Will Trump Make the Fed Great Again?

Donald Trump has repeatedly castigated Federal Reserve Chairman Jerome Powell for not slashing interest rates, calling him a “major loser” and a “numbskull.” He had tried to push Powell out early, but now that Powell’s term is concluding anyway, the president announced this morning his pick for a replacement: Kevin Warsh.

If the goal is to “own the libs,” it worked. During President Trump’s first term, the Washington Post ran a story titled “How to Be Wrong About Almost Everything and Maybe Be Fed Chair Anyway: The Kevin Warsh Story.”

• They hated him because Warsh was a fiscal hawk, wanted to raise interest rates over fear of inflation, and called for “regime change” at the Federal Reserve—but generally because he believed the Fed hadn’t worried enough about inflation.

At first glance, he seems to be the exact opposite of what President Trump is looking for.

Warsh has recently changed some of his rhetoric on interest rates, leading some to accuse him of selling out his principles in an effort to win what could be Trump’s most consequential nomination this term.

The reality is more nuanced. Since 2008, America has launched a massive, unprecedented experiment: quantitative easing. This means creating trillions of dollars from thin air. It’s basically like money printing, except the newly created money can be destroyed at a later date.

• That is Warsh’s plan: Take massive quantities of this new money back out of circulation, which should keep inflation under control and enable the lowering of interest rates.

There’s a lot to like about the plan. Quantitative easing pushed asset and stock prices up, helping the rich get richer and staving off a collapse in the stock market. But high interest rates have made it harder for ordinary Americans, especially when it comes to obtaining a mortgage. Quantitative easing clearly threw the entire economy further out of balance. It needs fixing.

But there could be one huge obstacle. The money created by the Federal Reserve was used mostly to buy U.S. treasuries—in other words, it was loaned to the federal government. Getting rid of all that extra money requires selling U.S. treasury bonds, lowering their value and making it much harder for the U.S. government to borrow money.

Yet President Trump wants to continue borrowing money at record amounts.

Warsh seems to have some sound ideas, but they could be compromised by America’s addiction to debt.

Finance, like all areas of human life, is governed by laws of cause and effect. Obey them, and you reap success; disobey them, and you reap curses. Lawbreaking in one area compromises our ability to keep the law in other areas. Someone who steals, for example, will soon find himself lying to cover it up.

America’s debt addiction stems from greed. In the absence of repentance and the keeping of these laws, any plan to restore real strength to the economy will fail, as we explained during Donald Trump’s first term in “The King of Debt.”