This morning at 4am Eastern Standard Time, Dr Janet Yellen issued the following statement to the press:
My fellow Americans
I feel it is my duty to inform you of certain contradictions in monetary policy that I no longer feel able to tolerate. These exist at the level of mandate, strategy and data, and I will briefly describe them below.
In terms of the dual mandate of the Federal Reserve – to maintain inflation at or about 2%, and to maintain full employment – I must inform you that the tools we have been using for this are hopelessly inadequate. Indeed the notion that a centralised committee could ever control an economy of 300 million people using models as inadequate as ‘The Philips Curve’, or as crude as the overnight rate, is absurd.
This disconnection from reality becomes accentuated by the fact that our currency, the US dollar, is the world’s reserve currency. Our interest rates, and the cross rates of the dollar with other currencies, particularly those in emerging markets, have enormous impact on the global economy, and cannot be ignored. The net effect of this is that our actions are not independent of political considerations, both here and internationally. I am afraid that you have been misled – the Federal Reserve is not now, and never has been, independent.
In terms of monetary strategy since the crisis of 2007-2009, I must inform you that our over-arching concern has been the survival of the banks. The power structure in the banks is so powerful, and so intertwined with the political structures in Washington, that had we allowed market forces to complete their verdict on the banks, whilst it would have been possible to ring-fence the productive economy from contagion, it would have collapsed the political system. The powerbrokers on Wall Street, and their major shareholders, would have taken Washington down with them. To use an old colloquialism – they know where all the bodies are buried.
The notions of ‘trickle down’ and ‘the wealth effect’ were misdirection propagated by my predecessor, supported by myself. The bulk of QE has been held inside the system as reserves. Its effects have primarily been to immunise Wall Street from the possibility of losses, facilitate increased leverage, and enable those already ‘asset rich’ to gain from front-running what has effectively been a ‘sure thing’.
Turning finally to data: The employment figures are inflated and bear no relationship to the number of Americans who are under-employed, doing multiple part-time jobs, or have simply been discounted by the system. Similarly, the inflation figures bear no relationship to what normal people refer to as ‘the cost of living’; instead they fulfil the function of holding down automatic increases in government benefits and entitlements, whilst inflating the real cost of living for normal people, particularly those struggling to meet healthcare costs or put their children through college. The inflation figures fulfil the function of facilitating the continued sustainability of government debt – what Keynes might have described as ‘default through inflation’, although recent generations of economists have overlooked that aspect of his writings.
In short, we have ignored a phenomenon that all good scientists should be aware of – when a useful measure becomes a target, particularly an isolated one - it ceases to be a useful measure. It becomes the focal point for ‘goal-seeking’ behaviour. The information it provides loses its objective basis and becomes a tool of obfuscation rather than revelation. If I am to be completely honest with you - government statistics are dishonest.
In conclusion, I have been dishonest with you, the American People; as has your Congress and your Executive branch of government. It is with sadness, but relief, that I tender my immediate resignation from the Board of the Federal Reserve. My final recommendation is that a full audit of the Fed’s activities over the past ten years be carried out by a independent enquiry led by a nationally respected figure, acceptable to both parties and both houses – if such a person can be found. I apologise unreservedly for my part in what might truthfully be described as a fraud on the American people, and I will provide my full co-operation with the inevitable enquiry that will follow.
Dr Janet Yellen, Chairperson of the Board of Governors of the Federal Reserve
At 4.10am, Dr Yellen awoke in a cold sweat. After describing her nightmare to her husband, fellow economist and Nobel Prize Winner George Akerlof, during which they shared a soothing pot of camomile tea - she concluded it was nothing more significant than last night’s sushi, and resolved to dine earlier in future. She showered, put on her house-robe and went to her study to review the daily spread sheets, before leaving for the office at 6.30am. Normal service was resumed.