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At the Fed, the Deep State Hides in Plain Sight

By George Gilder and Richard Vigilante

We’ve never quite liked the “Deep State” as a descriptor, as it tends to suggest dark and, well, deep, hidden machinations by unknown actors.

That’s not quite right. The Deep State consists of a long list of very public institutions, staffed by people listed in some publicly available directory, acting in broad daylight but subverting democracy nonetheless.

In theory, anyone sufficiently interested can keep informed about what these institutions are doing. In practice their actions are almost impossible to track, appeal, or bring under democratic authority.

Essentially, every federal agency, whether “independent” or theoretically subordinate to the Executive Branch, carries three antibodies immunizing it from democracy.

  1. Invisible: Each makes so many rules, handles so many resulting cases and has such discretion in enforcement, that it would take an extraordinary effort for any citizen–or legislator–to track a small portion of what any one of them is doing.
  2. Implacable: Practically speaking if a citizen attracts the unwanted attention of a federal agency, there is nothing to do but give in and cut a bad deal. It is far easier for a bureaucrat to punish a law-abiding citizen than for a prosecutor to nail a violent criminal. The criminal gets the protection of a real court, you don’t.
  3. Irresponsible: Though the political branches–Congress and the President–yield an enormous amount of their power to this not-very-deep state, they like it that way. It gets them off the hook.

The Federal Reserve exemplifies all three. The meaningless melodrama of the federal funds rate is all too visible, but did the public have any hint of the bureaucratic failures that led to two massive bank failures in a month? Did Congress know–much less approve–how those disasters would be settled, with possibly viable banks wiped out, sweetheart sales orchestrated, and credit markets undermined as senior bondholders were punished while shareholders of the acquiring banks were rewarded?

As for implacable, has anyone asked you whether you prefer the risk of a recession to the risk of inflation? Has anyone asked whether you believe the Fed can even do what it claims, or whether recession or inflation are the only choices?

Not for 40 years, since Ronald Reagan blew the Phillips Curve to bits, has inflation been a consequence of growth. Not even when Donald Trump’s 2017 tax cuts led to the lowest unemployment rate in 77 years did inflation appear.

Yet now, without consulting any democratically elected body, the Fed declares it must save us from the horror of too many people working and, horror of horrors, getting raises. Even if the Fed had the power it claims, which we doubt, have the U.S. central bank leaders asked you or your catatonic Congressperson which you prefer: losing your job or paying a few more pennies per dollar for groceries.

This a very real question for several million American households that will be impoverished if the Fed realizes its fondest hopes. Shouldn’t they be asked? Shouldn’t their neighbors?

Worst of all, the very existence of the Fed excuses Congress, and only to a slightly lesser extent the President, from responsibility for the soundness of the current health of the economy. Biden may pay some political price for rising prices but far less than he or Congress deserve. The myth of the Fed’s power shields them all.

The prevailing narrative is that inflation kicked in because the Fed:

A. Kept interest rates too low for too long, and/or

B. Let the money supply get out of hand.

“A” asks us to believe that 156 months (roughly since 2008) of a near zero Fed funds rate is no problem, but cross that red line at 168 months and all Hell breaks loose.

“B” asks us to forget that Aggregate Demand is not determined by M (money supply) alone, but by M x V (velocity). During the run-up in the money supply, velocity collapsed, as it often does when the government tries to give people money for which they can find no productive use.

We all know what really happened. The government, for more than three years, under both Trump and Biden, paid people not to produce; then let Europe slide into war; then proceeded to cripple our domestic energy supply, all causing massive supply shortages.

Miracles would have been required to keep prices stable.

Happily, if the government had ignored the rise in prices altogether and just stopped doing any of those bad things, a miracle was readily available in the form of an economy liberated 40 years ago to create decades of inflation-free growth.

The myth of the Fed provided an excuse for the government to do nothing. And yet doing nothing was the right solution all along. Too bad the government couldn’t accept the gift.

*   *   *

Since what we do for a living is write about technology investing, and you wouldn’t always know that from the subjects we cover in this column, we’ve decided to add a new feature. Every week we are going to offer you some stuff we’ve been reading with insights for tech investors:

SoftBank’s Arm registers for blockbuster U.S. IPO

This is a huge event. Arm is easily one of the 10 most important firms in the global semiconductor eco-system and the only one that is still private, depending on where you rank Huawei. Does this mean that the IPO pathway to capital raising is back after some 20 years of Sarbanes-Oxley-imposed underperformance? Probably not. The real driver here is the Federal Trade Commission’s fanatic hostility to tech M&A, acquisitions long having been the main alternative to repressed IPOs. Last year, the FTC halted Nvidia’s acquisition of Arm, prompting Softbank, Arm’s principal owner, to default to an IPO even in today’s weak market.

ASML: Whistling past the graveyard or just high on life?

ASML holds the strongest monopoly in the semiconductor arena. It is the only company that can make the advanced photolithography machines required to produce the last three generations of state-of-the-art microchips. Many, including us, have worried that the Biden administration’s self-imposed embargo on tech exports to China would cost ASML dearly, but the company, which announced consensus-beating revenue forecasts last week, does not seem to be worried, or isn’t admitting it.

Surprise, surprise, Japan already seeking workarounds to U.S. export ban

Information theory teaches us that only surprise counts as information, which is why we have no comment.

China responds to U.S. export ban by… banning U.S. imports

Possibly even less surprising.

All hat and no cattle: Corning on networks’ promised fiber buildouts

Corning, the world’s leading supplier of optical fiber, is calling baloney on big fiber buildout plans that aren’t equating to earth moved. Our take: fiber buildouts are politically popular and heavily subsidized. But some of the biggest buyers, especially the legacy telcos, have a long record of over-promising and under-delivering. That’s why we still like cable as the winner of the broadband war.

Canadian cable leader Rogers delivering 8 gigs per second in live tests

And here is a great example of why we think cable wins: Coax cable can’t beat fiber’s theoretic top speeds, but it can deliver more bandwidth than you’ll ever realize you have.

House Introduces Bipartisan Legislation to Restore Immediate Deductibility of R&D Investments

And not a minute too soon. A huge portion of semiconductor R&D is directed at production 12-24 months out in an industry in which innovation is so relentlessly necessary that R&D must be treated as an operating expense.

IMPORTANT ANNOUNCEMENT: We are having our Eagle Virtual Trading Event on Tuesday, May 16. If you haven’t signed up for this yet, there’s still time. Just click here now to sign up for free. You won’t want to miss this online event — as we bring together all of Eagle’s investment experts at the same time to reveal the Second Half Outlook: 7 Ways to Beat the Market. Reserve your seat now by clicking here.

P.S. Come join George Gilder and other Eagle colleagues on an incredible cruise! We set sail on Dec. 4 for 16 days, embarking on a memorable journey that combines fascinating history, vibrant culture and picturesque scenery. Enjoy seminars on the days we are cruising from one destination to another, as well as dinners with members of the Eagle team. Just some of the places we’ll visit are Mexico, Belize, Panama, Ecuador and more! Click here now for all the details.


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