Fed Fears Bank Runs Triggered by Social Media

(Mike Gleason, Money Metals News Service) As Federal Reserve chairman Jay Powell expresses indecision over interest rates, metals markets are also exhibiting uncertainty.

Gold continues to hold up relatively well, but none of the precious metals are showing signs that they are quite ready yet to launch higher.

Mainstream investor sentiment toward metals is in the dumps. Exchange-traded instruments linked to gold have seen net investor outflows for several months in a row. And demand for retail bullion has continued to be soft, except among regular long-term accumulators and true bargain hunters.

The speculators and momentum chasers are going all-in on stocks, Bitcoin, and other intangible assets that are now very expensive.

Hard assets are looking very cheap by comparison. Eventually, the tables will turn and sentiment will shift. Value investors who buy low now will have the opportunity to sell high down the road.

On Sunday, Fed Chairman Jerome Powell gave an interview to 60 Minutes. He left the central bank’s next policy move up in the air, downplayed the risk of bank failures, and noted that the U.S. government is on an unsustainable fiscal path. He also admitted the Fed has gotten some important things wrong under his leadership.

Scott Pelley: Was the Fed too slow to recognize inflation in 2021?

Jerome Powell: So, in hindsight, it would’ve been better to have tightened policy earlier. We thought that the economy was so dynamic that it would fix itself fairly quickly, and we thought that inflation would go away fairly quickly without an intervention by us. And so in the fourth quarter of ’21, it became clear that inflation was not transitory in the sense that I mentioned.

Scott Pelley: You seem confident in the banks, and yet the Silicon Valley Bank, second-largest failure in U.S. history. Did the Fed miss that?

Jerome Powell: So yes, we did, and we forthrightly saw that we needed to do better. So we’ve spent a lot of time working on ways to make supervision more effective and also to adapt regulation to a modern context in which a bank run can happen so much faster than it could have even 20 years ago.

Powell admitted that bank runs can happen much quicker in the age of social media, online banking, and exotic financial instruments that are leveraged onto bank balance sheets. But he says not to worry, because this time the Fed has everything under control. Unlike last time and the time before.

Powell does perhaps deserve some credit for owning up to the Fed’s recent forecasting fails. But he wasn’t pressed by interviewer Scott Pelley to explain why central bankers should continue to be entrusted with the power to set interest rates and create currency out of thin air.

They have a lousy track record of anticipating major adverse moves in the economy and banking system. But even if the world’s most brilliant economists ran the Fed, they still wouldn’t know more than the market itself.

And they still wouldn’t be able to fix broken U.S. fiscal policy. Powell laments that the government is borrowing too much but insists that it’s not his role to do anything about it.

Scott Pelley: How do you assess the national debt?

Jerome Powell: We mostly try very hard not to comment on fiscal policy and instruct Congress on how to do their job when actually they have oversight over us.

Scott Pelley: But is the national debt a danger to the economy in your review?

Jerome Powell: In the long run, the US is on an unsustainable fiscal path. The US Federal Government’s on an unsustainable fiscal path, and that just means that the debt is growing faster than the economy.

Neither Congress nor the Biden administration feel any particular urgency to get the deficit under control. That’s because they know they have a buyer of last resort for any new debt that’s issued – that being the Federal Reserve.

If Treasury Secretary Janet Yellen called Jerome Powell to tell him the government needed an emergency cash infusion to avert default, Powell would of course provide it.

So, despite the Fed chairman’s vague and passive calls for fiscal responsibility, he will continue to enable politicians to spend and borrow recklessly – and everyone in Washington knows it.

Elected officials won’t change their ways until the incentives and constraints change. They have little incentive to stick their necks out and oppose programs that have fervent supporters and backing from big donors.

One of the few members of Congress who does is Thomas Massie of Kentucky. He gets called all sorts of nasty names in the media and by his own colleagues for saying no to politically sacred spending. Most recently he was branded an “anti-Semite” for opposing aid to Israel.

It’s just not worth it for most politicians to endure the attacks and risk their careers for the sake of trying to contain spending.

Under a classical gold standard, Congress would face an external constraint on how much it could spend. Any debt it issued would be represented in promises to pay in gold.  The gold supply cannot be expanded at will like the supply of fiat currency.

Of course, gold standards have their critics and their flaws as well. But ever since President Richard Nixon ended the ability of foreign governments to convert dollars into gold, federal finances have been on a dangerous trajectory.

Those who long for a return to sound fiscal policy should understand that it begins with sound money.