The takeaway …
I like to take a common man approach to understanding what is happening at the Federal Reserve, at least I try to. We hear all the academic and political explanations for why the Federal Reserve System exists, how it came about, etcetera, etcetera. Last night during the GOP presidential primary debates held in Miami, I tweeted out that any discussion of inflation without a discussion of the role of the Federal Reserve would be null and void. Florida governor Ron DeSantis must have heard me because a few minutes later, Mr DeSantis argued that the American politico-economic system was not a centrally planned one and that Federal Reserve policy actions gave that impression.
Mr DeSantis was the only candidate that addressed the Federal Reserve beyond three words. In the end his vocalizations about the Federal Reserve System signaled the same level of ignorance transmitted by the silence of the other candidates. Here is the reality….
The American political economy is centrally planned. The State’s intent is to optimize the distribution and extraction capabilities of its currency; to ensure that the currency flows into as many productive and consuming hands as possible. The State does this by chartering banks that then create the loanable funds marketed to the producing and consuming public. The State has chartered the central bank, the Federal Reserve System, to regulate via interest rates the market for loanable funds. The spread of these funds, whether between banks or between banks and consumers keeps the U.S. political economy alive.
(Are you ready for the next trader challenge? https://traderswithedge.com/?r=348 )
If the GOP candidates understood this, then they would remain as silent as possible on the issue of inflation. If you are a trader (there is no such thing as an investor), then you want two things to happen. First, you want the assets you bring to the bank as collateral to increase in value every damned day. Asset appreciation should be your goal. It is indicia of your wealth. If I am sitting on $100,000 of property today, I want that property to be worth $100,027 tomorrow.
Second, I want to generate as much yield as possible from that asset. I want to actualize my wealth, moving from paper to reality. For example, if my property is now worth $100,027, why not also increase the yield (rent) on that property? Yes, other economic factors will hinder the ability to do so i.e., the renter’s ability to pay more rent, but the goal is to seek out opportunities to increase that yield.
Traders who use the banks to intermediate their trades should give the bank this true dual mandate, capital appreciation and yield appreciation. The Federal Reserve System as regulator of the interbank market should have this true dual mandate at the forefront.
Neither GOP candidate gets this as policy. The incumbent U.S. president does not get this as policy. To express this narrative would be suicide politically. Instead, the candidates will pitch softballs at the American public regarding consumer price inflation, offering programs that are doomed to fail or, ironically, drive up the very price inflation candidates say they wish to reduce.
Traders should filter candidate messaging through this framework, bearing in mind that the candidates either are ignorant or being disingenuous.
Alton Drew
9 November 2023
For my views on the political economy, buy my book at amazon.com/author/altondrew. Thanks for your support.
The stats ….
30-Day Federal Funds Futures and Options: 94.67.
Discount Window rate: 5.50%.
Interest on Reserve Balances: 5.40%.
Effective Federal Funds Rate: 5.33%.
10-year Treasury: 4.49%.
Lawyers Write the Bets. Bankers Sell the Bets. 