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Kevin Warsh, President Trump’s nominee to replace Jay Powell as Chair of the Federal Reserve next May, is the epitomy of a Wall Street, hedge fund insider. Educated at Stanford University and currently a fellow of its graduate school, he is also a member of the secretive Bilderberg Group set up in the 1950s to work out strategy for the preservation of ‘Western democracy’ as the Cold War with the Soviet Union intensified. He is married to the heiress of the Estee Lauder company. As a young man he first worked at Morgan Stanley, the American investment bank (actually at the same time as I did, although I never met him).
A good Republican, he became an adviser to the Bush administration on financial markets. He was heavily involved in the 2008 financial crash, becoming the liaison between the Federal Reserve under Ben Bernanke and the Wall Street banks. He advocated that the crashing investment banks should be turned into proper ‘banks’ so that they could receive Fed loans to bail them out. In this way, he helped save his former employer Morgan Stanley from going the same way as Bear Stearns or Lehman Bros.
So Warsh was the link man for the Fed in ensuring the banks were bailed out of the disaster of their own making. “He brought a lot of real experience, he knew these people on Wall Street — he knew the difference between when they were arguing their book and when they were bringing us good information — and that was very, very valuable,” said Don Kohn, the former Fed vice-chair. The then chair of Goldman Sachs, Lloyd Blankfein, the man who claimed he was “doing God’s work” at Goldman Sachs, loved Warsh. “Kevin was unflappable at chaotic moments,”Warsh’s mentor is the billionaire hedge fund boss, Stanley Druckmiller, who also promoted current Treasury Secretary Scott Bessent. Druckmiller maintains regular contact with both Bessent and Warsh. Indeed, Warsh has worked as a partner in Druckmiller’s operations since 2011.
Warsh had been a Federal Reserve governor but resigned after the financial crash bailout when Obama took over the presidency and Fed chair Bernanke began to pursue a policy of ‘quantitative easing’ (QE), where the Fed pumped billions into the banking system to support it and keep interest rates low. Warsh was opposed to QE. He was a good ‘Austrian school’, free market man. So he saw the Fed monetary pump as causing “misallocations of capital in the economy and the misallocation of responsibility in our government.” Warsh has long believed that central banks were addicted to ‘printing money’ and thus encouraged “recklessly large public sector deficits”. He wanted no excessive funding for the economy and no excessive government spending. Quoting Chris Giles of the FT here, he thinks the Fed governors “should stick to their knitting on inflation and not get distracted by environmental concerns or the distribution of income.” Reducing inequalities is not on Warsh’s agenda.
As a monetarist a la Milton Friedman, he then claimed that QE would lead to runaway inflation. As we now know, it did not. As I have shown in other posts, the monetarist theory of inflation is faulty because it assumes that money drives supply, when it is the opposite; and it fails to account for ‘hoarding’ or increased money supply being used by the financial sector for speculation and not for lending onto the wider economy. That is what happened after the financial crash in 2008-9 and explains the near-zero inflation during the Long Depression of the 2010s.
But now in 2026, after the inflationary spike following the end of the pandemic slump, Warsh is not worried about the Fed lowering its policy interest rate and causing inflation because this time AI is going to save the day by boosting productivity so much that it will be a “significant deflationary force”. As his mentor Druckenmiller put it “Kevin right now very much believes you can have growth without inflation.”
The interesting contradiction is that Warsh still wants to stop the Fed expanding the money supply as that is inflationary, in his view. So if the Fed reduces its balance sheet further (which it did for a while under Powell) that could raise government bond yields – unless, of course, the government makes significant cuts in spending and inflation subsides. Everything will depend on that AI productivity boost.
Let the Financial Times sum it up: “US stocks ride AI hype and trade truce to 6-month winning streak S&P 500 and Nasdaq post longest runs of monthly gains in years.” The FT points out that US stocks have hit their longest monthly winning streak in four years as AI hype, declining interest rates and Donald Trump’s move to dial back his trade war led the way. The S&P 500 rose in October for a sixth consecutive month of gains, and reached its 36th all-time high this year last Tuesday. It is the best run for the index since August 2021.
Any concerns about an AI bubble in the making, and signs of weakness in the US labour market have been eclipsed by a torrent of bullish spending announcements and strong earnings from Silicon Valley tech groups. And then the one-year deal between China and the US to postpone export controls on rare earths and chips added more to bullish sentiment. The Federal Reserve also delivered its second rate cut of the year on Wednesday. The Fed rate cut followed an explosion of mergers and acquisitions across corporate America, with more than $80bn worth of deals struck on last Monday.
The tech giants delivered their quarterly earnings results. Amazon shares rose 12 per cent on Friday, adding almost $300bn to its market value after the company’s cloud business reported its strongest quarterly growth in nearly three years. Meta sold $30bn of bonds to finance AI projects and the bond sale drew about $125bn of orders — the grade corporate bond. largest-ever demand in dollar terms for a US investment. Nvidia became the first company to reach a capitalisation of $5tn and Apple topped $4tn for the first time. “Yes, this is a bull market that’s run a long way . . . but at the moment the tech firms just keep on delivering,” said John Bilton, head of global multi asset strategy at JPMorgan Asset Management. “The fact everyone is telling me [tech] is a bubble makes me think it’s got further to go.”
Investment advisors were ecstatic: “There’s a greater consensus that the impact of AI is going to be real and transformational, earnings season is turning out well, we are at the beginning of a Fed rate cutting cycle, and there’s optimism that there could be a reasonable [US trade] deal with China,” said Venu Krishna, head of US equities strategy at Barclays. All the doom mongers have egg on their faces. The US economy is not in a slump, inflation is not out of control and Trump has made a trade truce with China. So everything is hunky dory in the best of all possible worlds.
But is all really so well? The stock market boom has taken the ratio of stock market prices to corporate earnings to new highs. The P/E ratio, as it is called, is now some 40% above its historic average and surpassing the ratio reached during the so-called ‘dot.com bubble of 2000. That bubble burst with a fall of 40% in the P/E ratio.
In previous posts, I have pointed out that the US success story is almost totally due to the expansion of AI investment by the tech giants, which continue to rack up big profits. But the rest of the US corporate economy is in the doldrums. In the corporate sector, earnings are still rising, but at a slower pace, up over 18% yoy at the end of 2024, but in in Q3 2025, rising at 10.7% – still good but on a downward trend.
Source: FactSet
The rate of profit, although up from the depths of the pandemic slump, is still low historically, while profit growth is slowing in the non-financial sector.
Source: BEA
Even the Magnificent Seven are forecasting a fall in earnings growth, mainly because of heavy AI spending. At Meta and Amazon, profits are supposed to grind down to nearly nothing. As for working people, the market for labour has been weakening. Net new jobs are disappearing.
And once people lose their jobs, it is increasingly difficult to get another.
No wonder the euphoria in the stock markets is not mirrored in the labour market. American consumers have never been so depressed by their situation.
But the only joker in the economic pack of cards, according to investors and corporate strategists, is the public sector. The US government is still running huge annual budget deficits and thus driving up the level of government debt, and so increasing the cost of servicing that debt.
Apparently, this is the reason for low investment in productive assets: government bond issuance is rising so fast that it is ‘crowding out’ credit for the private sector to invest in productive assets. This is nonsense. There are now many studies that show that interest costs are not the first worry for companies. The main question for firms is: what return in profits will there be from new investments?
The reason that public sector debt has risen so much in the 21st century was the bailing out of the finance and private sector during the global financial crash of 2008-9, the euro debt crisis through to 2012, and the fiscal support necessary for people to get through the pandemic slump of 2020. Those were the periods when government debt ratios rocketed. In the periods in between, policies of austerity (particularly in cutting welfare benefits and investment in infrastructure), along with a some recovery in growth, kept debt ratios more or less stable. Meanwhile, cuts in personal income taxes (particularly for higher income groups) and corporate profits taxes meant that government tax revenues as a share of GDP remained flat at around 35% of GDP, while government spending to GDP rose (IMF).
Source: OECD
Debt does matter, but the debt that matters in a capitalist economy is not so much public debt, but corporate debt. The latest estimates are that in the major economies, some 30%-plus of companies have so much debt that they do not earn enough profits to service that debt.
Source: Bloomberg
Despite most central banks cutting short-term interest rates, borrowing rates for corporations have not fallen so much. The big cash-rich companies do not need to borrow and if they do, they can get the best rates. The AI companies are still able to fund their huge capital investments from existing cash reserves and earnings from successful core businesses, although that cash is being drained fast. But other companies are dependent on the banking sector to keep bailing them out.
And here is the risk. In the US, smaller regional banks got into deep trouble in March 2023, when start-up tech companies started to take out their deposits to keep going and the banks could not meet their obligations. And last month, JPMorgan CEO Jamie Dimon delivered a cryptic warning to the financial system. Referring to the bankruptcies of auto parts supplier First Brands and subprime auto lender Tricolor Holdings, Dimon said: “When you see one cockroach, there’s probably more. Everyone should be forewarned on this one.” JPMorgan lost $170 million on Tricolor. Fifth Third Bancorp and Barclays also lost $178 million and $147 million. Some US regional banks were also back in the wars. First Citizens Bancshares and South State lost $82 million and $32 million, respectively.
And just as in March 2023, European banks are in the mix. Back then, it was the mighty Swiss bank Credit Suisse that went under. This time, European banks BNP Paribas and HSBC each called out specific write-downs of $100 million or more in loan exposure. And just as in March 2023, it appears that fraud is involved. Apparently, $2.3 billion in so-called ‘factoring deals’ have “simply vanished” from First Brands accounts.
That’s the risk to the commercial banks. But increasingly, the big banks are not lending directly to companies, particularly smaller ones, but instead providing ‘liquidity’ to non-bank lenders, so-called ‘private credit’ companies. Non-bank financial institutions now account for over 10 per cent of all US bank loans. While direct on-balance-sheet funding by banks has declined sharply since 2012, the use of credit lines to non-banks has expanded significantly, now representing approximately 3% of GDP. Having grown from $500 billion in 2020 to almost $1.3 trillion today, private credit is an increasingly important source of financing for companies.
Much of this private credit lending is now used for household mortgages – shades of 2007.
As this private credit is not on bank balance sheets, it is not regulated. That could mean that there may not be enough capital in the credit companies to meet any losses if the companies they lend to go bust. Then the private credit companies could also go bust or need a big bailout by the commercial banks – a classic ricochet through the financial system – and perhaps onto the ‘real economy’.
Such ‘systemic risk’, as it is called, is dismissed by most financial strategists. Goldman Sachs recently went out of its way to argue that there was no risk from non-bank private credit companies going belly up. On the other hand, Bank of England governor Andrew Bailey raised “alarm bells” over risky lending in the private credit markets following the collapse of First Brands and Tricolor. And he drew a direct parallel with practices before the 2008 financial crisis.
Referring to how ‘repackaged’ financial products have in the past obscured the risk of the underlying assets, Bailey said: “We certainly are beginning to see, for instance, what used to be called slicing and dicing and tranching of loan structures going on, and if you were involved before the financial crisis then alarm bells start going off at that point. Tricolor and First Brands both made use of asset-backed debt, with the subprime lender bundling up car loans into bonds and the car parts manufacturer tapping specialist funds to provide credit against its invoices.” Bailey’s comments follow a warning last month from the IMF that US and European banks’ $4.5tn exposure to hedge funds, private credit groups and other non-bank financial institutions could “amplify any downturn and transmit stress to the wider financial system”.
So the stock market may be booming and the AI hype is still exploding, but the rest of the economy is not so buoyant; and there appear to be cockroaches eating into the clean running of the world of debt. Watch that space.
Jackson Hole 2025: monetary policy, demography and productivity
Every August, the regional Kansas City Federal Reserve holds a symposium for the world’s central bankers to consider their role in economic policy and important developments in the world economy. The head of the US Federal Reserve usually presents a summary of how he (or she) sees the state of US economy and what action the US Fed should take in trying to meet its set targets of keeping price inflation moderate (no more than 2% a year) and achieving ‘full employment’. The gathered central bankers also receive presentations from a range of mainstream economists to improve their ‘expertise’.
At this year’s symposium of central bankers in the major economies, current Fed chair Jay Powell was under pressure. First, the US economy is showing significant signs of stubbornly high inflation and falling employment. Second, Powell was being called an ‘idiot’ and ‘moron’ by the US President Trump for not reducing the Fed’s policy interest rate. This so-called ‘policy rate’, decided by a Fed Committee, sets the interest rate that banks and other institutions can borrow from the Fed as the ‘lender of last resort’. So that rate in effect becomes the floor for all other borrowing rates: government bonds, corporate loans, mortgages – and even interest rates in foreign currency markets where the dollar dominates. The current policy rate is around 4%-plus; Trump wants it cut to 1% and is threatening to sack Powell and other Fed committee members and then appoint a new chair of the Fed, if Powell does not act.
Goldman Sachs economists have created a model to examine the movement of import prices in response to tariffs, using product-level figures and tariff rates. They estimate that foreign exporters have absorbed 20 per cent of Trump’s tariff increases, but that won’t last for long. Already prices at the factory gate are beginning to rise and that will eventually feed through to retail and consumer prices. ‘Pass-through’, as it is called, is coming.
At the same time, employment growth has been falling fast and the official unemployment rate is ticking up. As Powell said: “The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts. The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem.”
And Powell probably knows that massive jobs data revisions are coming: on 9 September, the Bureau of Labor will release its preliminary benchmark revision to net jobs increases for the year to last March. Goldman Sachs estimates the revision could cut existing reported payrolls by 550-950,000 jobs. This implies that the jobs growth was overstated by a massive 45,000-80,000 jobs per month.
In sum, inflation remains above target and full employment is disappearing. Powell posed the dilemma: “In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation.” Indeed!
In his speech, Powell was more concerned with the deteriorating employment situation ie he was more worried about stagnation or recession than rising inflation. “Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
And the US economy has been slowing down. Apart from the Magnificent Seven of tech giants with their huge profits and their astronomic spending on AI capacity, US manufacturing remains in recession and the rest of the economy is crawling along.
The irony is that the Fed, like other central banks, has little effect on the economy through monetary measures. So the Fed has been reconsidering its monetary policy ‘framework’. It still holds to the view: that “the inflation rate over the longer run is primarily determined by monetary policy,” but it has to say that, because otherwise there is no need for ‘monetary policy’! Yet in 2010s, the US inflation rate dropped below the 2% target even though the Fed cut rates to zero, and after the COVID pandemic ended, inflation rocketed despite sharp rate hikes by the Fed and has remained stubbornly above the 2% rate. Indeed, US inflation has remained above ‘target’ for more than four years. And now both inflation and unemployment are likely to rise from here, whatever the Fed does. Monetary policy does not work.
That’s because there are much more important ‘non-monetary factors’ that affect employment and inflation, like global supply chain disruption, and changes in the profitability of investment and in the supply of labour. On the latter, there is the downward impact of an ageing population and the rising effect of immigration. Both can significantly affect the supply of labour over the longer term.
These ‘supply’ trends were discussed by the mainstream economists invited to the Jackson Hole symposium this year, under the theme: “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy”. What is happening to the supply of labour globally? Will there be enough for capital to exploit and boost surplus value? Claudia Goldin from Harvard University told the great and good of banking at the symposium that “fertility decline is everywhere in the world today.” Birth rates in the rich countries of the so-called Global North have been below what is needed to replace deceased humans for decades – and that gap has accelerated since the Great Recession.
Goldin reckoned the reasons for the decline in fertility was mainly due to women entering the workforce and those with careers not having children. More to the point, couples increasingly cannot afford children, given the huge cost of child care and the lack of state support. Goldin: “The downside of fertility is that greater female autonomy in the absence of sufficient change to guarantee support will produce lower birthrates.”Chad Jones from Stanford University suggested that one solution was to get men to share clhild-care. (!) In recent years, US population has only risen because of immigration but the recent policy of successive US administrations is to reduce that.
What do the population projections globally suggest? The UN consensus projection is for the world’s population to level off at about 10m and then start falling. That’s because the fertility rate will fall below two per family. Jones reckoned this is bad news because fewer humans will mean fewer technological advances (unless you think AI can do the job). GDP per person may rise to begin with as the population peaks and falls, but eventually the loss of new technical advances would lower GDP per person.
In another paper, Linda Tesar found that within the US, labour mobility between states was pretty much unchanged. Despite reasonable labour mobility, ‘left behind’ areas suffer from poor economic and social outcomes with little ‘out migration’ of workers or ‘in-migration’ of jobs. Regional inequalities of income thus remain, despite mainstream economics claiming that the ‘free market for labour’ reduces disparities. In his paper, Lawrence Katz from Harvard University found that from the 1980s, better education for some increased inequality of incomes within the labour force (surprise!), but in the last two decades this educational advantage has weakened ie graduates now gain less of an income advantage over non-graduates. Ufuk Akcigit from Chicago University argued that “AI can mean the loss of jobs for some sectors but also boost jobs in others.” Nothing new there.
But it is the large companies that will gain most. That’s because they dominate research and development, replacing the state which dominated up to 1970s, and now the large companies get the bulk of government subsidies for tech.
Laura Veldkamp of Columbia University reckoned that for now, only 4% of jobs used AI for at least 75% of tasks. 1/3rd of jobs used AI for 25% of tasks. (Anthropic Econ Index, 2025). But AI will hit wage share in national output by as much as 5%.
Other papers presented discussed the efficacy of central bank monetary policy. Back in the 1970s, mainstream economist John Taylor developed a rule for central bank rate policy. The Taylor rule assumed an “equilibrium federal funds rate of 2% above the annual inflation rate”. This was supposed to keep inflation under control without hurting real GDP growth. But Emi Nakamura of the University of California-Berkeleyand Jordi Galà showed in their presentations that the Taylor rule was inadequate in the 2010s when inflation headed towards zero and in the post-COVID period when inflation inflated. Once again, central bank monetary policy, whether based on the Taylor rule or not, did not ‘manage’ inflation. And that’s because inflation is driven by changes in value through the supply of labour, not by demand, as the post-COVID period graphically showed.
Ludwig Straub of Harvard University looked at the relation between fiscal deficits, government debt and monetary policy. He suggested that an ageing population with savings will look to invest in government bonds. “This implies that there is space for the government to finance its additional outlays by increasing its debt.” The paper’s authors suggest that governments like the US or Japan could continue to allow government debt-to-GDP to rise even up to 250% and not drive bond yields up – but apparently only if governments reduce their fiscal spending. This seems like a contradiction to me.
ECB President Lagarde, in her presentation, tried to explain why unemployment rates have not risen so much in periods of slump and/or rising interest rates. She argued that “part of the answer lies in global factors. Monetary tightening helped bring inflation back to target, but it coincided with other forces that supported activity: an easing of supply constraints worldwide, a steep drop in energy prices and proactive fiscal policies – all of which help explain the unusually low sacrifice ratio.” Above all, wages did not match the rise in prices and the pandemic slump saw a fall in hours worked, so companies kept their workers on as prices and profits rose. “Real wages fell by nearly 2% between late 2021 and early 2023, and only gradually caught up with cumulative productivity growth early last year. By widening the gap between productivity and labour costs, it eased unit labour cost pressures and supported firms’ profitability, while also making labour relatively more attractive than capital. Both dynamics encouraged firms to expand hiring.” So it was a profits-led inflationary spiral.
After a brief dip during the lockdowns, the Eurozone labour force was back to its pre-pandemic level by the end of 2021 – and has since grown by about six million people. The supply of labour rose partly because of more women and older workers joining the labour force, but mainly from foreign immigration, which has accounted for half the rise in the labour force since the end of the COVID slump. “In Germany, for example, GDP would be around 6% lower than in 2019 without the contribution of foreign workers. Spain’s strong post-pandemic GDP performance – which has helped support the euro area aggregate – also owes much to the contribution of foreign labour.”
Currently, only around 50 percent of women workers in Japan are regular employees, compared with around 80 percent for men. Although foreign workers account for only around 3 percent of the labor force, their contribution to labour force growth from 2023 to 2024 exceeded 50 percent. Alternatively, the BoJ governor hoped that the productivity of the existing labour force (which, by the way, is stagnant) could be boosted by AI. But he showed that AI is still not actively used by firms in the major economies, particularly Japan.
In summary, what do all these papers at the Jackson Hole symposium tell you? First, it is the value created by human labour that is key to economic growth and living standards, not changes in the cost of borrowing or lending money and the decisions of central bankers on interest rates. The ‘supply side’ of an economy is what matters. All the papers implied that.
The general conclusions were that: 1) human labour supply is likely to peak globally and fall in the imperialist core over the next few decades, so 2) that means the major economies can only achieve economic growth (and capital can only get more profit out of human labour) by raising the productivity of labour through technology substitution (AI?). Within any one country, more labour can be obtained through immigration or by moving capital to areas where labour has lower wages and a pliant workforce. But that is increasingly difficult. The impact of monetary policy in altering interest rates and the money supply is negligible compared to these underlying trends.
Nevertheless, mainstream economics and central bankers plough on with their claims that economic growth and prices can be modified by monetary measures. In reality, the cost of borrowing and lending mainly affects the financial sector and speculation in financial assets. That is why the likes of the Financial Times and the Wall Street Journal worry about the attacks on Fed chair Powell by Trump. They paint this as an attack on the ‘independence’ of central banks to decide monetary policy and as a defence of ‘expertise’ on economies over political interests.
Maurice Obstfeld of the Peterson Institute for International Economics finds ending central bank independence deeply worrying. “These attempts to discredit expertise are ultimately going to end up showing themselves in the markets,” he says. “Even though expertise doesn’t always get it right, it’s much better than going with what’s politically convenient at the time”. “If we have appointees who are primarily political loyalists, rather than people who have the right economic experience, this will be a material threat to evidence-based policymaking,” Obstfeld at the symposium. “And it may not achieve what Trump wants it to, because if you sacrifice central bank independence and rates are reduced to unwarranted levels, then investors will worry about inflation, long-dated interest rates will rise, and people will move away from dollar assets.”
Exactly. This ‘independence’ really allows the financial sector to look after its fictitious capital (bonds and stocks) and the profits gained at the expense of wages and real value. Many decades ago, governments in the major economies acceded to this monetary independence and ‘expertise’. And what has it achieved in sustaining economic growth, raising employment and controlling prices? The Jackson Hole symposium will be the last that Fed chair Jay Powell will address as his term is coming to an end. He will leave as public confidence in the Fed is close to all-time lows.
