Billionaire says Powell and his merry band of lunatics are destroying capitalism

Our understanding of monetary policy views the interest rate as a control variable, and the objective variable that is being controlled is inflation. The goal is to keep current inflation around 2%. The idea is very simple, when inflation goes above target, you hike the rate, and when it falls below target you lower the rate. There is a hypothesized "natural" rate, which may change, and is the product of productivity growth, population growth, and many other factors like time preference of the population, etc. This natural rate is the rate at which inflation is exactly at target. And when inflation drifts above target, you increase the rate from the natural rate.

That theory, historically, fixated on the problem of the zero bound -- you can always hike, but you can't always lower. Many old school people kept warning that no, the real problem remains high inflation, not low inflation. We can also debate whether we should be targeting inflation or the price level -- e.g. do we want high inflation to make up for a period of low inflation and vice versa? Or do we have no memory and only try to get inflation back to 2%? And we can debate whether 2% is the right target inflation or if it should be higher.

In any case, wherever you fall on these issues, it's well known that the response for the control to work has to be greater than 1. E.g. if the inflation deviation is a little high, the interest rate deviation from the natural rate needs to be even higher. Any sustained period of negative real rates is going to be disastrous.

That means with 10% inflation we may need a policy rate of 12% or 15%. It was for this reason that Volcker (even though the theory had not been worked out yet in academia) hiked rates to 19% in 1980 and that was what really crushed inflation, as previous efforts were insufficient.

That would mean that today, we should see a much higher overnight rate than what we do see -- which is only 3%. It should be something like 13%. And people will say "wow, that's a very deep recession" and the answer is "yes, exactly. That's what's needed to bring inflation back down to target."

Powell's refusal to stick to the policy that was initiated by Volcker and more or less honored by all his previous successors is what most economists blame for the current period of runaway inflation.

Runaway inflation is not just about making people poorer, but long periods of negative real rates means that pensions will not be paid, there will be problems in credit markets, and it will be difficult to make long term investment plans, both for business and personal financial planning. It's really hard to find out how much you need to save if you have no idea what your savings will be worth in 20 years. That uncertainty about future prices causes long term standard of living to fall even more than what would happen in a very sharp, yet brief, recession that brings inflation back down and allows companies and households to make long term plans.

Powell's refusal to create this recession, primarily for political reasons, as there is always an election coming up every 2 years, is what is jeopardizing the viability of our system of savings and investment.