Dollar Doomed as Biden Taps Yellen for Treasury

“President-elect Joe Biden rolled out the first set of nominations for his economic team on Monday, formally announcing his selection of Janet Yellen to be Treasury secretary.”1

The media loved it.

Mrs. Yellen, age 74, has been around America’s money for a long time. She’s a policy celebrity.

In the 1990s, Yellen ran President Clinton’s Council of Economic Advisers. In the 2000s, she was President of the Federal Reserve Bank of San Francisco. From 2010 to 2018, she was a member of the Federal Reserve Board of Governors, and then Chair of the Fed from 2014 through 2018.

Quite a resume, right?

Still, my colleague Jim Rickards didn’t join the cheer section. In fact, he pointed out that Yellen has, “No understanding of money and monetary economics.”

Hmm…  Is something amiss with the Yellen fanfare?

Let’s dig into this…

First, let’s take a factual look at Yellen’s background in economics, which begins in my basement where I have a box full of old Harvard course catalogs from 1972 through 1978 when I was a student there.

Somehow or another — a hoarding instinct, I suppose – I kept these rare and revealing volumes for 40+ years.

Yellen prophesies

Inside these pages are the Yellen prophesies!

In the mid-1970s, a young Yellen was on faculty at Harvard, employed as an assistant professor of economics.

Janet Yellen

Janet Yellen, long ago, on faculty at Harvard.

Yellen earned a PhD in economics from Yale University in 1971. Her thesis was entitled Employment, output and capital accumulation in an open economy: a disequilibrium approach.

Yellen’s Yale faculty advisers were Nobel Laureates James Tobin and Joseph Stiglitz. Okay… impressive.

Post-Yale, Yellen migrated north from New Haven to Cambridge and taught at Harvard from 1971–1976. What did she teach?

Here’s where those Harvard catalogs come in handy. They provide an overview of the Harvard economics faculty back then.

Indeed, the catalogs reveal many familiar names. Titans of their time, some might say. Professors like Otto Eckstein, Kenneth Arrow, Robert Dorfman, Wassily Leontief.

And nestled within the ranks of junior faculty is the name… “Janet Yellen, Assistant Professor of Economics.”

From 1972 – 1973, Yellen taught “Aggregative Economic Policy.”  This covered “Theories of national income determination, employment, interest, investment, money, and economic growth from Keynes to the present.”

From 1973 – 1974, Yellen taught the same course with the same name. Except the course description changed to “Keynesian and post-Keynesian theories of national income determination, introduction to monetary theory, cyclical fluctuations and economic growth.”

Then from 1975 – 1976, after a leave of absence, Yellen taught two courses: “Macroeconomic Theory” and “Economic Theory.”

The first course covered “Keynesian and classical models of employment and income determination; theories of inflation, aggregate fluctuations and growth; principles of stabilization policy; theories of consumption, investment and portfolio choice.”

Her second course covered “Static Keynesian models and their classical antecedents; modern monetarist and post-Keynesian models; theories of consumption, investment, and portfolio behavior; theories of aggregate fluctuation and inflation; economic models and policy optimization.”

Do you notice anything here? Like perhaps… Keynes, Keynes, Keynes!

In essence, Yellen taught party-line, Keynesian economics. At Harvard, no less.

And what does that mean? Glad you asked…

Here’s the short version…

Keynesian economists believe that private sector economic decisions are inherently inefficient.

That is, normal, everyday people — like you and me — simply don’t behave properly. We allow human flaws like emotion to dictate how to spend money.

Oft-times, people actually do things that professional economists don’t want to see. People buy into fads and create bubbles.

This cumulative “micro” behavior adds up and creates inefficiency at the “macro” totality. The economy experiences unstable and even volatile aggregate demand. Uh-oh…

The worst inefficiencies come in the form of recessions when aggregate demand drops. Plus, there’s inflation when demand is high.

The Keynesian solution to inefficiency is targeted policy responses, typically guided by Really Smart People with PhDs from big name universities like Harvard, Yale, Stanford and more.

This means active measures by a (supposedly) knowledgeable central bank, raising or lowering interest rates. Plus, working fiscal policy — aka government spending, from the (supposedly) all-seeing, all-knowing government.

The idea is to (ahem…) “stabilize output” over any business cycle. Indeed, the Keynesian dream is to eliminate business cycles completely.

Thus, the standard Keynesian policy response to recession is — wait for it! — government spending. It’s almost always on politically popular programs like roads and other infrastructure, transfer payments, military programs and much more.

The Keynesian answer to inflation is to raise taxes when the economy heats up to pull money out of circulation. But again, emotions typically prevail in this sector of policymaking.

The long and short is that Keynesian economics advocates a mixed economy, in which the private sector jumps through policy hoops created by government and its legions of Really Smart People.

Keynes or no, however, spending and tax policies are absolutely creatures of politics.

Go back to the micro level, where individuals are governed by human flaws like emotion. And per Keynes, we can’t have that…

Then again, national-level political forces are similarly governed by emotion, although at a different, broader and macro scale.

I won’t belabor the points. People write books about Keynesianism, versus, say, the “Austrian” school of economics.

And smart people have long argued over the merits of recessions. That is, how best to clean out the muck from an economy bogged in inertia and overflowing with malinvestment due to bad decisions at both the micro and macro level.

As for central banks controlling business cycles… Ha! Good luck with that…

Which brings us back to Janet Yellen.

After Biden announced her as his future secretary of the Treasury, Yellen quickly issued a statement on Twitter, saying, “We must restore the American dream. … As Treasury secretary, I will work every day towards rebuilding that dream for all.”

My colleague Rickards doesn’t exactly buy into those noble sentiments. He forecasted, “The U.S. will go broke and a clueless Janet Yellen will supervise the entire operation.”

According to Rickards, the Biden administration — and by extension Yellen, at Treasury – will follow a script that’s written around the idea of Modern Monetary Theory (MMT).

Under MMT, the Treasury and Fed act in concert. This means, per Rickards, “Merging Treasury and Fed operations into a single engine for spending, borrowing and printing.”

In other words, MMT adopts the Keynesian fiscal idea of spend-spend-spend, with the bill paid by the Fed, which simply monetizes the outflow.

Appointing former Fed Chair Yellen to Treasury will grease the skids for MMT. We’ll likely see hand-in-glove levels of monetary cooperation between Treasury and the U.S. central bank.

Generally, the job of any Treasury secretary is to fund the operation of our federal government. At its root, the Treasury collects funds and pays the government’s bills.

With Yellen as Treasury secretary, the mission will transform outright to subsidizing Biden’s campaign promises; such as writing off student debt, offering “free” college, other free stuff, and the so-called “Biden Plan” for energy, aka his bizarre, untenable version of the Green New Deal.

Biden’s increased spending will compound the current fiscal hemorrhage in Washington, courtesy of the endless wars of the Bush-Obama eras, plus the past four years of the spendthrift Trump administration, all complicated by ongoing COVID-related losses, costs and expenses.

Indeed, the federal government currently spends almost $2 for every $1 it takes in from taxes. You don’t make that up with volume.

Looking ahead, the only way to balance the government books is to monetize the debt.

Hence, the critique that Yellen will preside over further destruction of the dollar.

Let’s keep dissecting this MMT idea. It has micro- and macroeconomic implications.

One basic issue of governance is who controls the currency. In the U.S., who runs the dollar machine? Is it Treasury or the Fed?

MMT characterizes currency as a so-called “public monopoly.”

At first glance the public monopoly idea is not far-fetched. The Constitution gives Congress the power “to coin Money, (and) regulate the Value thereof” (Art. I, Section 8). So yes, Congress has power over the nation’s money.

But anymore, we’re a long way from 1787 when the term “Money” meant coins; as in copper, silver or gold.

Today, we have a central bank (the Fed) that creates what’s called money supply. But the Fed doesn’t run a classical printing press. (That’s for the Bureau of Engraving and Printing.)

Instead, the Fed conjures up currency out of the ether. There’s nothing real or tangible to back it up. No metal. Not even paper. The Fed’s money supply is entirely electronic.

The Fed simply makes bookkeeping entries. It transfers electronic dollars from its Fed-computers to the computers of the Treasury and of major banks. Voila… Money!

Which brings us back to MMT. The idea requires the Fed to create however many dollars the government (through Congress) wants to spend.

That is, under MMT money (currency, actually) is simply a creature of politics.

Another way to say it is that MMT is Keynesian-style spending without even a semblance of monetary limits.

Using raw political power, Congress will appropriate funds. And the Fed will be obliged to issue dollars to pay the bills. The Fed becomes the banker to a Ponzi-style payout.

Under MMT, fiscal policy — which is macro and subject to large-scale politicking and political emotion — will drive monetary policy.

Of course, there’s a deep flaw in this, going back to the economics of a classical gold standard.

With gold, the stability of a currency is anchored by yellow metal in vaults. Call it a “Fort Knox standard.”

As we’ve discussed before, gold was behind the Bretton Woods Agreement, which stabilized the world economy after World War II.

Absent gold, the stability of the dollar must be anchored by an international consensus that American politicians and policymakers will not go nuts and that they’ll keep the nation’s books somewhat balanced. They won’t spend-spend-spend and then monetize the debt.

Stated another way, the dollar derives its strength from the integrity of the balance sheet of the Fed.

But if the Fed blows up its balance sheet by monetizing debt? Whoops!

And yet, here we are…

And here’s what Yellen will confront: the need to monetize the debt.

It’s a dollar disaster waiting to happen.

The point is, MMT is fundamentally flawed. It’s rooted in ignorance about what creates wealth.

MMT is magical thinking, along the lines of how some children actually believe that electricity comes from the switch on the wall.

But no… Dollars are not the same thing as wealth. Real wealth is based on real things, like energy production, extraction of ores and foodstuffs, “value added” manufacturing, and services that improve the lot of people who pay for them.

Indeed, by comparison, MMT makes the Marxian idea of the “Labor Theory of Value” look good. That is, the notion that the economic value of an article or service is based on the amount of labor that goes into producing it.

With Labor Theory, at least you’re measuring the value of an input and comparing it against the value of an output.

But with MMT? It’s just politically driven spend-spend-spend, backed by monetize-monetize-monetize. Which is why MMT is a setup for failure, to destroy the dollar.

On the best of days, dollars are not wealth. Dollars are just a claim on wealth. It’s a point that too many people fail to understand…

Too many dollars claiming the same wealth is a recipe for inflation and destruction of the currency.

Which means that too many dollars actually don’t make a nation rich. They make a nation poor.

And this is where Yellen’s affinity for Keynes will open the door to wrecking the U.S. currency.

With Yellen at Treasury, the upside is that hard assets will benefit… Especially precious metals, because you can’t create gold or silver out of the ether.

We’ll have more on that as events unfold.

On that note, I rest my case.

That’s all for now… Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder

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1 Biden Fills Yellen-Led Economy Team, Risks Clash on Budget Chief, Bloomberg

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A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

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