Today Is Our Dependence Day

There's not going to be an independent Fed you stupid slut

not a great time

We can't be consumed by our petty differences anymore. We will be united in our common interests. (…) you will once again be fighting for our freedom, not from tyranny, oppression, or persecution - but from annihilation. We're fighting for our right to live, to exist. And should we win the day (…) as the day when the world declared in one voice: We will not go quietly into the night! We will not vanish without a fight! We're going to live on! We're going to survive! Today, we celebrate our Independence Day!

President Thomas J. Whitmore, “Independence Day” (1996)

Trump said he would fire Federal Reserve Governor Lisa Cook under made-up mortgage fraud allegations, which is both illegal under federal US law, illegal under a recent Supreme Court decision that insulates Fed governors from political firing, and a terrible idea. It’s extraordinarily unlikely, in my basically uninformed opinion, that the courts actually do anything - they haven’t, in any way so far, genuinely curbed Trump’s executive powers. Regardless, this puts the Fed at an extremely uncomfortable position: being politicized as a decisionmaking and policymaking body. Since the Fed sets, directly or indirectly, the monetary policy of the entire world, it losing its independent status and thus its standing would immediately reverberate across the globe. If the US loses its monetary primacy, then the US as an economically powerful country, is basically over.

Are things really that bad?

What are we doing?

It’s widely acknowledged by economists that monetary policy has to be independent. This means, in regular English, that interest rates should be set responding only to economic conditions and without political pressures. Why?

Well, the first thing to consider is that monetary policy is very important: it determines the amount of money in the economy. Shocking, I know, but how much money there’s going around is really important. In a 1752 essay titled “Of Money”, David Hume proposed a rough version of what we now call the Quantity Theory of Money: increasing the amount of gold (money) in an economy would only increase prices, but not increase the amount of stuff produced, because all prices (including wages) would adjust upwards as people spent more cash on the same physical quantity of items. Hume also adds another idea that is now extremely common, that not all changes to prices and wages would happen at the same time, so this means that big, sudden surges in the quantity of money that lead to surges in prices also can lead to sudden changes in purchasing power. The big question here is why, then, printing money doesn’t stimulate the economy. There’s many reasons why this could be true but one of the simpler ones is that, because it takes physical infrastructure to make more stuff that is currently possible and building that infrastructure takes time, then there aren’t big short-term increases in volumes and there are in prices, and because people know that all prices are eventually going to even out, they don’t bother investing anyways.

This idea, that money is neutral with regards to economic activity but causal with inflation, is just straightforwardly true when you look at the data: there’s a very tight correlation between the growth rate of money and of prices, no correlation between the growth rate of money and output, and no correlation between inflation and growth. To be fair, the relationship between money and prices isn’t 100% immediate (as we said, prices adjust in steps), and, most importantly, this relationship only appears for countries that don’t have good monetary policy: countries with low inflation seem to have no correlation between money and prices, and countries with high inflation have a very tight one. I’ve written a post about this like 3 years ago but, basically, if two major macroeconomic variables are determined simultaneously by policies that aim to keep one of them stable (in this case, inflation) then their relationship will not show up in the data for the (very logical) reason that, if the central bank is good at its job, then it keeps one variable stable and one fluctuating - this makes it appear that there’s no correlation even when there’s a very strong one.

In fact, that the Fed is so powerful is why Trump wants to act. He wants them to cut rates, and they won’t, which is why he’s been making noise about firing Jerome Powell (the head of the Fed) and replacing him with one of his wackjob yes-man advisors. In particular, the Fed has kept interest rates relatively high (at 4.5%) for all of this year and some of the last one, even as the economy began slowing: American consumer demand is much weaker than in 2024, and job growth had its worst month since the Great Recession in June (excepting COVID). The only thing propping up the house of cards of consumer sentiment is AI investment, and investment (especially in tech) is really sensitive to interest rates. So that’s what Trump wants, lower rates.

Other people’s blood

But why isn’t the Fed cutting rates? First, because inflation is still relatively high. They have a 2% target and it’s been above 2%, sometimes very above, for long stretches of the past 4 years. This was because, when prices shot up because of the War in Ukraine and post lockdwon reopening stress and the big 2020 pandemic stimulus, which put them in a tight spot where prices went up but a lot of it was due to things monetary policy doesn’t control - Jerome Powell can’t print microchips, or oil. He can print US dollars. But Powell knew the economy would overheat from the big deficit spending of 2021 - in fact, it was priced into the markets. So why didn’t he raise rates in 2021, before the War and everything made everything hard? Well, because he was afraid of messing up the post-pandemic recovery, like the Fed had in the 2010s: the Federal Reserve had trouble meeting its 2% mandate for basically the entirety of the 2000s, which was due to them keeping total spending too low and therefore have too many people without jobs. In brief, this caused the economy to take basically a decade to recover from the Great Recession. The Fed did what it did because they thought that acting too early on inflation risked repeating this mistake. Which, ironically enough, meant that they had to overplay their hardness on inflation while at the same time risking a recession in 2024 to not look like they were panicking.

The thing here is that the Fed keeps repeating the mistakes it made the last time around, which is something they’ve done as long as the Fed has existed as an institution: back in the 1920s, the Federal Reserve decided it was powerless to stimulate the economy because rates were low, which led to the supply of money collapsing due to the gold standard, which led to an economy so bad people were eating their shoes. This scarred economists for half a century, and by the 1970s they kept putting off hiking rates because they were worried about causing a recession even though inflation was extremely high. This played a big role in economic thinking at the time¹, which meant that economic models were built on flawed premises that resulted in bad economic thinking, and not necessarily on a politically captured Fed (though Chairman Arthur Burns was politicially captured) or on bad decisions. The fundamental theoretical problem with the Federal Reserve’s theory of the economy back in the 1970s wasn’t that they thought stupid things about raising rates - it was that they believed stupid things about economics in general, informed by extremely traumatic moments in the 1920s.

But this all meant that the Fed had very little prestige by the late 70s, after 6 entire years of extremely high inflation and a weaker economy. The only way to resolve this was what’s known as the Volcker Shock: interest rates going to extremely high levels, sometimes nearing 20%, to tame inflation. There’s a quote from Reagan economic advisor Michael Mussa that explains Volcker’s policies: "to establish its credibility, the Federal Reserve had to demonstrate its willingness to spill blood, lots of blood, other people’s blood.” This means that the Fed didn’t need to raise rates because it was politically captured - it needed to raise rates because it had to convince everyone that, after 15 years asleep at the wheel (inflation had begun rising in the mid 60s), the Federal Reserve was was serious about inflation.

It was extremely painful, but it worked. By shedding so much blood, the Fed’s credibility was cemented. This credibility is extremely important to monetary policy: the reason why the Fed was able to bring down inflation without causing a recession in 2022-25 is that people trust it so much. But not even the Fed, which as of August 24th 2025 was the most credible monetary policymaker in the world, could get away with it forever: the market was certain that consumers wouldn’t be worried about inflation indefinitely. If this happened, people would have started freaking out very quickly - because they’d have received information of higher and higher inflation with complete Fed passivity not just from the news, but at the gas pump and the grocery store. The key idea in modern macroeconomics, confusingly named “rational expectations”, is that you can’t trick everyone forever, because sooner or later they start anticipating what you’re going to do and it stops working. Thus, if the public has faith in central bankers committing to stop inflation, then it’s a lot less costly to stop it than if they don’t, because you have to earn people’s faith as well as stop inflation. Trust in central bankers manifests as trust in their words, trust in how they respond to numbers, and trust in their decisions - and it’s crucially important to retain it.

Church and state

The obvious question here is whether an independent central bank is more credible than a politically captured one. For example, you could take a John Dewey-esque “wisdom of the crowds” type position and think that, over time, people would vote out inflationists and would elect optimal policy. Also there’s a philosophical argument where democracy means that regular citizens should get a direct say over monetary policy. So unless you have really good evidence that independent monetary policy is superior, then that’s just not enough.

Well, there is very good evidence on this, or as good as it gets in macroeconomics. The core case is pretty simple: if you can boost growth in the short term at the expense of long-term inflation (the core of monetary neutrality as an idea), then you can take policies that are optimal in the short term but not the long term, because growth doesn’t permanently increase but inflation does. This means that, if people catch on to this goosing of the economy (for example, during election season), then it stops working and it just causes even more inflation, which makes it beneficial to have very firm rules around when to cut or hike interest rates - that is, independent monetary policy. This can also emerge if taxes reduce income and the government can order the central bank to finance it, but it’s less relevant to this case in particular (though David Beckworth, a pretty smart guy, thinks it is actually relevant).

But that’s just macro theory and macro theory is, let’s be frank, bullshit. Well, the empirical evidence is reasonably strong too: it’s just a clear fact that central banks that are less politically captured have lower levels of inflation, fewer recessions, and more stable and lower unemployment. The first reason for this is that countries with independent central banks have stronger independent institutions in general, and this results in stronger, lengthier, and more predictable governments that are more incentivized to care about the long-term growth of the economy. You can see this in practice too: in developed countries the laws surrounding central bank independence are what matters, but in developing countries, what matters isn’t what the law says, but whether it’s followed - that is, not by de jure measures of legal independence, but by de facto measures of whether there’s a lot of turnover in central bankers.

The second issue is politics, obviously: the government would want to deliver more growth in the short term, so it can get reelected, with inflation coming later. If the government is capable of manipulating the central bank in order to do this, then when they have to bring down inflation, the bank’s promises aren’t credible - because what prevents the president or parliament from stepping in and ending the disinflation program? The way to resolve this tension is with an independent monetary policymaker that cares about inflation more than the average person, so they’re more believable not just when they cut inflation, but also when they don’t cut it (such as the Fed in 2022-25). If a country has really volatile politics (that’s just every country these days), it becomes even more especially important to keep monetary policy stable and independent, because the alternative is to just change it every 5 seconds and that means more and more (pointless) monetary stimulus. This is especially serious for governments who think they’re likely to lose elections, which will boost the economy as much as possible right before voters head to the polls. The vast majority of economic benefits from central banking are of this nature, of the political variety - the Fed isn’t capable of preventing pandemics, natural disasters, or bad harvests. But it is capable of offsetting or preventing too much money from being spent. The fact that governments make very short term decisions around elections is why it’s also considered important that central bank terms be longer than political terms, or at least don’t coincide with them, to avoid making monetary policy a major political issue and reducing credibility in the decisionmaking.

The end is near

The US probably won’t have a credible central bank in the near, near future. What is that going to look like?

The first place to look is Turkey: as seen above, inflation increased a lot when President Recep Tayyip Erdoğan started meddling with the central bank of Turkey. This was due, obviously, to persistently easy money and to a central bank with little credibility and little commitment to stabilizing inflation. Similarly, Brazil had a market freakout earlier this year: the President, Luis Inazio “Lula” da Silva, appointed a center-left economist with intellectual ties to the government as head of the central bank. This really worried the markets, which don’t trust Lula and in a context when inflation was very high, and the Brazilian real weakened significantly in a very short period of time. The bank of Brazil had to sell off tens of billions in reserves to prevent the currency from spiraling out of control, and eventually the situation was calmed when the new central banker started off his tenure with a 100 basis point interest rate hike - in fact, rates under Gabriel Galípolo’s tenure have increased by 3.75%, to 15%. There’s also cryptocurrency (in particular, the demonic stablecoins), which don’t have a credible central authority proactively stabilizing their value; as such, when people started getting antsy, they completely imploded, and not only that but sent the value of many other related assets tumbling down.

But the most obvious example of what would happen to the United States over time is, you guessed it, Argentina. The central bank of Argentina has extremely low credibility: in its 90 year history, it’s had 60 presidents, or roughly one every 18 months. In fact, of those 60, the longest serving one (Santiago Bosch) served 6 years… or a single full term. And he was the first and only central banker to complete his full appointment. This manifests in extremely high nominal volatility: inflation was very high from the 1940s all the way to the 1990s, and then again from the mid-2000s until the present, when it peaked at 25.5% a month in December 2023. Such high inflation also shows the classic dynamic of monetary neutrality, where high-inflation periods have very accomodating monetary policy and very volatile nominal variables, but low inflation periods have stable inflation with variable money growth to keep it on track. Monetary policy in Argentina was not independent and instead was at the service of fiscal policy, in particular the need to finance enormous deficits without raising taxes or, due to the low credibility of the government in general, issuing debt.

Somewhat interestingly, these monetary patterns also had a clear financial impact: if you consider the possibility of investing in various assets that are denominated in pesos and in dollars, the real rate of return of peso assets depends on interest rates and on inflation as well as on the qualities of the asset. But because interest rates and inflation are so variable, so capricious, and so high, then it’s really hard to make good decisions - especially because rates of return change a lot ex post, after you’ve invested. This makes it very economically advantageous to invest in foreign currency denominated assets (ironically enough, in US dollars) to prioritize wealth preservation over return maximization. This also has negative effects on economic performance: if you include real estate as an asset, then you find that significant economic volatility distorts investments away from useful assets in pesos and towards economically useless wealth-protecting devices like cash US dollars and housing, which reduces long-term growth and productivity by keeping capital out of the economy.

So it would be extremely bad for the United States to have the Fed captured by Trump’s idiot cronies, not just because they’d make bad, short-term decisions to keep that odious orange fascist in office doing other bad things, but because they’d also severely damage the US economy with higher risk, higher volatility, and higher inflation - and, if things get bad enough, lower growth and lower investment. Yippee!

The world’s wanker

But the US isn’t just any currency. It’s the global reserve currency. This means, basically, that the US has to export a lot of services like lending currency to other countries, at the expense of having an artificially strong dollar and depressed savings rates - but depressed savings rates and big capital inflows mean artificially lower interest rates, and lower interest rates plus more capital plus lower savings mean higher consumption. Trump’s lackeys, particularly Stephen Miran, really dislike this because it means the US imports a lot of cheap consumer goods, which improve the quality of life of the average Adolf Treatler voter but decreases it for Trump’s lumpenprecariat base of white Midwestern racists who lost their jerbs to the Chinese.

As the country at the center of the global economy, the US has money coming in and out of every other country, for pretty self explanatory reasons (it’s their currency you’re using). Because the global financial system is very well integrated, then what happens is that American monetary policy means that countries always face some blowback - without controlling these capital flows they either have to change their interest rates to match the Fed, or let their currency fluctuate (which can be bad for them). The key condition here is interest parity, that says that a country’s interest rate has to be equal to the global rate (the Fed Funds Rate) plus its currency depreciation rate plus global risk. Obviously Trump’s bullshit raises global risk. But it also means that, for a global rate that is higher (because the Fed would also face higher inflation expectations, which means eventually a higher nominal interest rate, which would be priced in by markets), then countries either have to depreciate their currencies more (which is inflationary) or raise rates more (which is recessive).

So other countries would experience repercussions from American economic instability and/or national decline, right? Yeah. The way the system works is that everyone agrees to give the United States free stuff in exchange for financial assets, and in return the Ameriburgers act as a mix of banker, venture capitalist, insurance company, and central banker, which borrows short-term in safe dollars to invest long-term in risky ventures worldwide, and provides safe assets to other countries during global crises. This dynamic is the bedrock of the global economy, but its stability is entirely contingent on one thing: the credibility of the United States.

To retain its global economic hegemony, the US must stay a reliable and well-run country. Its number one responsibility is to provide an unlimited supply of truly safe assets that every single other country in the world can depend on. Every bank on the planet has US Treasury bonds as collateral to its loans and assets and liabilities. The countermeasure has to be that, for those assets to be safe, the US has to be safe. One reason this is true is because the US is the most powerful country on the planet. But the country is also, much more importantly, committing to stabilize US government debt as a share of its own GDP, since a sustainable federal debt level points to both macroeconomic prudence and capacity to handle repayment of complex assets. In fact, literally the main constraint for all past hegemons of the last three hundred years is to have a responsible fiscal policy, since at some point it just starts becoming too risky to keep borrowing if the world’s bank has a balance sheet like it’s Groucho Lehman. The big risk in having an overly indebted world’s banker is that, the moment investors suspect the US might devalue its currency to escape its debt obligations or act unpredictably, the entire global financial system falls apart. A crisis of confidence in the Pax Americana wouldn’t be caused by an American default, but rather by the fear of default, triggering a catastrophic sell-off of dollar-denominated assets.

The consequence of a crisis of confidence against America would be total global economic bedlam. Fearful investors would dump U.S. assets, sucking liquidity out of the American economy and wrecking all global currencies as they tried to found somewhere to park. The last time the global hegemon failed so badly was in 1929. The United States, as the dominant economic power, was unable and unwilling to stabilize the global monetary system because it was more interested in protecting its gold reserves. Since nobody was capable of managing global imbalances, the world fell into complete chaos: countries with surpluses hoarded gold, countries with deficits faced brutal deflation, and they both engaged in mutually destructive sets of competitive protectionism and currency manipulation. Because there was no credible party capable of enforcing global economic rules, a recession that would have been initially manageable spiraled into a decade-long catastrophe, the deadliest war in the history of humanity, and the worst atrocities ever perpetrated on Earth by the hands of the fascist regimes elected in the wake of the Depression.

Sleep tight.

Conclusion

The risk posed by a Federal Reserve without credibility isn’t just to the American economy, but to the perception of the US as a safe pair of hands. Under the complete personalist assault on American institutions, the United States wouldn’t just become poorer, but also it would become less credible - it would not be a nations of laws, but rather, a nation of Trump. The total centralization of power in the elected leadership of a single person (let alone one as stupid and venal as the Orange Man) would result in an extremely unpredictable and volatile policy panorama: erratic leadership, attacks on the rule of law, fiscally irresponsible policies, tariffs designed to devalue the dollar. This all represents a fundamental rejection of the rules-based system the US itself built to its own advantage. The combination of weaker rule of law, reckless juicing of the economy, and mercantilist trade policies undermines and impoverishes the US, and would potentially create a currency crisis as severe as the Great Depression.

1. Go to page 43 of this extremely lengthy PDF, or Review: March/April 2005, Vol. 87, No. 2, Part 2 of the St. Louis Fed, specifically “Commentary” by Christina Romer on the Allan Meltzer text. They redid their website in the last 3 years and it doesn’t link directly anymore.