Ep 57 – Danielle DiMartino Booth: Threading the Fed Needle
Can Jerome Powell do the impossible? Fed insider, author, and CEO of Quill Intelligence, Danielle DiMartino Booth joins the Gold Exchange Podcast to talk about Fed policy and its implications. Does the Fed care about gold? Will rates fall below zero? Watch to hear Danielle’s expert insights!
Follow Danielle on Twitter: @DiMartinoBooth
Connect with Keith Weiner and Monetary Metals on Twitter: @RealKeithWeiner @Monetary_Metals
Additional Resources
The Case for Gold Yield in Investment Portfolios
Podcast Chapters
00:00–01:20 Danielle DiMartino Booth
01:20–03:54 The Perpetual Pivot
03:54–07:30 Marginal Productivity of Debt
07:30–08:36 Trying to Do the Impossible
08:36–12:00 Threading the Needle
12:00–17:55 Which is More Likely…
17:55–22:47 FedSpeak and Forward Guidance
22:47–29:07 Silicon Valley Bank and Credit Suisse
29:07–36:16 Gold and Central Bankers
42:11–44:30 Mark-to-Market Accounting
50:07–53:24 Eurodollars and Shadow Banking
53:24–54:50 Quill Intelligence and the Debt Ceiling
54:40 Monetary Metals
Transcript:
Benjamin Nadelstein:
Welcome back to the Gold Exchange podcast. My name is Benjamin Naderlstein. I am joined today by founder and CEO of Monetary Metals, Keith Wiener, and our special guest, Ms. Danielle DeMartino Booth. Danielle, how are you doing today?
Danielle DiMartino Booth:
I’m doing great. I even dressed appropriately. Hello.
Benjamin Nadelstein:
Hello. And you’ve got me and I all dressed up as well.
Danielle DiMartino Booth:
Yeah, exactly.
Benjamin Nadelstein:
So, Danielle, I just finished reading your book last night. It is incredible. For those who don’t know, Danielle is the founder and CEO of Quill Intelligence and the author of Fed Up, an insider’s take on why the Federal Reserve is bad for America. And nobody knows more about the inner workings of the Federal Reserve than Danielle. So Danielle, I want to jump right in today. I got a quote from you here, The grave error in logic being committed by growing hordes of Powell detractors is presuming to think policy can ever be normalized if the Fed put is not slain once and for all, accepting loss. Danielle, what did you mean by that sentence?
Danielle DiMartino Booth:
It means that there are armies of people out there who have diluted themselves into thinking that as long as the Fed perpetually pivots, and this is where they actually cannot answer the question, as long as the Fed perpetually pivots, that everything will be okay. And my response to them is, but every time the Fed does pivot and it takes a greater effort, if you will, there has to be a higher level of money printing and it’s the law of diminishing returns. You get less and less every time the Fed has to do this. And so you’re quoting my opus, too small to not fail. And so I take the logic all the way to the end of the pivot ears. I call them pivot ears, of the pivot ears argument. And that is if the US economy can only subsist, and I don’t say exist, I don’t say perform, I say subsist at the zero bound with the Fed monetizing every penny that the treasury issues, then the last chapter of Fed up is irrelevant. There is no need to reform the Fed. You can just end the Fed. And don’t get me wrong, the people who want to end the Fed think that there would be some utopia that followed.
No, it would look a lot more like modern monetary theory on steroids, universal basic income, the treasury. Again, this is my Avenger’s end game, that the treasury could just absorb the functions of the New York markets desk. No, not even the New York markets desk, because that entails analysis. You don’t need to analyze anything. You don’t need to study the economy. You don’t need any PhDs. You just need a desk to buy treasures. And then for that desk in buying the treasures, allow the treasury then to just provide money to US families. We have hyperinflation and as a country, we just disappear off the planet.
Benjamin Nadelstein:
Keith, I want to go to you. This sounds greatly familiar as well. I know you and Keith have both actually publicly stated that the structure of the economy is such that the Fed can never meaningfully keep rates high for a substantial period of time. Keith, what are some of those arguments as to why not? Is it the productivity of the debt? Is it the solvency of the banks? Is it zombie companies? Another taper tantrum? What are some of those reasons why, as Danielle mentioned, we really can’t live or even subsist in anything other than low rate environments?
Danielle DiMartino Booth:
No, wait, there is an option. It’s just in the end, the main character dies. So anyways…
Keith Weiner:
Kind of reminds me of the myth busters where they say failure is always an option. But in certain circumstances, you may not prefer that option. The thing that occurs to me in what you were saying about diminishing returns is almost no economist talked about marginal productivity of debt, which is how much additional GDP juice do you add for every dollar of debt you add?
Danielle DiMartino Booth:
Which is the Lacey Hunt Bible.
Keith Weiner:
If you Google marginal productivity of debt, at least the last time I did a couple of months ago, my articles and my name is all over the first page on that. I’m a known person. I’m not a zero in the world of economics, but I don’t think I’m that prominent that I should dominate the first page of a term that existed in economics for 100 years or something. I’m not that prominent and nobody’s writing about it. And you get, I call it the Steven Moore syndrome where he says, oh, well, we just need to grow our way out of this slightly better fiscal policy and tax policy and whatever. And GDP will go up. And it’s like, you take a look at that graph of marginal productivity of debt, it’s been falling since at least 1950. It’s secular. It’s been under Democratic administration’s, Republican administration’s, Democratic control of the of the Congress, Republican control of the Congress, the vestiges of the gold standard that existed from 1950 to 1971. And I think it’s been falling longer than that. But just the oldest data set that I’ve been able to get my hands on to look at it.
And everything about the system is diminishing. You have to do more and more borrowing to get less and less GDP. When the interest rate is falling, obviously asset prices are rising. Rising asset prices allow greater collateral values, greater borrowing. And then if things go down, interest rates go up and asset prices go down, then suddenly everybody’s in solvency. So there’s the raise on debt try, if you will, of the Fed put. And the Fed doesn’t have… My view is the Fed doesn’t have any good policy choices. They’re all bad. It’s basically continue the decay or blow us up all at once. And they usually tend to prefer not to blow us up all at once.
Danielle DiMartino Booth:
Well, you could argue that Jay Powell has succeeded in blowing us up slowly because fiscal stimulus has softened the blow of every company that’s gone out of business because we have seen the beginning of a bankruptcy cycle, a real bankruptcy cycle, and yet the market is still hanging in there, mainly due to fiscal stimulus that is very quietly going on in the background.
Keith Weiner:
Right. And wait till the bankruptcies continue to cascade and accelerate, and then we’ll see when the chips are down, which lever he pulls.
Danielle DiMartino Booth:
We will see. Again, I am the lone cheerleader. That’s what I feel like. I am the lone cheerleader. People get confused and people really get offended when you use the word confused, but people do get confused. And they think that I’m cheerleading for Powell as a person. Now, he seems to be a very nice person, don’t get me wrong, but I’m cheerleading because he’s trying to do the impossible, which you’ve just described. And if he can succeed, then as I said in an extreme example, maybe my grandchildren one day don’t say, Hey, my grandparents are from the United States as Australians. So if he can succeed, if he can’t succeed, then I’m not sure what the fate of this country is.
Keith Weiner:
There’s a lot of bleak scenarios…
Benjamin Nadelstein:
So, Danielle, I want to talk a little bit about that because I heard you mentioned that J arome is actually trying to thread the needle here, right? So going back down to near zero, that’s not really a great option. And having these bank defaults, these runs, destroying the economy, that’s obviously not a great option either. But maybe there’s a small, small thread where if J arome keeps rates high enough, we can kill off some of these zombie companies, some of these companies that really shouldn’t have existed in anything other than the zero rate environment. But on the other hand, we can keep some of these stronger companies alive. So can we talk about that for a second? How might this play out in a dream scenario for Gerome Powell?
Danielle DiMartino Booth:
So in this dream scenario, before this bankruptcy cycle started, and if you’re talking about a textbook bankruptcy cycle, in the three months through February 28, 2023, you had 51 companies with $50 million or more in liabilities file for Chapter 11. That’s your textbook. Goes back to 2009, last time we saw this. Individual bankruptcies are rising. Small business bankruptcies are rising. They’ve been rising year over year for two months now, January and February. So we’re in a bankruptcy cycle, and yet things really haven’t fallen apart. But before this bankruptcy cycle started, we had approximately 20 % of all US firms that were zombies. So if you’re talking about my idea of utopia, which has nothing to do with universal basic income, it’s a different utopia. You come out at the other end with, say, 75 %, knowing I’m not naive enough to say there’s not going to be casualties along the way, innocent casualties. But let’s say we come out at the other end of whatever this possibly is, if he can maintain high interest rates, which my mentor, Dr. Lacey Hunt, says is impossible. But if he can maintain them, doesn’t have to raise rates anymore, by the way, the level is irrelevant at this point.
If he can just continue to roll the balance sheet off in the background, depleting liquidity from the system, which is what is fueling the bankruptcy cycle. And we come out at the other end with, say 75 % of the companies in America, 80 % of which were not zombies. They were good, solid companies going in. But let’s say we come out with 75 % of them, and then we’ve got 25 % capacity for new entrants to come in and get well priced capital. We never go back to the zero bound. He’s gotten the Fed funds right all the way up to five. Let’s say we take it down 300 basis points and he says, you know what, the new floor is 2 %. The zero bound introduces too many distortions and it doesn’t accomplish anything on a macroeconomic level. It just feeds the non banking sector. Maybe we get rid of securitization along the way. That’s not a really good way to price credit. Maybe credit goes back to the banking system. And we look back and say to the private equity kingpins who run monetary policy today, I hope you’re happy in the Hamptons.
I know you only collected billions of dollars during that lovely 40 year era of Fed easing, but that party is over and now we’re just going to have the conventional banking system, nothing in the shadows. The light of day acts as a cleanse. And here we go. that’s fine.
Benjamin Nadelstein:
I love that dream, Danielle. I’m going to go to bed tonight dreaming of your own power like I always do. And I actually had a fun question here, which was for both of you, which do you think is going to be more likely? That the Fed hikes higher than during Volcker
Or
The Fed funds rate never falls below 4 % ever again. Keith, I’m going to start with you this time.
Keith Weiner:
My view is that, and I don’t know, Danielle, if you’re seeing me talk about this, is that it’s like we’ve entered the gravitational field of a black hole. And that whether or not they would like the interest rates to be higher, there’s so many forces. The force driving interest rate lower is so powerful that they can’t overcome it. And when I was formulating my theory of interest and prices, I was at a Cato Institute Monetary Policy Conference. This would have been in 2014, probably. So before they started that abortive attempt to hike rates. And there was a number of senior Fed officials. I remember Charles Plouffer was there and one or two others. And then also there was John Taylor there of the Taylor rule and a few other economists of that sort. First thing that occurred to me, they all have the same playbook, which was at that time largely the Taylor rule. And they all thought that Bernanke should have been raising rates. And one by one, they went up to talk and they were all puzzled. I don’t know why chairman Bernanke is not raising rates. And that was just when I was really formulating this thought of a black hole.
And I was like, now I know why. It’s because he knows he can’t. And so my prediction would be whatever Powell may intend, that the rate is going to fall back down. And part of it is what demand is there for credit at these interest rates? Demand for credit drives up. So that would be my view. But I’m curious what Danielle thinks about that.
Danielle DiMartino Booth:
So I don’t think that we ever have a Fed Fund’s floor of 4 %. What I did find to be intriguing and what I do continue to find to be intriguing is the hard line that Powell has managed to hold with his committee, which is a little bit easier with Lail Brainard out the door. But when you saw the latest dot plot come out of the March meeting, the terminal rate at the end of 2024 had risen from 4.1 % the last time they put the dot plot together to 4.3 %. And I said to myself, Well, isn’t that interesting? Because the implication is that he has managed to sell his theory, my theory, to the committee that he can maintain rates higher for longer and potentially end 2024 north of 4 %. Now, do I think that I am, again, in the tiniest majority in the world? Yes. I’m in a whole different 1 %. There’s the 99 % who are like, the world will end. We will go to the zero bound and they will have to start QE again. And I empathize with that gigantic majority knowing that for one specific reason, when Janet Yellen has to go refill the treasury general account and sell $700, $800 billion worth of bills, if you thought that you heard a great big sucking sound after a trillion dollars or so of QT, wait until she sells all those bills at once, the woman will be petrified to her…
Her hair is already white. I don’t know how else she’ll be able to reflect how petrified she is. But that magnitude, because we have to remember, right? Steve Minuchin sold $1.1 trillion. Now, there was stimulus going on at the time, but when they resolved the debt ceiling when Minuchin was Treasury Secretary under Trump, he had to go into the market and sell $1.1 trillion worth of reserves. Now, at the backdrop of a banking crisis which he didn’t have at the time and massive reserve depletion, it could have never happened. And yeah. So for me, that’s the real systemic aha moment. We might be able to plot a long year until then, but that moment will test the word systemic. And no banker, no central banker, don’t get me wrong, I actually still think that Powell could say, Two’s the new zero. So overnight, go from four to two. If there was something crazy, systemic, or five to two, but say 2 is the new zero, get used to it, and let the chips fall where they may. Again, to Keith’s point, there is no good choice. It doesn’t exist on planet Earth. And accepting losses, the first quote you through out there, accepting the loss that comes from that Delta between 2 % and the zero bound, maybe that’s the loss we have to accept to get back to the rational world of the Federal Reserve making independent monetary policy instead of private equity.
Denison’s making monetary policy for the Fed and for every American because that’s who they’re making policy for. And that’s who’s making monetary policy. It is the people who run private equity. It’s with good reason that there is a Bloomberg headline that came out a few weeks ago that said Steven Swartsman collected $1.23 billion in income last year at Blackstone. Nobody gets paid that. Jamie Diamond doesn’t get paid that. The best bank CEO, Goldman Sachs, but nobody gets paid in the billions except for the people running monetary policy. They do because the rule book.
Benjamin Nadelstein:
I want to speak about FedSpeak for a second. You have a lot of great lines in your book about FedSpeak and how carefully they said, Oh, it’s slightly, or should we say moderately or marginally? These all have different connotations to them. And you mentioned the dot plot. So I want to hear from an insider, what is your opinion on using this forward guidance, if you’d want to call it by central banks, the dot plot? And Powell’s actually recent public clarity on his plans. He said, Listen, guys, this is what I’m going to try to do. Now, that doesn’t mean he can necessarily do it, but he’s definitely been clear, as clear as I’ve ever heard someone say, this is the plan going forward. Do you agree with that strategy? And do you think that it’s worked so far?
Danielle DiMartino Booth:
I think it’s worked so far. People are like, But the market’s pricing and rate cuts at the end of the year. And I’m like, Rewind, you circus of morons. All of you. That’s not very nice. I take that back. But Rewind six months ago when the market was saying he’s going to have to pivot. And every single time for one now, we’ve crossed the one year anniversary for more than a year now, he has slowly but surely used Fed speak in between blackout periods to methodically reset market pricing. He’s reset it every single time. And the dot plots this time were intriguing, the end of 2024. What was more intriguing was to see an actual new word in the statement. Not a nuance, word, firming. I went, Oh, my God. That must have taken them the first full day of the Tuesday, Wednesday meeting. They must have spent at least eight hours putting a real new verb into the statement. I couldn’t imagine how long it would have taken them. It must have been five hours. But that one word tells you because they were saying it might be the time to stop hiking rates, but we still see firming.
And that’s his way of saying, I’m running the balance sheet down. Bill Dudley, I don’t care if it used to be your baby, and now you’re my biggest public detractor. I’m going to keep running that balance sheet down. And it is a form of tightening. But we don’t want to use that word. So they got out World’s Biggest Thesaurus, and they were like, What else can we use besides tightening? And they come up with firming, and then they debate it. And then they call in an etymologist from somewhere in the Beltway, and they bring in a consultant and, Okay, if we add the word firming, what will that do? And I am exaggerating, but just a little. When you read the transcript and you see how long they deliberate over one word, a word that could be a synonym for tightening, put into the statement, Wow, it’s incredible. It refers to QT. And if you add that to the dot plot, 4.3 % from 4.1 %, that means that he intends to keep QT going, at least into as the reporter dared ask him, does this mean that you’re not considering rate cuts in 2023?
His answer, no. That means that he intends to keep tightening throughout the end of the year.
Benjamin Nadelstein:
Keith, I’m going to give you a second there to giggle and laugh. But Danielle, I do agree that it seems like there is this clarity. And listen, these guys aren’t fool. They’re smart people, right? They’re PhD economists, some of them. And they’re picking the words carefully to try to signal to markets, this is our plan. Now, in the end, the 99 % of us might be right. We might have to turn around. But that doesn’t mean that what you’re seeing as that 1 % of the 1 % is wrong. This is what Jerome is trying to signal to us. And so far, Danielle, you’ve been 100 % right. Keith, let’s jump to you for a second.
Keith Weiner:
What do I even say? I think it’s one thing to say the monetary system works the way that it works, and this is what’s going to happen. I was thinking earlier that 20 % of the firms were zombies at 0 % interest. When you raise the bar, raise the margin so high, how many are zombies at 4 % Fed funds rate? A much greater percentage. I can point to that and say more bankruptcies are coming and those bankruptcies will then cascade because other bankruptcies. But the decision to set rates higher or lower is a political decision made by a politician to the extent that Powell was acting as policy planner, he’s acting as a politician. He may have an economist and an economist credentials, but he’s acting as a politician. And I don’t feel I have any insight as to predicting what politicians will do. And the politics can get very strange on these things. And I don’t know if you noticed on the Silicon Valley Bank, I’m not sure what the right word would be, but at first they said all depositors over 250,000, we’re going to give you a little check and then we’ll see how the liquidation proceeds.
And then by Sunday, two days later, they said, okay, we’re going to make everybody whole. Now, politics of that played out in a very strange… They haven’t really played out. I mean, that stood for Silicon Valley Bank. But you had the extreme right and the extreme left both hated it. And I guess most of the people, not extreme left and extreme right, thought it was fine. The extreme right hated it because they said this is a bailout for the both left Silicon Valley companies and VCs that are destroying America and destroying the world. And the extreme left hated it because they said this is a bailout for rich white privileged people. And so when politics can line up in that way, how do you predict what the outcome is going to be on the next one? And I would say the same thing applies to interest rate policy. What are going to be the pressures? Who’s going to be lobbying for Powell to continue rates to firm? And who’s going to be lobbying for lower rates? And sometimes the sides switch abruptly without any predictability beforehand. So I could not begin to guess how that’s going to play.
I guess it also reminds me of the so called tax cut act of 2017 when the Republicans are nominally the party of let’s cut taxes, they said, oh, we have state and local tax deductibility, let’s eliminate that, which is obviously a tax hike. But they said it’s a greater tax hike on rich people in blue states than it is on rich people in red states, which tend to have lower tax rates. So all of a sudden the nominal side is switched, and then you have the party of let’s cut taxes suddenly advocating what’s actually a tax increase. And I’m actually touching a long established precedent that I don’t think had been in play. It wasn’t on my bingo card for 2017. So how do these things play out? It can be very unpredictable, or at least I don’t have any insight into predicting them. Well, you.
Danielle DiMartino Booth:
Know what’s interesting, Keith, when you’re talking about the politics of this is that Powell’s schedule is a matter of public record. So the public can see all of the meetings that he attends and with whom. And to me, what was interesting was how very afraid Janet Yellen was of, rightly so, of a run that became a very contagious run. One bank after another falls, one domino after another. And that was, I mean, I understand both the extreme right and the extreme left and their reaction to Silicon Valley Bank, because it was specifically Silicon Valley Bank. And you had Harry and their deposits there. And it was this… That is to me, superficially understandable. Looking beneath the surface, you saw the dominoes lined up, one banker after another, after another, after another and contingent. And so you have a duty to get in front of that. But what’s been intriguing to me, though, to go back to your point about Powell, is that Powell is an extremely active Fed chair. If you look at his predecessors and the number of meetings that they had with individuals in Congress, it doesn’t compare. In that sense, he’s very political in that his ears are open as a lawyer’s would be, he’s a lawyer, to all sides, he’s listening.
Danielle DiMartino Booth:
And yet every once in a while, you get blasting out of a baz. Janet Yellen’s attempt at being political, even though she refuses to go up to the hill and visit with anybody. So there are ironies in what I just said. There are nuances in what I just said because Powell is desperately trying to not be politicized. And that defines killing the Fed put. Kyrsten Sinema left the Democratic Party shortly after she had killed a bill that was going to kill carried interest, which would put a dagger through the heart of private equity profitability. And she left the Democratic Party. You’re like, wait, what?
Keith Weiner:
I was going to say I can add something to Kyrsten’s Sinema as an Arizona here, which is so she got elected in the wake of the reaction to Trump. And everyone said, oh, the state of Arizona is turning purple. It may turn blue. And I didn’t read it that way. I read it as a reaction against Trump, not a reaction in favor of the Democrats. And so she knew that in order to be electable in Arizona, you cannot go along with the rank and file party line of Democrats. You’re not going to be electable in our district. So she had to do that to remain electable. And then I guess the Democratic Party, if for an ultimatum, I don’t know how that played out. But in a certain sense, it doesn’t surprise me that she has to get elected in Arizona and therefore had to take certain positions.
Danielle DiMartino Booth:
My point is that she has… Private equity has been her biggest benefactor. They funded her campaigns for generations. They’ve always known that they’ve got a Senator in their pocket when it comes to carried interest, which is, that’s the holy grail of private equity is getting beneficial tax treatment.
All I’m saying is you would think that Powell would be more political than he is because he’s visited more with people in Congress, and yet he is less political than you would think just by looking at his… I’m going to date myself here, just by looking at his date timer.
Benjamin Nadelstein:
Danielle, I want to jump to something that is obviously near and dear to our hearts, which is gold. So in one of your latest interviews, you said, Who cares about the savers? Nobody. When we go down to these zero interest rates, this kills savers and no one is screaming from the rooftops saying, Where are savers? So I’m going to do a little salt serving pitch, which is, we care about gold and we care about savers, which is why Monetary Metals obviously offers interest on gold, payment gold to these savers. But I want to talk to you a little bit about gold because Keith and I mention this a lot in the podcast. And one thing that we say is, central bankers don’t really think a lot about gold. And I’ve got a tweet response from you here, which is great. So Joseph Wang, who’s the Fed guy, said, I like gold. I think of it as a hedge against government mismanagement, such as forever trillion dollars deficits. But in my experience, the Fed doesn’t care about gold. Desk reports never mentioned gold, and I’ve never heard of anyone in the Fed wanting market intel on it.
Benjamin Nadelstein:
Now, Danielle, you responded saying, Ditto. I mystify that there is so much focus on the Fed being focused on gold. In nine years, the precious metal wasn’t even a topic of discussion as it pertained to jewelry, much less monetary policy. Danielle, please eviscerate gold from anyone who thinks that the Fed is thinking about the shiny metal.
Danielle DiMartino Booth:
Oh, no, it’s not even a subject of discussion. Now, my boss used to own a lot of gold, but that was during quantitative easing 1.0 as opposed to what followed the pandemic. But no, it doesn’t factor into their models, their thinking. There’s nothing that is in this Keynesian school of thought that brings precious metals into the discussion to begin with. So if it’s not in a model, it’s not discussed. It just is what it is. The Fed doesn’t even really talk about the dollar, even though monetary policy clearly affects the dollar and the value of the dollar. But that is technically in the treasury’s purview. And if there’s anything to be said for bureaucrats at the Fed is that they do know how to follow rules. I really did not. So that was another red X against me when I was on the inside, among others. But it doesn’t matter. No, gold is not something that is pondered, contemplated, etc. And more to the point, because it’s not considered, I think in a philosophical way, it’s probably one of the reasons that it is as bulletproof as it is as a diversification vehicle, even vis a vis treasures, in times of gigantic disruption in the market.
Benjamin Nadelstein:
And you said, and I’m going to quote you again here, that gold does well in times of inflation and deflation. Maybe I’ll give you a second there.
Danielle DiMartino Booth:
Boy did I get taken out to the woodshed for that! And I actually had the graph created. So the graph now exists so that you can see, yes, gold had a hiccup in 2008, but then it came roaring back, even while the CPI continued to fall. And then the CPI bounced off the bottom and came back. I get that. I can read a graph. But as the CPI was falling, as Lehman was imploding, it was a safe haven. It wasn’t a safe haven in the sense of, gee, a treasury is a safe haven. It was just a safe haven, period. It didn’t matter what gold’s traditional store of value is in times of inflation, blah, blah, blah, blah, blah. Hell, no, it was just a safe place to be.
Benjamin Nadelstein:
So Danielle says the Fed has never talked about gold. They never think about it. But in times of crisis, inflation, deflation, banking crisis, 2008, people run to gold, not because of some theory or some tradition but because people want gold. What do you think about that?
Keith Weiner:
Yeah, obviously I agree. I was going to add something to what Danielle was saying about they don’t talk about it, it’s not in the model, therefore, it almost doesn’t exist. Danielle, I’ve written an awful lot to debunk this persistent conspiracy theory that the Fed is in cahoots with some dark cabal of banks to manipulate the price of gold. And a lot of people get really into that. So if you’re right against it, you become a lightning rod, which I certainly have been. And we finally assembled the data to be able to look at how the futures contracts behave as they approach maturity. And so I wrote a very long piece backed by data that I don’t think anybody else in the world has the data that we have now. And it was an open letter to Ted Butler, who was a conspirator central for a while. And anyways, that was circulated everywhere. It became very controversial. And one of these conspiracy sites actually had an article where I became a one named person. It said, What Wiener does not want to know. And it was in response to something I had said that I’ve met a lot of central bankers.
I haven’t met anybody at the level of Powell, but I’ve met people one or two levels down and had conversations. They don’t think about gold. That was my observation as an outsider. If you ask them about gold, there’s this pause and they squint slightly. And I picture it like I’ve never done this. But if you went up to the senior engineer at Tesla and asked them about when you’re going to put carporators in the next Tesla model, you’d probably get that same pause of like, Wait, what? That’s uh….
Danielle DiMartino Booth:
Great analogy.
Keith Weiner:
That was obsolete 50 years ago, wasn’t it? I read about that in my grandfather’s old textbooks that I inherited when he passed away 10 years ago, like that thing. And why would they care about manipulating the price? Well, according to the conspiracy theorists, when the price of gold hits whatever magic number that it’s supposed to be, which always keeps going up in their minds, then gold is going to be remodetized and will spontaneously begin to circulate and the dollar will lose its reserve status and whatever. And as a monetary theory, that doesn’t work. But just from an actual… They’re making a statement of fact that the Fed is plotting constantly and conspiring to manipulate the price of gold. And it’s very interesting that both you and Joseph Wang said as insiders, you never heard it come up. There was never any request by senior Fed officials for a research report.
Danielle DiMartino Booth:
It’s like a briefing?? On gold?? Please! Those words were never uttered ever.
Keith Weiner:
Right. And so there it is. So I think if this episode of our podcast has any enduring value that even 10 years from now, people are going to look back on it, whatever is going to happen with interest rates will play it out. It’s going to be old news. But this idea that the Fed just isn’t thinking about gold is I think a really important gem for people to hear.
Danielle DiMartino Booth:
I think the one thing that people who are thoughtful took away from my book Fed Up was that rather than conspiratorial and Machiavellian, they were just really boring. And I think that that’s one of the biggest takeaways for people who are paying attention to the book. It’s that they get their PhD and they spend the next 40 years of their career fleshing out their dissertation until the leather patches on their elbows have been run through. And then they retire with a great big fat pension. And at lunchtime in the executive dining room, they spend a lot of time talking about their dissertation for 40 years. Again, I exaggerate, but not that much.
Benjamin Nadelstein:
When I finally finished the book, I went, They’re not evil geniuses. They might be PhD standard geniuses, but they’re not evil geniuses. They’re not really trying to get one over on the gold community or trying to keep the dollar. They’re not really doing this. It’s just the way that the system is built and the way that the politics inside the Fed that you described so well have just catered to this PhD standard, which doesn’t really interact well with what we call reality in the real world.
Danielle DiMartino Booth:
No, but I am going to push back. If you have not read Too Small to Not fail, go to demartinobuth. Substack. Com immediately because there was a moment when Bernanke crossed the line and brought together too small to form a quorum group of Fed insiders to create his blueprint that you had to go to the Zero Bound. That precondition that was not made among all leaders including Charlie Plouster and Richard Fisher at the time. They were not invited into the room at Jackson Hole in 2007. They were not invited. But that was where the precondition of the Zero Bound based on the body of academic models and knowledge that they had to look to, again, a small group of people, including Janet Yellen. There were some really choice people in that room that day. But that precondition is what set us on this path of inextricability, of the inability to escape the Zero Bound. That was made… If you want a conspiracy theorist, if you want to stay awake at night and wonder why on earth the man used the title, The Courage to Act, the hubris of it all, and then getting a Nobel prize for for the global economy and a gordian is not, that’s something that should get under your skin and upset you and keep you up at night. Because that decision should have never been made in a small room by a few people.
Keith Weiner:
I think in terms of getting upset and staying up at night, there’s so many things that go on. I remember, I guess it was last week, I’d commented on one of your threads on Twitter about, in 2009, it felt like we had government by leek. It was always like a Fed official close to conversation sad, but asked to remain anonymous because he’s not author, I have to speak or whatever. And the other thing that we seem to have dispensed with at that time, and now we’re seeing it again, Credit Suisse being an example, we throw out the rule of law and Silicon Valley Bank as well. They’re Credit Suisse, what did they do? They said, well, the stockholders are going to get something and the bond holders get destroyed. There goes what? 600 years, 1,000 years of law and reason out the window. How is anybody supposed to plan investment?
Danielle DiMartino Booth:
The Swiss of all people. You would think that there would be the most agnostic neutral level headed, and they’re just like… We’re going to change the law.
Keith Weiner:
Right, on a Sunday.
Danielle DiMartino Booth:
On a Sunday. But again, because… And I don’t mean to be so hard on Bernanke, but maybe I do. But because one person set us on this path, getting out of it, it’s created every direction you could possibly step, you’re going to step on a land mine.
Benjamin Nadelstein:
Absolutely. It feels like there’s almost a path dependency from that moment on. There’s this path dependency of, listen, if we turn back now, it’s even worse. If we go forward, it’s bad. If we take a left, it’s landmines. On the right is projectiles all because of this, if you want to call it one conspiratorial meeting or this whole set up in general, we’ve run into the problems that have been built either by the system, by its predecessors or by the people of the very.
Danielle DiMartino Booth:
Now, trust me when I say random houses, lawyers made sure that I fact checked it. So the Bernanke doctrine is not a pigment of my imagination. I don’t even want to begin to say that. It’s just been very hush hush over the years for obvious legal reasons. But it did happen. And I think people, again, they really need to read because it’s short. I finally managed to put people are like, Why did you open up something that was for your institutional clients to the general public? And I’m like, because I managed to put Fed up into 5,000 words because of the moment of this banking crisis and because of the body of work that was done when I was there about too big to fail and how Dodd-Frank actually institutionalized too big to fail and made it worse than what it was because regulations are always looking through the back through the rearview mirror.
Keith Weiner:
Absolutely. If I could just add to that, in 2009, a lot of people, including a lot of very sensible people like Steve Forbes, who I count as a friend, were saying that mark to market, if not a cause of the crisis in 2008, was exacerbating it. Let’s eliminate mark to market accounting. And I remember trying to say something to him, but I mean, I just wasn’t in that position. But fast forward to Silicon Valley Bank did not hedge their interest rate risk, the duration risk. And then in the discussion thread on Twitter comes up, if something is put in the bucket, hold to maturity, you can’t hedge the interest rate risk because the hedge would just be treated as a separate proprietary derivatives position that does not offset this hold to maturity thing. So unintended consequences, you think, okay, 2008 is exacerbating market market. I can see the mechanics, but I don’t agree that that’s the root cause. And they say, okay, well, let’s change this. And then you have this perversity that the bank is essentially overstating how well capitalized it is while the value of its assets is eroding because they put on a magic bucket labeled, we’re never going to have to sell it.
And so I got into an exchange, I think it was with Brent Johnson, talking about you can say that your Bitcoin is hold to maturity, you can say that your bonds are hold to maturity, but you don’t have that power because you don’t know the future. And if your depositors are suddenly withdrawing their deposits, all these things that you said I never intend to sell, you find them stuff to get sold in order to raise the cash to pay the depositors out. And then the bank suddenly discovers that it’s got inadequate capital because the regulation not only allowed but encouraged them to overstate the value of the capital balance sheet.
Danielle DiMartino Booth:
And that’s one way of characterizing what was a regulation set under the assumption that the Fed could never get very far off of the zero bound.
Benjamin Nadelstein:
Dangerous, absolutely dangerous. Well, Danielle, as we come near the end here, I want to ask you some questions. So at the very end of the podcast, I always ask the guest, what is the question that you would like me to ask all future guests? So I’m going to ask you some of those questions now. So the first one is actually from Brent Johnson, who we just mentioned, which is obviously we’ve discussed the Fed this entire podcast, the danger and the path dependency that they put us on. What about all other foreign central banks, the Bank of Japan, the Bank of China? Are they dealing with these same problems and how are they going to get out of the path dependency that we’ve just been discussing to the United States?
Danielle DiMartino Booth:
Again, the Federal Reserve Bank of America is the leader of all central banks of the world. And if you think that our banks are going to have a hard time, think of Japanese banks because the Japanese sovereign market is inside of their banking system. So imagine the impossibility of being in the position of having to try to get rates anywhere near… You can’t even use the word normal. You just can’t. You can’t. Right now, we’re at normal. Right now, 5 % is normal ish. But the whole country would advantage. It would be like that movie, the Pink Panther, one of the sequels when the mad scientist is at the organ and eventually the Castle just disappears into some really bad special effects from back in the 80s or 70s, whatever it was. But that would be what you would think of as the Japanese economy just imploding on itself. So there is something very real to be said about if going to the zero bound was bad, then for God’s sake, what are the implications of negative interest rates and trying to get out of that and the implications for the sanctity of the banking system in countries that depend more on banks than the United States does, that don’t have as robust or mature capital markets?
Keith Weiner:
Something I’ve said many times where on the line that’s essentially been falling for 40 years, where do you point to and say it’s normal? I mean, it’s a fallen trend.
Danielle DiMartino Booth:
But again, I’m going to I am like, the woman walks around with a black cloud over her head. I’m going to repeat it one more time. Maybe two is the new zero. Maybe we can draw that line. I can hope. Yeah.
Keith Weiner:
In Japan, I don’t know what percentage of the bond market that the Bank of Japan owns, but it’s stupefying. They could ever undo that. I think it’s 40 % of the entire bond market. And they also own a big chunk of the public equities, too. Oh, yeah. So if we have a mountain to dig ourselves out from underneath of, they have an entire, I don’t know, planet solar system to dig out from underneath of in order to try to get the normal. And during which time would be… Then they have a huge demographic problem that we don’t have on top of it. A lot of people are looking for the housing crash here in the US as interest rates go up. And one of the things that mitigate that, are that most mortgages here are fixed rate, especially post 2008. But in the rest of the world, it’s the exact opposite. I don’t think some countries, I don’t think there is such a thing as a fixed-rate mortgage. I think they’re all variable.
Danielle DiMartino Booth:
Now, a lot of the Nordic countries, when you talk about Australia, New Zealand, we could spend hours talking about that.
Keith Weiner:
So if the mortgages are all variable rate, or the vast majority of them are, and you try to raise interest rates, it’s not just the banks that you’re targeting and the zombie corporations, it’s every homeowner.
Danielle DiMartino Booth:
I’m like, it was only the United States, and to a certain extent, England, that experienced a balance sheet recession in ’08, ’09. A balance sheet recession that really hurt households. But the rest of the world skate it right on by. Look at Canada, meaning it’s still to come. That’s right. And you look.
Keith Weiner:
In Australia, property prices, we had this huge… I mean, I live here in Arizona. It’s one of the epicenters of the housing crash in 2008, 2009. And you look at the housing prices in Australia and they barely paused. They certainly didn’t crash. I think the line flattens a little bit before it goes, continues rising. When the reckoning comes, I just think it’s so intractable how you get out of this. And then the rest of the world is much more intractable than here. Our economy is in a lot of ways the least bad. Not that it’s good, to your point earlier about diminishing returns and all that. But in a lot of other places, significantly worse.
Benjamin Nadelstein:
Danielle, I want to get to one more question from a past guest, which is from Jeff Snider. Jeff wants to know about the Euro dollar system as well as the shadow banking system. What are some of your thoughts on that and how it pertains to the real economy and the above ground economy?
Danielle DiMartino Booth:
So the thing about the Euro dollar economy is that it’s well, it’s funny that he asked the question in the same question as the shadow banking system, because now you’re talking about things that are completely out of the control and or purview of my former employer, the Fed. And that is where the idea of systemic really gains steam. I always go back to the example of German landesbanks when the subprime crisis first broke and the money market fund broke the book and Leem and fell. And you’re like, Wait a minute, what do you mean? You’re blowing up German landesbanks because they had high concentrations of US subprime mortgages. But you didn’t know that. And you wouldn’t have known it. It’s the things you don’t know and what we don’t know going in. And I constantly quote this so that everybody can pack it in their minds is $220 trillion, 12 31.20, $220 trillion, the non banking financial system, 180 trillion dollars, the conventional banking system. One of them is not regulated. One of them we don’t know what’s going on inside of. Global regulatory speaking, one of them we do. The unknown unknown is gigantic compared to the known known.
And the known known, if you bring, as we just did, Japan into the discussion is enormous. These are subjects that this is what keeps me up at night. People are sitting here fighting about deflationary discount window lending, and I’m like, okay, there are other things to worry about here, kids. A, it’s not QE
But B, have you considered the non-banking sector? Because that will keep you up at night. And the idea of getting rid of mark-to-market and the effect that that’s had. But it doesn’t matter. They don’t have laws, rules, strictures in that shadowy area of the world. It’s been marked to target because they run monetary policy and have always been able to force the pivot so that they’ve never had the teacher’s pension of the city of Chicago have to mark to market, which would blow up the city of Chicago. So t hese are the bigger subjects that really deserve the attention of people who are inclined to worry. Not whether or not, oh, Bitcoin is trapped. It’s up. Okay, it’s trapped, it’s up, and therefore it’s QE. And I’m like…
Benjamin Nadelstein:
I want to give you an opportunity now to ask a question that I’ll ask all future guests. But first, where can people find Quilt Intelligence? They want to read more about Danielle, and obviously they have to buy the book. I’m telling you right now, if you don’t buy the book, this is QE. If you don’t buy the book, that’s QE. So if you don’t want QE, you have to buy the book. Danielle, where can people find more of your work?
Danielle DiMartino Booth:
Demartinobooth.substack.com. I’m new to the platform, which is why I don’t really have the smoothness of my spiel down. But that’s also where you can find, in full form for free, Too Small to Not fail, my opus. So come and then jump on trial, do whatever you want, try out the… It’s $59 a month to get the daily feather seven days a week. It’s stupid cheap, which I shouldn’t say out loud because I run the company anyways. But just give it a whirl, because as unhinged as I am in the spoken word, my research is amazing. Ask every single guest until it’s resolved, if the debt ceiling is not Kabuki theater this time, how should it play into what your narrative is going forward?
Benjamin Nadelstein:
Danielle, I want to thank you so much for coming on to the Gold Exchange podcast. You’ve been a wealth of knowledge. We can’t wait to have you back and we’ll be seeing you on Substack!
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