Two policies concern me when it comes to a Republican-controlled Congress and President, if that should come to pass. One is protectionism that could lead to a 30s-style trade war and subsequent world depression. Donald Trump would be just the man to bring that on with his threat of raising tariffs 35% to surplus nations like China, Mexico, and many other exporters to us.

This would cause massive unemployment in the name of creating jobs in America! A contraction in world trade which is happening now, will only be exasperated by raising taxes on Americans - which is what increased tariffs are. US consumers would be forced to cut back on a lot of the discretionary purchases they make today, and that would reduce world-wide demand in a world that suffers from lack of demand already.

See for a further discussion of Trumps trade policies.

But even more threatening is a movement within the Republican Party to eliminate or take over the Fed. The Washington Post ran an article covering a meeting of top intellectuals of the party. The article began...

"JACKSON HOLE, WYO. —  They converged last week on a red barn here in the shadows of the Grand Tetons, a small but passionate group of free-market thinkers and conservative activists hoping to convince the Republican Party that the Federal Reserve is ruining the economy.

“...the fight against the Fed has never been more timely: The era of easy money unleashed after the financial crisis appears to be coming to a close as the nation’s central bank prepares to raise its target interest ratefor the first time in nearly a decade."

There is no easy money and hasn't been since the financial crisis. On the contrary, the official money supply has remained tame. In fact, M2 is unchanged since April. Loans by banks have dramatically contracted. Only those that really don’t need a loan are offered one.  Even Ben Bernanke was turned down for a loan attempting to refinance his mortgage when he left the Fed. The financial system as we knew it is broken. The velocity of money is at an all-time low as money refuses to chase goods. But regardless of the fact that the money supply is not chasing goods and inflation has fallen to historic lows conservatives continue to argue, and have been for over seven years, that the Fed is creating money which will lead to inflation. It hasn’t!  To continue...

"It will be a moment of truth, conservatives here say, when the economy crumbles without the central bank’s support and the folly of the Fed’s policies will be revealed."

The Federal Reserve exists to support the financial system by preventing a systemic collapse. This is its function as "bank of last resort". They accomplished this. Yet, the new monetary activists blame them for their actions while espousing theories that have been proven wrong for seven years. All of their predictions of an inflationary depression have not only not come to pass but have gone the opposite way.

“The easy part is bringing interest rates to zero,” famed investor and Fed skeptic Peter Schiff told the crowd in Jackson Hole. “Anybody can start taking drugs. Try stopping.”

We did. QE3 ended last November. The Fed has not been affecting interest rates since then. What these so called "free market” folks want is not a market interest rate, but for the Fed to artificially raise interest rates, because "it's the right thing to do". It is theory over market forces that drive the anti-Fed conservatives. They claim to "know" the right level of interest rates. Yet it's the Fed that so far has remained "data dependent"…which is to say, market dependent.

“No one seeking our nation’s highest office — and there are many, at my last counting — can seriously contend without addressing these issues.” Heritage Foundation President Jim DeMint, a former senator from South Carolina, told the conference-goers. “Gaining public support for changing our destructive monetary policy will be challenging, and it will require reformers to speak in terms Americans understand, and for reformers to understand that this will be a long and difficult battle that we can and must win.”

So, the main issue confronting America according to these monetary activists is to replace the Fed with their own monetary theories. Now here comes the meat of their arguments.

"Among the criticisms: The Fed was keeping interest rates artificially low and fueling speculative bubbles."

There are no bubbles in the economy. The economy is growing at the slowest pace since just after World War Two.

"The helicopter-drop of money known as quantitative easing did little more than inflate stock markets and fund Washington’s deficit spending."

Stock prices have followed earnings for six years. Multiples are no higher today than historically and the market lately has turned down following the lower corporate earnings being reported by business. And to the second point, the Fed does not fund spending. All of our spending is paid by tax collections and borrowing. Our national debt is made up of our deficits which is now approaching 19 trillion dollars. This is all borrowed money to pay for our excessive spending.

President Obama just mandated seven additional sick days of leave per year for up to 300,000 government employees. Will the Fed fund this? Obviously not. It will be added to the deficit and borrowed from China to pay our bureaucrats. The Fed does not control fiscal irresponsibility. The President and the Congress  are supposed to. 

"The bailout of big banks left them bigger than ever. A Gallup poll  during the height of the recession found Americans ranked the Fed last among government agencies in performance — behind even the IRS."

There was no bailout of banks. All loans by the Fed were not gifts of money but bridge loans with market rates of interest charged to every borrower. All have been paid back. Even AIG has paid back its huge loan which was the largest loan the Fed made. The American taxpayer reaped huge rewards in interest payments during the four years it took to pay those loans back. Yet the public believes banks were bailed out mainly due to the constant reiteration by conservatives that the Fed bailed out the banks. They did not -- the Fed saved the banks and financial institutions they could, and assisted in merging the rest.

The fact is that banks kept the money the Fed loaned to them, and instead of loaning the money out and making a profit on it, they have held it as excess reserves against outstanding loans. The banks are afraid to lend money for fear of not getting repaid. The reserve-to-loan-ratio is one of the highest today in the history of the modern US banking system. The US financial system is relatively unleveraged and strong. Deleveraging has continued by both the financial industry and consumers since the financial crisis of 2008.

It is deleveraging that is affecting the economies and the price levels of the world, not the Fed.

It wouldn't be so bad if these monetary activists that want to get rid of the Fed were some kind of kooks or fools, but to see some of the finest minds in the world assemble and make so many blunders poses real danger if they should ever get their way. And this is coming from me, a proponent of a return to the discipline of the gold standard (see my book "The New Gold Standard") that basically agrees with most of their objectives but not their methods.

The difference is they believe in theories, many of which are correct but don’t apply in the situation we have before us today. You can't tighten the money supply when you face deflation, falling velocity of money, and constant deleveraging in a recessionary deflationary world. A return to a gold standard is still the ideal, but not in this fiscally insane world we live in. It is not the Fed that needs to be disciplined by strict rules as the new monetary activists seek – it’s the Congress and the President.

The new monetary activist wants to impose anti-inflationary policies where inflation does not exist.  It is a solution is search of a problem.  They want to increase interest rates in spite of the fact that market interest rates have fallen to historic lows. They want tighter money in a world where money is harder to get than ever. They are fighting the wrong enemy. It is deflation, recession, and fiscal irresponsibility that are the enemies -- not the Federal Reserve.

If the Fed raises interest rates as the monetary activists are insisting, they will do so in spite of all the evidence the markets are signaling; it will amount to a shift in Fed policy away from being data-driven to theory-driven, and that will be a victory for the so-called free market advocates at the expense of the actual free market and the economy.

There is no logic in the new monetary activist demanding the Fed raise interest rates rather than demanding that the market set interest rates -- not if you claim to be pro free market. Market interest rates are always preferable to mandatory interest rates as are being called for today. 

The major monetary contradiction of our day is the passionate so-called free market advocates demanding government intervention into the economy. Both the conservative monetary activists and the liberal fiscal activists unfortunately accept the same premise: they want to impose their theories on the market rather than allow the market to be free.