Introduction to Zombie Ideas
The last few months have seen a resurgence of zombie ideas that were once considered dead. These ideas, which have been proven wrong time and time again, are rising from the ashes, and it’s essential to remember the past to avoid repeating the same mistakes. The philosopher George Santayana once said, "those who cannot remember the past are condemned to repeat it." This quote holds true, especially when it comes to the influence of the executive branch of government on the central bank.
The Separation of Powers
In modern developed countries, there is a strict separation between fiscal policy and monetary policy. Fiscal policy refers to the power to raise taxes and spend the corresponding revenues, which is shared by Congress and the president. On the other hand, monetary policy refers to the power to control the money supply and interest rates, which is executed by the Federal Reserve. This separation serves as a check and balance on the other, ensuring that no single entity has too much power. The president nominates the Fed’s leadership, while the Senate confirms or rejects these nominees, and the Fed is independent to follow the data and markets to set policy.
The Danger of Combining Powers
The combining of fiscal and monetary policy into one person or one branch of government has consistently led to disaster. A famous example of this is the aftermath of the Treaty of Versailles in 1919, which ended World War I. The Allies demanded that the Central Powers pay heavy reparations for the cost of the war. Since few private investors were willing to purchase treasury bonds to make these payments, the parliaments of Germany, Austria, Poland, and Hungary decided to order their central banks to print the money. This decision led to hyperinflation, with the German mark being worth about one-115 trillionth of its previous value a decade earlier.
Historical Examples of Hyperinflation
This scenario has played out again and again across the globe. For instance, in Zimbabwe, the government printed a hundred trillion dollar bill, while in Argentina, inflation reached 20,000% in the 1990s. Every time lawmakers wanted to bribe their constituents with huge payments from the treasury and force the central bank to fund it with new money, hyperinflation was the result. The only solution to avoid this disaster and maintain credibility is to ensure the strict separation of powers.
The Importance of Independence
The independence of the Federal Reserve is crucial in maintaining trust and credibility in the financial market. If people lose trust that the Federal Reserve is operating independently of political pressure, they will anchor their inflation expectations high, leading to a self-fulfilling prophecy. Institutions like the Federal Reserve are storehouses of trust and credibility, and breaking these unenforceable rules have real-world implications that are nearly impossible to rebuild.
The Consequences of Pressuring the Fed
Pressuring the Fed through insults, trumped charges, and threats of firing to hijack monetary policy will result in higher inflation and crush the shreds of normalcy that voters were starting to sense. Leadership requires policymakers to be honest about costly trade-offs and the long-term consequences. The new administration’s tariff policy and huge deficits have already pushed the inflation monster out of its cage. The Fed’s tough medicine to tame inflation is to increase the interest rate, reducing the excess money supply, and suppressing price increases.
Conclusion
In conclusion, it’s essential to remember the past and avoid repeating the same mistakes. The influence of the executive branch of government on the central bank is a zombie idea that has been proven wrong time and time again. The separation of powers, the independence of the Federal Reserve, and the importance of maintaining trust and credibility are crucial in avoiding disaster. Let’s not conjure up zombie policies of the past and instead work towards creating a stable and trustworthy financial market. By doing so, we can ensure a brighter future for generations to come.
