my only question is who is our bigger enemy JP
Pal or Chairman Shei this is an actual tweet Donald Trump posted back in August 2019 and
it’s one of the many that has been making the rounds again in recent weeks this is because
Trump is reportedly looking for ways to get rid of Federal Reserve Chairman Jerome Pal
it’s a possibility that has the markets on edge and one that could change the entire way the
financial system works and that’s why today we’re going to examine exactly why Trump wants to get
rid of Pal whether he could actually do it when it could happen and what effects it could have
on the markets my name is Nick stay tuned the short explanation why Trump wants to get rid of
Pal is because Trump believes the Fed is making its policy decisions based on politics rather than
economics in other words Trump wants to get rid of Pal because the Fed isn’t lowering interest rates
and Trump believes this is an intentional mistake the long explanation however is much more nuanced
and truly fascinating you see Trump didn’t always hate Pal in fact Trump was the one who picked him
to be the Fed chair in 2017 it wasn’t until late in 2018 that Trump started publicly criticizing
Pal and the Fed’s policies as you might have guessed Trump’s criticism focused on the Fed’s
decision to raise interest rates tweeting quote I think the Fed is making a mistake they’re so tight
i think the Fed has gone crazy trump’s criticisms continued throughout 2019 with tweets like the
one I mentioned in the introduction believe it or not but Trump was arguably right in the end
and that’s because in September 2019 there was a crisis in the US repo market put simply there
was an unexpected spike in interest rates in major lending markets the result was that the Fed had to
step in with emergency liquidity lowering interest rates but here’s where the truly fascinating part
comes in in August 2019 a former New York Fed President Bill Dudley published an opinion piece
in Bloomberg in which he basically argued that the Fed should push back against Trump’s policies for
context the New York Fed president is technically the third most powerful person on the Federal
Open Markets Committee or FOMC the Fed Governing Body which makes policy decisions this is exactly
what Dudley wrote quote “There’s even an argument that the election itself falls within the Fed’s
purview after all Trump’s re-election arguably presents a threat to the US and global economy to
the Fed’s independence and its ability to achieve its employment and inflation objectives if the
goal of monetary policy is to achieve the best long-term economic outcome then Fed officials
should consider how their decisions will affect the political outcome in 2020 translation: The
Fed should do whatever it can to prevent Trump from winning the election in 2020 in the name of
its dual mandate which is 4% unemployment and 2% inflation dudley publicly calling for this was
seen as many as quite unprecedented because the Fed is supposed to be apolitical at least in
theory in practice however this doesn’t seem to be the case a 2022 paper about the political
affiliations of Fed economists found that the ratio of Democrats to Republicans at the central
bank is 10:1 the catch is that Fed economists are not the ones who decide the Fed’s policies
you’ll recall that’s the FOMC’s job also Jerome Pal himself as chairman is a registered Republican
even so the fact that Fed economists are the ones who provide the data required for the FOMC to make
their policy decisions suggests that there is a real chance that politics is finding its way into
the Fed’s policies and this means that Trump’s current claim that the Fed is acting politically
isn’t as crazy as it may initially appear more importantly the presence of this apparent
evidence could give Trump the justification he needs to get rid of Pal and take control of the
Fed which actually has precedent before we get back to the video though I have to let you guys
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to the video now if any of what I’m saying sounds familiar that’s probably because you watched our
video last year predicting that this would happen uh to refresh your memory we highlighted the
fact that central banks have the power to act as modern-day bond vigilantes due to their large
bond holdings and activities for reference bond vigilantes are large holders of government bonds
who will sell or threaten to sell their bonds in response to government policies they don’t like
until said policies change the most recent example of bond vigilantes inaction is believed to have
been Liz Truss’s ousting as UK prime minister back in 2022 the TLDDR is that Truss proposed
a budget that included large tax cuts holders of UK bonds sold their bonds in protest as this
would essentially lower their real returns this caused bond prices to fall which caused a crisis
for UK pension funds holding bonds the result was that Truss was forced to resign after only 49 days
in office as we pointed out in our video however the UK bond market had been made vulnerable
to volatility by the Bank of England which had announced bond sales shortly before Truss’s budget
proposal we also underscored the fact that other populist leaders such as Italy’s Giorgio Maloney
reportedly toned down their rhetoric after seeing what uh happened to Trust fearing that the same
bond crisis could happen to them most importantly we noted that the Trump administration was hyper
aware of the possibility that the US bond market could be weaponized against them the same way it
was against Truss if Trump won the 2024 election lo and behold we’ve seen no shortage of US bond
market volatility in recent weeks and this begs the question of whether the Fed is in any way
responsible for this bond market volatility and before we answer that question though we must
ask a bigger question and that’s whether the recent bond market volatility is being caused
by vigilante type activity as far as we can tell the answer seems to be yes evidence for
this can be seen in the fact that the new US bond sales by the Treasury Department have had no
issues despite the volatility in the broader bond market logically if there was truly an issue with
US bonds then there wouldn’t be so many investors lining up to buy the new US bonds being sold the
fact that there are suggests that the broader bond market volatility is political and not economic
in nature if this too sounds familiar that’s because it’s also something we mentioned in our
video last year specifically as it related to the snap election in France uh to recap French
bond market volatility started spiking when it looked like the populist party would win the
election but sales of new French bonds had no issues as with the current bond market route this
suggested that the French bond market volatility at the time was political not economic in nature
the fact that the bond market volatility calmed down after the populist party rolled back many of
their proposals was evidence of bond vigilantes in action given these facts it stands to reason that
the recent bond market volatility is being caused by bond vigilantes and that their purpose is to
try and force Trump to roll back his policies namely his tariffs and this brings us back to
the question of whether the Fed is in any way responsible for this volatility at first glance
you might think that the answer is yes because the Fed has continued to keep rates high and reduce
the size of its balance sheet both of which could be contributing to the bond volatility that we’ve
seen upon closer inspection however you realize that it’s impossible to prove any political
intent the Fed can and has argued that its tight monetary policy is necessary to combat inflation
which continues to be above the Fed’s 2% target notably this is the same argument the Bank of
England gave for why it sold UK bonds it was just fighting inflation and it just so happened
that this fight contributed to the downfall of the Truss government there’s no way to prove this
was the true intention and by the way guys if you’re enjoying this video so far then smash that
like button to let us know and don’t forget to subscribe to the channel and ping the notification
bell as well to make sure you don’t miss our next one now just because the Fed’s intentions can’t be
proved doesn’t mean that Trump thinks he doesn’t have the pretext required to take over the central
bank on the contrary he’s explicitly stated that he thinks the Fed’s decision to cut interest rates
ahead of the election last year was political and that the Fed’s current refusal to cut interest
rates while other central banks are cutting now is no different obviously firing the Fed chairman
would only be the first step in taking over the Fed because you’ll remember that it’s not just
the Fed chairman or the FOMC for that matter it’s the economists too as such you could say
that Trump firing pal would be more symbolic of the restructuring that could come if he succeeds
and that is why the media and the markets are so focused on this action as so-called Fed whisperer
Nick Tamioris pointed out in a recent Wall Street article Fed governors can currently only be fired
by the president if there’s cause i.e a very good reason nick explained that what counts as cause
has never been defined by the courts but is known to include quote inefficiency neglect of duty or
malfeasants in office this is interesting because it means that Trump could theoretically fire Pal
and other members of the FOMC if they fail to act in accordance with the Fed’s mandate in case you
forgot the Fed’s mandate is keeping unemployment around 4% and inflation around 2% and in case you
missed it unemployment has been steadily rising above 4% while inflation has been trending back
down to 2% if unemployment continues to rise and or inflation continues to fall and the Fed refuses
to ease monetary policy in response this could be concrete evidence that Fed officials are acting
politically and would theoretically give Trump enough legal grounds to fire Pal and all members
of the FOMC the caveat is that we’re months away from this possibility and the Fed would likely
ease before that happened and this is where things get complicated trump’s recent comments
and the reports of what’s being said behind the scenes suggests he’s not looking to wait that long
but also that he’s not rushing just as we were shooting this video Trump came out and said he
has no intentions of firing Jerome but uh this is something that could change again in a heartbeat
even so it’s safe to assume that firing Pal would be a last resort given the profound impact it
would have on the markets but this assumes that Trump has the option of firing Pal without cause
if he needs to and this ties into the main reason why Trump wanting to fire Pal has been all over
the news and that’s the Trump administration’s recent filing with the Supreme Court to repeal
a ruling from 1935 that effectively prevents the president from firing people working at federal
agencies without need for cause the funny thing is that the appeal has nothing to do with firing
people at the Fed it’s about firing people at the National Labor Relations Board and the Merit
System Protection Board trump has asked the Supreme Court to consider the appeal in May and
this would reportedly result in a ruling on the appeal in June or July in case it wasn’t clear
enough a successful appeal would make it possible to fire Pal as such you could say that it’s not
the political leanings of the Fed that matter here but the political leaning of the Supreme Court
as it so happens the Supreme Court is believed to be biased towards Republicans given that six of
the nine justices were appointed by Republicans not only that but three of the nine justices were
appointed by Trump which has led many to believe that they could vote in favor of this appeal the
Supreme Court ruling in favor of Trump’s appeal would not only cause enormous volatility in the
markets as investors would speculate that Trump would use this power to take control of the Fed
but it would also call the integrity of the US legal system into question which would do enormous
damage to the US if that wasn’t bad enough it’s unlikely that the Fed would go quietly according
to this pro crypto lawyer the Fed would either ignore the order or fight the order in which case
there could be many months of appeals and this is evidenced by Pal’s recent comments regarding
the Supreme Court appeal where he said that he’s not sure if the ruling could be applied to the
Fed since it’s technically not federal and this relates to something that I mentioned earlier and
that’s that there is actually precedent for the government taking control of the Fed after the
2008 financial crisis the Richmond branch of the Federal Reserve published a truly interesting
paper about Fed independence and we’ll leave a link to that down in the description for you to
come back and read later for those unfamiliar the Fed is supposed to be independent of the
government in practical terms this means that the Fed is supposed to change interest rates
depending on economic conditions like inflation and unemployment rather than to accommodate
US government spending in this sense you can think of taking control of the Fed as practically
forcing the Fed to purchase US bonds to suppress their yields newslash but that’s exactly what
happened during the 2008 financial crisis the Fed bought trillions of dollars of US bonds
to stabilize the financial system this is extremely significant because this means that the
independence of the Fed has been on the decline since 2008 and that’s what the paper from the
Richmond Fed warned the 2008 financial crisis was the beginning of the end of Fed independence
quote “It puts the Fed in an untenable position when the Fed must cooperate with the Treasury
on items such as banking regulation and payments system policy this interdependence exposes the
Fed to political pressure to make undesirable concessions with respect to its credit policy
initiatives in return for support on other matters this is exactly what we’ve seen
since under both Democrats and Republicans the craziest part is that the paper reveals that
Fed independence seems to follow a cycle of its own when the Fed was first founded back in 1913
it was controlled by the US government to the extent that the Fed didn’t even have its own
building all Fed policy decisions were made at the Treasury building the Fed’s famous Eckles
building wasn’t built until 1937 but it still didn’t have independence at the time marin Eckles
the seventh Fed chairman after whom the building was named wrote in his memoirs that during the
1940s he worked more as an administrator of the Treasury Department than the Fed chairman another
Fed official put it more bluntly quote “We are not the masters in our own house.” According to
the Richmond Fed paper it took decades for the Fed to become independent with the author arguing
that true Fed independence was only achieved with the appointment of Paul Vulkar as the Fed chair
in 1979 when you realize that Fed independence has been eroding since 2008 you understand that
the US government taking control of the Fed has also been a multi-deade process putting things in
perspective in this way makes it clear that Trump firing pal would just be one of the many steps
along the way to the Fed losing its independence and it wouldn’t be the first either nobody knows
how long it will take for the Fed to lose its independence but uh history suggests that the
process is inevitable and will be accelerated by global crises and global conflicts 100 years ago
World War I the Great Depression and World War II were the three steps that caused the Fed to lose
its independence in this century 2008 seems to have been the first step towards the Fed losing
its independence and 2020 was the second step nobody knows for sure what the third step will be
but history suggests that it won’t be good for the average person or for the markets for that matter
and this brings me to the big questions will Trump fire pal and if he does when will it happen and
what effects could it have on the market as we’ve learned history suggests the answer is that Trump
would likely fire Pal in the event of a crisis and chances are that markets would be crashing because
of this crisis and this is only if Trump can fire Pal without cause something the Supreme Court will
decide over the summer objectively though it’s unlikely that Trump would fire Pal in the event of
a crisis even if he could and that’s just because the Fed has been slowly losing its independence
since 2008 and has repeatedly proven that it would step in to stabilize the bond markets if need be
case in point Boston Fed President Susan Collins announced that the Fed would step in to stabilize
the bond market during the recent volatility if it had to what this means is that there’s actually
no need for Trump to fire Pal or anyone else at the Fed for that matter because they’ve already
signaled that they would step in and do what it takes if an actual crisis occurred this hasn’t
stopped the media from running with the narrative and it’s worth keeping in mind that the narrative
comes from an unrelated Supreme Court case about firing other government officials it’s also
worth keeping in mind that Pal’s term ends next May uh this means that Trump will be
able to appoint whoever he wants to the Fed with minimal disruption in about a year’s time
some have speculated that Trump could announce he intends to appoint someone who’s already on
the FOMC thereby making it possible to control the Fed via a so-called shadow Fed chair who’s
already there put differently Trump doesn’t need to fire Pal to get what he wants from the Fed
and the only reason he would fire Pal was if he couldn’t get what he wanted from the Fed by other
means the only circumstance in which this would happen would be a massive crisis of some kind and
under such circumstances the markets would be down so badly that PAL’s firing probably wouldn’t
do much the real question is what will happen when the Fed completely loses its independence
something that seems to be inevitable regardless of who’s in office the answer is also something we
mentioned in our video about bond vigilantes last summer and that’s that the Fed will eventually be
forced to print money to finance whatever it is that the government wants to spend money on be it
ideology or infrastructure and this is the truly terrifying outcome because it’s one wherein tens
if not hundreds of trillions of dollars will be printed and misallocated a trend that some would
say has already begun the result would be rampant inflation where any asset that’s scarce relative
to the money supply would rise in fiat terms that would be literally everything but only truly
scarce assets would gain value in real terms in this context that means gold Bitcoin and any other
digital or physical commodity that’s recognized by investors as a store of value the thing is is that
if the misallocation of capital is bad enough then there could also seriously be supply shortages
so much so that you won’t be able to buy what you need even if you have the money at the same time
the economy would struggle due to these shortages of critical supplies this would create a degree of
stagflation that we’ve never seen before and some would say that this has also already begun and
you can learn more about the risks of stagflation watching this video right over here and if you’re
not subscribed to the channel yet you can do that right over here that’s me for now thank you guys
very much for watching and I’ll see you soon
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