Stockman: Central Planning Is The Problem

Authored by David Stockman via InternationalMan.com,

It seems damn obvious that neither Jay Powell, Donald Trump, the 12 geniuses on the FOMC, nor any other set of Washington apparatchiks should be setting interest rates. That’s a job tailor-made for millions of players on the free market without any help, nudges, guidance, or big fat thumb on the supply/demand scale by the central bank.

It also seems equally obvious that under the current post-1987 regime of Keynesian activism at the Fed that interest rates have been way too low for most of the past four decades. Indeed, the very idea that interest rates on the money market should be negative or even close to zero in real terms is an out-and-out recipe for inflation, both with respect to goods and services prices on Main Street and also, most especially, with respect to financial asset prices on Wall Street.

Yet here is what we have had since Alan Greenspan and his heirs and assigns embarked upon the path of heavy-duty Keynesian macro-management of the US economy. Since the year 2000, the inflation-adjusted money-market rate (i.e., Fed funds) has been negative—often deeply so—more than 80% of the time.

Accordingly, the implicit thrust of Fed policy has been to severely punish savers, who, after taxes and inflation, have been badly crushed, and reward borrowers and speculators. The latter have essentially been offered free money on a short-term basis to fund their leveraged speculations via rolling over the Fed’s cheap overnight money day after day for years running.

Indeed, Wall Street speculators literally loved the negative carry pictured in the graph below: It became the foundation for trillions upon trillions of easy, arbitrage profits in the futures and options market and via an endless variety of highly leveraged bespoke trading schemes.

Needless to say, the politicians on the banks of the Potomac were also enthusiastic about their resulting ability to borrow on a massive scale while still paying diminutive levels of annual interest on the soaring public debt. In fiscal terms, the Fed’s negative real rates were the equivalent of a free lunch.

Still, the opposite ends of this 40-year chart tell you all you need to know about why central bank interest rate pegging is both counter-productive and unnecessary. Thus, back in 1984-1987, the real Fed funds rate was clearly not too high at positive 3-5%. That’s because it was exactly during this five-year period that the ballyhooed “Morning in America” Reagan Boom occurred. Real growth averaged 4.8% per annum between 1983 and 1987.

Now, according to GOP orators, the Reagan Boom of 1983-1987 was the be-all-and-end-all of spectacular economic performance. So why in the hell did Jay Powell and his merry band of money-printers insist that the real Fed funds rate in Q3 2024 was too high at barely +2.0% and therefore warranted the 100 basis point rate cut it administered on the eve of the November election?

Moreover, at the present moment, the story is even worse. The Donald was pounding the table for a 300 basis point cut a few weeks ago when, during Q2 2025, the inflation-adjusted Fed funds rate had posted at just +1.27%. So what he apparently wants is a return to the inflationary Fed print-a-thons of the last several decades and to an implied inflation-adjusted Fed funds rate of, well, -2.27%.

That’s right. After more than two decades of inflationary money-printing, the real money market rate has barely peeked its nose above the zero bound per the graph above. Yet we have both of our wanna-be monetary central planners—Powell and Trump—in a public shouting match about how much to cut, how soon to cut, and what flakey excuse should be offered to justify it.

Well, the hell with both of them!

Neither can possibly know the “correct” overnight interest rate (i.e., Fed funds), to say nothing of the level and shape of the entire yield curve all the way out to 30-year bonds or even 50-year loan maturities. The right levels for all the interest rates along the entire yield curve are constantly on the move and shape-shifting at any moment in time owing to a blizzard of changing real-world conditions with respect to the supply and demand for funds, and the undulations of the underlying macro-economy.

Indeed, the very idea of administered or state-pegged interest rates is as unworkable, counter-productive, and absurd as each and every failed past experiment in wage, price, profit, and rent controls with respect to Main Street commerce in daily bread, shelter, clothing, and transit has shown. And most especially so when the far superior alternative of a vast, liquid free market in debt and all other forms of financial assets is readily available.

The reason we have administered interest rates rather than free market rates, of course, is due to the great big Keynesian bugaboo about financial instability, the oscillations of the business cycle, and the alleged grand collapse of capitalism during the Great Depression.

That is, the implicit claim is that unless we have an all-powerful interest rate Sherpa managing debt yields and the related economic activity, a free market in money, debt, real estate, and other financial assets will inexorably tumble into thundering instability and ultimately send the main street economy into depressionary collapse.

The truth is, this is unmitigated humbug. In the first place, it is obvious that the financial and economic instability we have had during the half-century since the dollar was unshackled from its anchor in gold in 1971 has been caused by the “start and stop” policy interventions and interest rate pegging cycles of the Fed itself, not the free market.

As shown in the graph below, once the 12-person FOMC took lock, stock, and barrel control of the nerve center of capitalism—the financial markets and asset prices— after August 1971, there have been eight recessions and short-run volatility of economic activity that has ranged from +35% to -35% on an annualized basis.

If we were in the betting business, we’d wager that left to his own devices, Mr. Market would likely generate less instability than the Fed-controlled economy has displayed since 1971.

If the volatility reduction and business cycle flattening canard doesn’t cut the mustard in terms of justifying the Fed’s interest rate-pegging regime, neither does the claim that it enhances the trend rate of real economic growth and living standard gains. The underlying presumption is that the free market is too stupid to discover the rate of interest that induces optimum growth, so a monetary politburo known as the FOMC needs to take control of the rate-setting process.

Well, here’s an empirical test that can’t be gainsaid. To wit, between the so-called Fed-Treasury agreement in March 1951 and August 1971, we had a gold-anchored monetary system and a Federal Reserve run with an exceedingly “light touch” by William McChesney Martin. By contrast, after the gamblers of Wall Street brought the credit, housing, and equity markets down with the thundering crash in the fall of 2008, we had a rogue regime of massive money-printing and incessant, heavy financial market intervention by the Fed under Bernanke and his successors.

There is no contest on the growth and prosperity front, however, between the two periods. Real growth as measured by real final sales of domestic product rose at a 3.83% annual rate during the “light touch” era of Q2 1951 to Q2 1971, while the growth rate was barely half of that level at 1.94% between Q4 2007 and Q2 2025. Q.E.D.

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If decades of Fed meddling have taught us anything, it’s that central planning doesn’t stabilize the economy—it undermines it. The bigger risk ahead isn’t just bad policy, but the potential collapse of the dollar’s global reserve status and the desperate measures Washington may take in response. To prepare for what’s coming and protect yourself from the fallout, click here to claim your free copy of our Special Report: Guide to Surviving and Thriving During an Economic Collapse.