Policy Creeps

Trump will appoint his political yes monkeys and make sure the Fed does what it is told to do. That will make America’s central bank more like those of Zimbabwe, Venezuela or Argentina.

Federal Reserve Chairman Jerome Powell, Source: Getty Images

Thursday, October 16^th, 2025

Bill Bonner from Baltimore, Maryland

In our never-ending quest for reductio ad simplicitas...that is, making things as simple as possible so we can understand them...and keep track of them...we come to this: The more policies you have, the poorer you will be.

Corollary: Changeable, discretionary policies are worse than those fixed by law.

You may have wondered.

How is it possible that US GDP growth has actually gone down since WWII? The country has been flooded with immigrants. Each one adds to sales, output and GDP. The economy has also absorbed countless new innovations and discoveries. The internet has vastly increased the availability of information. And more or less free trade policies (until recently) gave the US a huge market to which it could sell its products and services, and from which it could buy the things that others produced more efficiently.

More patents. More Ph.Ds. More people. All the things that should lead to economic progress. And think of all we’ve learned about how to manage a business...or a country? How is it then — with so many advantages — that economic growth slowed down?

In the 50s, 60s, 70s, 80s, and 90s, US GDP growth averaged around 4% per year. Now it’s around 2%. Cut in half.

Trying to understand why, here at BPR we have focused on the money. Today, we introduce another obvious reason.

Since 1971, America has had an artificial currency that can be readily manipulated for political purposes. The politicians prefer low interest rates to higher ones. The low rates give the appearance of prosperity and thus help their re-election prospects.

The lower rates, however, stimulate borrowing...which essentially shifts future GDP growth (from tomorrow’s sales and investment) to the present. That is, we borrow money, intending to pay it back from future earnings.

And now, after more than 50 years, we are in the future from which GDP growth was taken. Now, we have the debt from sales made long ago...but not the sales themselves. Though we are not paying off the debt directly, we are nevertheless paying the interest on all our past borrowing, thus devoting current GDP to spending that has already happened.

Note that this situation is about to get a lot worse. The Fed is not supposed to pay too much attention to the election cycle. But Donald Trump has put his ‘low interest rate man,’ Stephen Miran, on the Fed payroll. And Miran is expected to replace Jerome Powell when his term expires next year. Trump now openly discusses how he will appoint more of his political yes monkeys and make sure the Fed does what it is told to do. That will make America’s central bank more like those of countries such as Zimbabwe, Venezuela or Argentina...ready to ‘print’ as much money as the politicians require.

But money isn’t everything. There is also ‘policy creep.’ As we saw yesterday, the more government ‘policies’ you have...the less free you are to pursue your own policies.

As governments become bigger, older, and more controlled by elites, they add even more ‘policies.’ At the end, for example, the Austro-Hungarian empire employed a third of the population. And they published a tax code in three huge tomes, with two columns per page, printed on thin paper in small type. There were 15 official languages in Austro-Hungary, including Yiddish and Ruthenian. Often, parliamentary policies allowed debates in languages most of the delegates didn’t speak.

US federal policies are less baroque but no less stifling. They often prevent action...or simply make it more difficult and expensive. Typically, economic progress slows.

Federal policies, implemented by the vast army of public servants, are recorded for us in the Federal Register. In 1980, it had 70,000 pages. Last year, the count was up to 107,000 pages. And each page has a rule, a regulation, a no-no that a business must pay attention to. They tell farmers how high to pile their manure...or how high off the floor a toilet seat must be...or what kind of procedure a bank must follow when it suspects a customer of laundering money. The list of dos and don’ts is almost endless. For a large business, the cost of administration and compliance mounts up. For small businesses, without crackerjack legal help, it can be almost impossible to keep up.

And like a golf course with 87 different traps, it creates an economy full of missed fairways.

Regards,

Bill Bonner

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Research Note, by Dan Denning

Has the Federal Reserve already caved to pressure from President Trump and begun inflating asset values in the economy again? Earlier this week, Fed Chair Jerome Powell said the US central bank may be approaching the point ‘in the coming months’ where it will cease the balance sheet run off. More importantly for investors, Powell said the Fed has no plans to return the balance sheet to its pre-Covid size of around $4 trillion.

The use of the balance sheet to create bank reserves out of thin air is otherwise known as ‘Quantitative Easing.’ The run-off of the balance sheet—letting purchased securities mature without replacing them—is known as ‘Quantitative Tightening.’ In practice, the Fed purchases either US Treasury bonds/bills/notes from banks (or mortgage backed securities) by crediting the sellers account with newly created bank reserves.

The Fed becomes the proud owner of these assets. As you can see from the chart above, the Fed increased the size of its balance sheet by $5.2 trillion between September 2019 and May of 2022 to nearly $9 trillion. It do so by purchasing roughly $1.5 trillion in MBS (leading to a 40% rise nationwide in average house prices) and $3.7 trillion in US government debt.

What does all this mean now?

Former Fed Chair Ben Bernanke—the god father of QE—once told then-Congressman Ron Paul that the Fed needed about $1 trillion in reserves on its balance sheet to guarantee enough cash in the economy and liquidity for the banking system in the event of a financial crisis. Now we learn from Powell that the Fed balance sheet will likely never be lower than $5 trillion again (it’s currently $6.5 trillion).

It my research note to paying subscribers tomorrow, I’ll look at whether Fed balance sheet expansion is inflationary…and if so…for what assets. That’s the problem with expanding credit in the banking system. You can create more bank reserves out of thin air. But you can’t control where they go or how fast they get there (the velocity of money). The relentless rise in gold and silver suggests at least some of this money is finding its way into precious metals…which cannot be created with a few keystrokes on a computer.