National Debt, Inflation and the Federal Reserve

My good friend, Alex Pollock, recently authored a thoughtful and important article in the New York Sun about the need for Congressional oversight of the Federal Reserve, something recently advocated by Rep. French Hill in the House and Sen. Rand Paul in the Senate. I have always been opposed to such legislation, believing that the Fed should be independent of the political system. The past two decades of Fed activities have convinced me otherwise. The Fed has already lost its independence, despite Chairman Powell’s heroic efforts to get it back.

The era of the greatest Fed Chairman ever, Paul Volcker, is over, including his enormous achievements in ridding our nation of terribly damaging inflation so painful to the middle and lower economic classes. Absent intervention by the Fed, Congress always responds to inflation by cutting the national defense budget to extremely dangerous levels in a highly dangerous world and by increasing massive, unsustainable social welfare programs intended to assist the middle and lower classes better cope with inflation. That was the story of the 1960s and 1970s before Paul Volcker was named Fed Chairman by President Carter in 1979. The economy and our nation’s stature in the world reached new heights during the Reagan Presidency and the Volcker Chairmanship.

Since that magical period, the national debt has rocketed from $5.6 trillion at the end of the Clinton Administration to $34 trillion today with no end in sight. Not only has the Federal Reserve accommodated the federal debt by printing endless amounts of money, but it has also expanded its own debt from $1 trillion during the Volcker and Greenspan years, to roughly $9 trillion today. Further, the Fed reduced market interest rates beginning around 2010 to the unfathomable level of nearly zero. Talk about a prescription for disaster! Paul Volcker passed away in 2019, and I know he was appalled.

Everybody loves free money, except the middle class and poor, who have trouble borrowing at any cost, and who have to pay for the inflation it causes. We purport to make it up to them with enormous social welfare programs whose cost we pay by slashing our ability to defend our nation against incredibly dangerous tyrants throughout the world. What’s then left over in debt we blithely pass along to our children and grandchildren – or so we pretend, as they won’t be able to pay it either.

Current Fed Chairman Jay Powell, to his great credit, has attempted to turn things around against enormous resistance from the markets and many politicians. Under his leadership, interest rates have risen to roughly 5%, which is still a very low rate by historical standards. Recall that the prime rate was 8% when Volcker became Chairman of the Fed, and the Fed under his leadership took it to over 20% to finally break inflation’s back.

We all went through enormous pain to put the country back on solid footing with a strong economy and a strong national defense. The last four Presidents have thrown that amazing feat out the window. Everyone blames everybody else for the incredible mess we are in. In truth, we are all at fault. We elect too many of the wrong people who believe in the wrong things.

We are not the first great country to slide from the mountaintop – we follow a very long list of them: the Greeks, the Romans, and the British to name just the most recent. They became self-indulgent before being pushed aside by stronger, more disciplined foes. It is way past time for us to put our nation back on track. It needs to begin at the voting box.