Summary of Key Points
The first thing the new chairman of the Federal Reserve, Jerome Powell, did upon taking office was to remove the dot plot, which had been in use for 14 years. This tool was used by Fed officials to predict interest rates and reflected a more ambiguous and flexible decision-making style reminiscent of Alan Greenspan's approach. However, the author warns that Greenspan was able to implement loose monetary policies without triggering significant inflation back then because of favorable conditions such as deflation (globalization and low labor costs) and low debt levels. Today, the situation has changed: with high fiscal deficits, persistent inflation, and saturated debt levels, Powell's ambiguous tactics may not stabilize the market but could instead lead to financial turmoil in the realm of sovereign credit (government debt and the currency’s anchor), rather than the type of crisis caused by private credit bubbles (such as subprime mortgages in 2008).
I. What Powell Removed Was Not Just a Chart, but the Market’s “Weather Forecast”
The dot plot was a transparency tool introduced by Ben Bernanke in 2012, akin to a central bank issuing an “interest rate weather forecast” to the market. Nineteen Fed officials would each mark their predictions for future interest rates on the chart, and the market would use these forecasts to gauge policy direction and reduce volatility. For example, traders would sell bonds in anticipation of rate hikes or buy them if the dot plot indicated rate cuts.
Powell dislikes this approach because he believes the dot plot is too precise and turns complex monetary policy into a set of fixed commitments. He wants to return the power of decision-making to the central bank itself, much like Greenspan did—by speaking in a way that is intentionally ambiguous, encouraging the market to make its own interpretations (for instance, Greenspan famously said, “If you understand what I’m saying, you must be misunderstanding me”).
The problem is that this tool works differently in different times. In the past, when deflation was a factor, it was conducive to monetary easing; today, however, we face fiscal pressures that counteract such efforts.
II. Does Powell Really Want to Learn from the Two Different Versions of Greenspan?
Many people only remember Greenspan as the “firefighter” who saved the economy from crisis, but in reality, he had two distinct personalities:
1. The “Hard Currency Advocate” of 1966: At that time, Greenspan was a believer in free markets and criticized government spending as “stealing money secretly,” viewing gold as a shield for protecting wealth. He was someone who advocated for strict monetary discipline.
2. The “Loose Monetary Policy Champion” after 1987: During the stock market crash of 1987, he implemented stimulus measures for the first time, which later led to the concept of “Greenspan put options”—the idea that the central bank would print money when markets fell sharply. In 2003-2004, keeping interest rates too low for too long fueled the subprime mortgage bubble, eventually contributing to the financial crisis of 2008.
Powell claims he wants to revive the disciplined Greenspan, but the author doubts whether he is truly learning from that version. The pressures of the current era are likely to drive him towards more accommodative policies. After all, even Greenspan’s earlier stance on hard currency eventually gave way to more aggressive monetary actions.
III. Greenspan’s “Good Luck” No Longer Exists
Greenspan’s success as a central bank chairman for two decades was not due to his exceptional talent but rather to favorable historical circumstances:
- The Legacy of Paul Volcker: In the 1980s, Volcker used high interest rates to curb inflation, establishing the belief that central banks would not let prices soar.
- Global Deflation: The dissolution of the Soviet Union and China’s entry into the global economy provided an abundance of cheap labor, keeping commodity prices low. As a result, when Greenspan eased monetary policy, the money did not lead to inflation but flowed into assets (real estate, stocks).
These favorable factors no longer apply today: inflation is persistent, fiscal deficits have exceeded $1.9 trillion, and debt levels exceed 101% of GDP—the situation has completely reversed. Powell’s attempt to replicate Greenspan’s loose policies lacks the deflationary cushion needed for success and could only lead to worse outcomes.
IV. This Time, the Crisis Affects Sovereign Credit
The crisis in 2008 was caused by a private credit bubble (subprime mortgages), which the central bank could address by printing money. However, this time the issue is more severe, affecting sovereign credit:
- Government debt is so high that interest payments exceed $1 trillion annually, accounting for 44.5% of fiscal deficits.
- By removing the dot plot, Powell has made it harder for the market to see the Fed’s commitment to fighting inflation. Instead, the market may interpret this as a willingness to let inflation erode debt (making government debt seem less significant).
- If the market believes this, it will demand higher interest rates on long-term bonds, increasing the cost of borrowing for the government and leading to a vicious cycle where more debt is issued, exacerbating the crisis.
This time, the problem is not just a private bubble but a weakening of the foundation of monetary stability (sovereign credit and the currency’s anchor), which cannot be resolved by simple measures like printing money.
V. Why Has Gold Become a “Hard Currency”?
The article concludes by pointing out that proponents of a gold standard (which oppose currency devaluation) and modern monetary theory (which discusses how fiscal debt affects currency values) are actually discussing the same issue: when governments spend recklessly and monetary policy lacks discipline, wealth is at risk. Gold serves as a form of insurance against such risks:
- Central banks around the world have been buying gold in large quantities (rather than U.S. bonds), driving gold prices to record highs. This is not mere superstition but a reflection of market sentiment: “Money may lose its value; gold is a more reliable asset.”
- Gold provides both protection against currency devaluation and risk of government debt default.
If Powell truly wants to follow Greenspan’s example from 1966, he should provide the market with a clearer anchor for monetary policy—perhaps by setting a clear inflation target and being willing to sacrifice economic growth if necessary. Removing the dot plot only exposes his willingness to compromise under fiscal pressure.
Conclusion: Focus on the “Thermometer” of Debt, Not Just the Central Bank’s Words
The author advises against trying to decipher Powell’s ambiguous statements. Instead, we should pay attention to key indicators such as:
- The yield premium on long-term bonds (the difference in interest rates between short and long-term bonds);
- The proportion of interest payments in fiscal deficits;
- The demand for government bond auctions;
- The trend of gold prices.
The best way to hedge against risk is to invest in assets that can survive any economic turmoil—such as gold or other assets with real value. This time, the crisis affects sovereign credit, and those who can withstand currency devaluation will be better positioned to weather the fallout.