If our monetary central planners in the Eccles Building cared a whit about enabling the workers, entrepreneurs, savers, investors and consumers of America to maximize capitalist prosperity on main street, they’d be worried to death about the collapse of private savings. After all, what raises an economy from a day-to-day subsistence is capital formation. And that wondrous process first and foremost requires deferred gratification and the accumulation of savings out of current income.

Needless to say, over-saving is not the default propensity of mankind as demonstrated through the ages. An incentive in the form of real returns to savings is needed, lest the natural impulse toward “eat, drink and be merry” rule the day.

Of course, that puts our Keynesian central planners in direct opposition to the core rudiment of capitalist prosperity. Professor J.M. Keynes insisted that mankind was prone to save too much, allegedly a trick of the coupon clipping classes designed to rob workers of the extra pint of ale that might come with a more robust level of aggregate consumption and spending. So Keynes’s core policy was to force interest rates lower than the market would otherwise produce, thereby causing the “euthanasia of the rentier”:

“Interest today rewards no genuine sacrifice . . . The owner of capital can obtain interest because capital is scarce . . . [But] there are no intrinsic reasons for the scarcity of capital. . . . I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear . . . It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently . . . . The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest . . . I conceive that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment . . . [The state should] determine the aggregate amount of resources devoted to [investment and] the basic rate of reward to those who own them. [ For some] the enlargement of the functions of government [will seem] a terrific encroachment on individualism [but it is] the only practicable means of avoiding the destruction of existing economic forms in their entirety.”

Keynes was more clairvoyant than even his ample ego understood. Here is the US net national savings rate over the last seven decades. As Keynesian policy became ever more deeply embedded in the double-whammy of bigger and bigger public sector deficits and lower and lower interest rates pegged by the Fed, savings at length have totally disappeared.

What was a 10% share of GDP set aside for investment in productivity and growth in the post-war heyday of American prosperity has now diminished to 0.0%, and often  to even negative rates of savings available for capital formation. And it is chronic ultra-low interest rates forced on the economy by the central bank that fully explains the ruinous trend depicted in the chart below.

Net National Savings As % Of GDP, 1950 to 2023 

Ironically, this Keynesian anti-savings bias has turned out not to be the death of the coupon clippers, but actually financial music to Wall Street’s ears. When it is recognized that the good folks in the canyons of Wall Street are not apostles of the Almighty pursuing the salvation of mankind, but at the end of the day are actually glorified speculators looking to make a fast buck,  the fatal attraction of low interest rates become self-evident.

To wit, from time immemorial, gamblers have feasted on two financial vectors, which can be described as arbitrage of the yield curve and inflation of valuation multiples. As it happens, the low-interest policy of the Fed facilitates both: The central bank always leans heaviest against interest rates at the front end of the yield curve, thereby providing the mother’s milk of the carry-trades.

For much of the decade before the Fed’s belated pivot to inflation fighting in March 2022, in fact, overnight rates were forced to the zero bound, meaning that Wall Street speculators could buy longer-term bonds and other risk assets with higher yeilds or rates of appreciation, and fund them with essentially zero cost short-term borrowings.

At the same time, the carry trade bid for longer-term bonds helped lower yeilds and elevate prices on these securities, as well. So speculators captured the spread on bonds as well as the appreciation on stock prices that were being driven ever higher by lower cap rates and higher PE multiples. And they did so on high leverage, which is to say tiny dollops of risk capital blended with ultra-low borrowings on the carry.

So, yes, they did laugh all the way to the bank. So doing, these Fed-dominated financial “markets”drastically mispriced the very essence of what matters for savings and capital formation. That is, it signaled to elected officialdom that government borrowings were dirt cheap and that the manifold spending constituencies decamped on the banks of the Potomac could be indulged at will, while punishing savers viciously with negative rates of return after inflation and taxes.

Indeed, the punishment for plain old bank account deposits was so severe that mom and pop were forced to wade into the Wall Street casino in pursuit of the mirage of positive yield in the junk bond market and stock market gambling den. And even this inured to the benefit of the big swingers of Wall Street who were there first, ever ready to ride the rising price wave fueled by the late-coming homegammer-lemmings or, at length, to bag the latter with their own over-priced holdings.

In any event, any one even halfway educated in classic finance would take one look at the above chart and come to a thundering conclusion. Namely, that a return to sustainable main street prosperity requires a thorough-going normalization of interest rates. That is, rates that are higher—much higher—for longer. Much longer.

Savers need to be brought back into the financial ball game with alacrity, even as government borrowers are made to face a punishingly high carry cost on the massive debt they have accumulated and continue to compound.

And yet, and yet. Upon still another post-meeting presser, when the guy supposedly in charge of the nation’s macroeconomic planning committee droned on professing that he wasn’t sure about almost everything, the question nonetheless recurs. To wit, did Powell mention a single word about the single most important ingredient of the economic prosperity he professes to be dispensing?

That is, did the Fed Chairman say anything at all about capital formation and savings?

Well, no, he did not utter a peep on the topics. Instead, he spoke in absolute circular double-talk, thereby reminding anyone who cared to reflect on his words that the nation’s monetary politburo everywhere and always slides by the seat-of-its collective pants, viewing the economy through an opaque Keynesian lens as it goes:

We know that reducing policy restraint too soon or too much could result in a reversal of the progress we have seen on inflation. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.

In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate. We will continue to make decisions meeting by meeting.

Then again, what if the Fed was not in the monetary central planning business and eschewed any and all attempts to manipulate and peg interest rates? Would the US economy then tumble into a black hole of  financial instability, recessionary contraction or, even worse, a modern day replication of the Great Depression?

It would not. The default modality of free market capitalism is growth and rising prosperity because individuals workers, consumers and businessmen are motivated to make it so. And the instability of financial markets and business cycle contractions are a bother to society’s betterment only because the central bank makes them so.

Congressman Carter Glass and the 1913 authors of the Fed had it right from the very beginning. American capitalism did not need then, and does not need now, a monetary central planner to keep the macro-economy on the straight and narrow and to push society livings standard and wealth levels steadily higher. Free people do that all on their own.

At most, what was needed then, and possibly now, is a liquidity window for the banking system. The former would be available to member banks in temporary need of funding beyond the market for deposits and short-term credit, but only at market rate of interest plus a penalty spread for tapping the public credit,  and only on the basis of sound bank collateral representing claims on private sector goods already produced (finished inventories) or sold (accounts receivable).

Moreover, the job of scrutinizing such collateral would be the work of green-eyeshades with a G-16 rating in the Federal bureaucracy. No economic PhDs need apply. No twelve wanna be geniuses sitting on the open market committee of the Federal Reserve would even be necessary. The FOMC would be abolished outright.

As it is, all of the Fed’s Keynesian macroeconomic planning nonsense does great harm to the main street economy, even as it pleasures Wall Street with trillion of unearned windfall gains. Therefore, a return to a pure Glassian Discount Window model of Fed operations is the only way back to sound money, as well as to de-progamming of the Federal Reserve from its captivity to the the traders and gamblers of Wall Street, and the top 1% for whom they ply their trades.

The head of a Fed so liberated would never emit the following gibberish as did Powell on Wednesday. The idea of returning savers to a new round of low rate punishment is economically asinine, but Powell claimed that only a tad more of progress on the inflation front would open the door to a new cycle of rate cuts once again.

Well, no. Interest rates cuts are not a reward for even 2.00% inflation. To the contrary, interest rates are the price of money and capital and therefore are the motor force of productive capitalist market. They should never be toyed with—even by the Almighty monetary central planners at the Fed:

I think there’s also other paths that the economy could take which would cause us to want to consider rate cuts and those would be, two of those paths would be that we do gain greater confidence, as we’ve said, if that inflation is moving sustainably down to 2 percent and another path could be an unexpected weakening in the labor market, for example. So, those are paths in which you could see us cutting rates.

Needless to say, the Fed’s rogue posture as an monetary central has infused the entire financial culture of Wall Street with a sense of entitlement to easy money—even if it does immense harm to the rank and file workers and families of main street America.

This speech in the form of a question at yesterday’s presser tell s you all you need to know about the disdain for the people that has been engendered by three decades of  Greenspanian monetary central planning at the nation’s central bank.

The Fed as we know it must go. And Robert F. Kennedy may be just the statesman to make it happen.

CRAIG TORRES. Craig Torres from Bloomberg. Two questions, first simple one; given
the run of data since March, has the probability in your mind of no cuts this year increased or stayed the same? That’s the first question. Second question; Chair Powell, you joined the Board in 2012, and I’m sure you remember as I do, what the jobless recovery was like, lawyers, accountants, all kinds of highly qualified people who couldn’t get jobs. And given your history here, I wonder if there’s an argument for being more patient with inflation here. We have strong productivity growth that’s helping wages grow up, go up, we have good employment, and so it seems to me there’s a lot of hysteria about inflation. I agree, nobody likes it, but is there an argument for being patient and working with the economic cycle to get it down over time?

Well, Mr. Torres, here is the real purchasing power of the average manufacturing wage since 1979 compared to the nominal wage rate recorded in the pay envelope. We do not believe that workers monkey-hammered by central bank inflation for 45 years have been the victims of “hysteria” at all.

No, the have been the victims of a central bank that has showered the 1% and the 0.01% with insensible wealth in the name of an economic doctrine which defies every principle of sound money and prosperous economy.