This theme has legs: The Fed is allowing Washington to act irresponsibly because money printing and asset inflation create the illusion of progress in a terminal economy.
It’s a theme I’ve been chipping away at since the government shutdown. Yesterday, former Fed bond buyer Andrew Huszar made the same point. Today it’s former Fed Governor Kevin Warsh in the WSJ:
The administration and Congress are unwilling or unable to agree on tax and spending priorities, or long-term structural reforms. They avoid making tough choices, confident the Fed’s asset purchases will ride to the rescue. In short, the central bank has become the default provider of aggregate demand. But the more the Fed acts, the more it allows elected representatives to stay on the sidelines. The Fed’s weak tea crowds out stronger policy measures that can only be taken by elected officials. Nobel laureate economist Tom Sargent has it right: “Monetary policy cannot be coherent unless fiscal policy is.”
I think this is a powerful idea and it has staying power.
Watch for more comments like this to begin appearing in Washington, at the Fed and more frequently in the mainstream financial press. It’s a line that will increase pressure on the Fed to taper and boost the US dollar.
