Bfast with a former Fed Chair

Today I got to hear Tom Hoenig and Christopher Leonard (author of "The Lords of Easy Money") speak at Business for Breakfast! Here are some takeaways for those who couldn't make it:

- We are in unchartered territory. Quantitative Easing (QE) has been an unprecedented experiment that is playing out.

- QE began in the wake of the Great Financial Crisis in 2008. The Fed purchased treasuries and mortgage-backed securities at scale in order to prop up asset values and inject liquidity (in the form of bank reserves) into the 24 largest banks in hopes this would cascade throughout the economy. In essence, money was created out of thin air.

- During the next few years, the US deficit grew from $1.65T (that's trillion) to $4.5T. Asset prices did indeed increase--mortgage backed securities, treasuries, the stock market all performed well....except, wages remained flat, productivity was weak, and overall growth anemic. (Mr. Hoenig explained that economic inequality grew very quickly during this time)

- Starting in 2010, Tom Hoenig began voting "no," acting as the lone dissenter to the Fed's monetary expansion. This lasted (8 no votes) until he left the Fed in 2012. Mr. Hoenig dissented on the grounds that he had seen something similar play out in the 80's in the Midwest with high inflation and slow growth. He believed QE would create an asset bubble and the Fed couldn't stop from growing the bubble even if it wanted.

- In addition to QE, the Fed kept interest rates at 0%. Since money was cheap, this encouraged borrowing and consolidation, not investment in capital. So we saw unprecedented amounts of stock buy backs from publicly traded companies. This was the "financialization" of everything. Some of the best minds from the Ivy League went to Wall Street, instead of working as engineers or entrepreneurs.

- "The US began to think it was invincible, it used monetary tools to fine tune the economic cycle, forgetting that increases in productivity from entrepreneurs is growth, not money creation." ~ Tom Hoenig

- Any attempts to tighten by the Fed, by reducing the balance sheet or raising rates, was met with resistance by the markets (taper tantrum 2013, repo spike 2019...and now bank failures 2023).

- When CV19 hit, the Fed increased it's balance sheet to $9T, while the US government incurred a $1T plus deficit annually for several years, growing the US debt to $31T where it stands today. We are on pace for total US government debt of $43T by 2033.

- Suddenly, in 2021, inflation perked up, cresting at a 9% year over year CPI

- While the Fed has created its own problems, the US government's ability to grow debt more slowly than GDP, or run a balanced budget, means the Fed has to try to improvise.

- The Fed has 3 choices now: 1) Continue to operate as it has--to spend, monetize the debt, and inflate the currency. This leads to runaway inflation, no growth, real wealth decline. 2) Fed tightens to stop inflation; US government keeps spending money and growing the deficit. This will play out in the 70's stagflation scenario. Low growth, volatile inflation, wealth declines. 3) "Test Kitchen Canada." In the late 90's the Canadian central bank cooperated with the government to reducing spending, eliminate subsidies...after several years of slow growth, the economy stabilized and began healthy growth.

- Mr. Hoenig reminded everyone that the US is still the envy of the world and the strongest economy. It has the 13th highest per capita GDP but will decline unless Americans are willing to make hard choices that entail everyone suffering a little now.

-?????Mr. Hoenig commented on AI, saying that an increase in productivity will be needed, and deflation will come. CBDCs are a terrible idea.