“. . . and That’s Terrifying,” writes Brendan Brown in the title of his recent Forbes op ed. According to Brown, Yellen is simply another in the line of deflationphobes and monetary authoritarians who have run the Fed in the last 20 years and are eager to please their political masters. Yellen’s choice as Fed chair thus presages an agonizing era of asset bubbles and crashes, stagnant recoveries, and an age of 1970s-style galloping inflation. Brown eloquently makes the case:
A doctrine of monetary authoritarianism has emerged through the past two decades which features the targeting of inflation (at 2% p.a.), a deep phobia of deflation, the systematic denial of asset price inflation and its monetary origins, an embracing of regulation as a key tool of macro-economic management and so-called prudential control, and the legitimization of currency warfare (by the US).
The doctrine is deeply flawed. Its pursuance has produced violent cycles of asset price inflation and deflation including the greatest financial panic and greatest recession in modern times and now the weakest economic recovery ever from great recession. Ahead looms the probability of a 1937-style crash and recession. And beyond that there is the specter of another age of high inflation. . . .
And so it is with the doctrine of monetary authoritarianism which pervades the Federal Reserve and is fully endorsed by its present political master, the Obama Administration. There are no grounds at all to imagine that the new nominated chief, Professor Yellen, will demonstrate any flexibility in applying the doctrine let alone experiencing a “road to Damascus” moment in which she doubts its validity.
So what drama can we expect in the theatre of the Yellen Fed?
Most likely it will open with some economic disappointment. The US economy may well enter one of its frequent growth cycle lulls (indeed it may already have done so). She will postpone QE tapering – indeed postponement could become indefinite. No doubt one element in the decision of the White House to nominate her was the belief that she could engineer a powerful growth cycle upturn ahead of the crucial mid-term Congressional elections (November 2014).
