An open Letter to Jerome h. Powell Chairman, U.S. Federal Reserve

John Douglas Van Sant

7540 Shoreline Drive, Stockton, CA 95219 jdvansant@kroloff.com (209) 478-7340

February 1, 2023

Jerome h. Powell

Chairman, Federal Reserve System

20Th Street and L Street n.W.

Washington, D.C. 20551

Dear Chairman Powell: i am writing to commend to your attention the remarkable ability of two well-known financial ratios to forecast retroactively the following year’s change in the Consumer Price index. the two ratios are the yearly changes in the M2 money supply and the Producer Price i ndex (All Commodities). t he sample period used to test the effect of these two factors on future inflation rates runs from 1991 through 2022, with a subsample spanning the years from 2010 through 2022. i therefore divided the full sample into two subsamples and performed the same regression on each. t he under- and over- estimations of the full sample disappear. t he coefficients and t-statistics of the two regressors also differ in the two regressions, confirming the variation between the 1960-1990 and 19912022 periods. See Figures 3 through 6. As a consequence of the apparent regime change occurring in the 1991-2022 period, this is the appropriate sample to use in forecasting post2022 CPI changes. t he equation

When I started this study, I first regressed the two factors against the following year’s CPI change using the Federal Reserve’s M2 data going back to 1959. As you can see in Figure 1, the two factors “work” in the sense that the regression R squared is .451 and the tstatistics of the two regressors are above 2.00. However, the Figure 2 graph clearly shows the regression point estimates consistently underpredicting inflation in the first half of the sample and (necessarily) overpredicting in the second half. t his indicates that there is a difference in the monetary economic environment between the two time periods causing a different inflationary response from the changes in M2 and the PPI.

Una carta abierta a Jerome H. Powell Presidente, Reserva Federal de EEUU

Estimado Presidente Powell:

Le escribo para llamar a su atención la notable capacidad de dos índices financieros muy conocidos para pronosticar, retroacti-

Civic Responsibility

the editorial Board

At almost the same time that we received the letter by Douglas Van Sant to Jerome Powell, the Chairman of the Federal Reserve, that you see below, we discovered a new book by Richard Haass entitled The Bill of Obligations: Ten Habits of Good Citizens (Penguin Press, 2023). Van Sant is a very distinguished retired Stockton attorney and longtime reader of Joaquin. Our magazine published a very sage article by Van Sant last year (“U.S. Inflation: What is Causing It and Where Is It Going,” Joaquin 114 (May-June 2022)) that is related to the argument that Van Sant makes in the letter to Powell. However, we had never before published a letter of this nature in the place of an article, notwithstanding its obvious merits, as Van Sant was proposing.

The Haass book prompted us to reconsider. In the aftermath of the attack on the U.S. Capitol on January 6, 2021, and at a time when our national security and law enforcement authorities are telling us that the greatest threat our country is facing comes from domestic terrorism and the irresponsible acts of our fellow citizens, Haass made us think twice about Van Sant’s proposal.

Whether you agree or not with Van Sant’s argument and analysis showing that the Federal Reserve should pay more attention to money supply in combatting inflation, his actions reflect a highly responsible effort to participate in the policy debate and engage government officials and fellow citizens by making his letter public.

This is precisely the kind of civic action that Haass believes would provide an anecdote to the crisis of democracy that we are facing. Having witnessed the breakdown of other societies around the world for half a century, Haass reminds us of the virtues – he calls obligations -- of good citizenship that are essential to overcome the animosity that has become the most prevalent attribute of American society today. Rather remarkably, Van Sant’s letter in some sense embodies all ten of these obligations that are important for all of us to keep in mind.

1. Be Informed

2. Be Involved

3. Stay Open to Compromise

4. Remain Civil

5. Reject Violence

6. Value Norms

7. Promote the Common Good

8. Respect Government Service

9. Support the Teaching of Civics

10. Put Country First continúa a la vuelta vamente, el cambio del año siguiente en el índice de precios al consumidor. Las dos proporciones son los cambios anuales en la oferta monetaria (M2) y el índice de precios al productor (todas las mate -

Besides the civics lesson that Van Sant’s action provides, maybe we should also hope that the Federal Reserve is listening and will think harder about whether more severe rate hikes are really what’s needed.

Responsabilidad Cívica

consejo editorial

Casi al mismo tiempo que recibimos la carta de Douglas Van Sant a Jerome Powell, presidente de la Reserva Federal, que verán más abajo, descubrimos un nuevo libro de Richard Haass titulado “The Bill of Obligations: Ten Habits of Good Citizens (Pliego de Obligaciones: Los Diez Hábitos del Buen Ciudadano)” (Penguin Press, 2023). Van Sant es un distinguido abogado de Stockton, ya jubilado, y desde hace mucho tiempo lector de Joaquín. Nuestra revista publicó el año pasado un artículo muy sabio de Van Sant (“U.S. Inflation: What is Causing It and Where Is It Going (Inflación en EEUU: Qué la está Causando y Hacia dónde Va)”, Joaquín 114/mayo-junio de 2022) que está relacionado con el argumento que hace Van Sant en la carta a Powell. Sin embargo, nunca antes habíamos publicado una carta de esta naturaleza en lugar de un artículo, a pesar de sus evidentes méritos, como proponía Van Sant.

El libro de Haass nos llevó a reconsiderar. A raíz del ataque al Capitolio de los EEUU el 6 de enero de 2021 —y en un momento en que nuestras autoridades de seguridad nacional y del orden nos advierten que la mayor amenaza que enfrenta nuestro país proviene del terrorismo interno y los actos irresponsables de nuestros conciudadanos, Haass nos hizo reconsiderar la propuesta de Van Sant.

Ya sea que uno esté de acuerdo o no con el argumento y el análisis de Van Sant —que propone que la Reserva Federal debería prestar más atención a la oferta monetaria para combatir la inflación, sus acciones reflejan un esfuerzo muy responsable por participar en el debate político, integrando a los funcionarios gubernamentales y a los conciudadanos, al hacer pública su carta.

Este es precisamente el tipo de acción cívica que Haass cree que proporcionaría una anécdota a la crisis de la democracia que enfrentamos. Habiendo sido testigo del colapso de otras sociedades en todo el mundo durante medio siglo, Haass nos recuerda las virtudes —a las que llama obligaciones— del buen ciudadano… que son esenciales para superar la animosidad que se ha convertido en el atributo más predominante de la sociedad estadounidense en la actualidad. Sorprendentemente, la carta de Van Sant, en cierto sentido, encarna las diez obligaciones que es importante que todos nosotros tengamos en cuenta.

1. Infórmese

2. Intégrese

3. Manténgase Abierto al Transar

4. Mantenga la Compostura

5. Rechace la Violencia

6. Valorice las Normas

7. Fomente el Bien Común

8. Respete la Gestión Gubernamental

9. Respalde la Educación Cívica

10. Primero el País

Además de la lección de civismo que ofrece la acción de Van Sant, tal vez también deberíamos esperar que la Reserva Federal esté escuchando —y piense más sobre si realmente se necesitan aumentos de tasas más severos.