The Daily Reckoning

The Daily Reckoning