Trump's Fed Chair Pick and Trump Accounts
Control What You Can Control
On Friday, January 30th, President Trump announced Kevin Warsh to be his nominee to succeed Jerome Powell as Chairman of the US Federal Reserve. To be transparent, I don’t follow these guys and gals very closely. Their influence is terribly overrated and their understanding of free market economies is no better. Of course, please feel free to doubt those last two sentences while digesting this exchange yesterday on FOX Business between Mr. Warsh and host Marie Bartiromo:
Ms. Bartiromo: “Should it be part of the Feds thinking: we’re spending more money on interest just to hold that debt than we do on defense spending. Is this something you will be thinking about in terms of lowering rates being a positive.”
There are two premises to this question: 1) Debt service expenses higher than defense spending is a bad thing, and 2) Lower interest rates will reduce debt service costs.
While it may be reasonable to compare federal interest expenses with the defense spending budget as a gauge of federal spending priorities, the question doesn’t address two things more important: 1) What is the primary cause of the debt, and 2) What is the most efficient way to allocate capital for national defense?
More to the point, will debt service expenses actually decrease with lower interest rates? What if the debt rises faster than that? What is causing the debt to rise as fast as it is? And with Kevin Warsh being the new Fed chair, what will he do about any of that? Even better, can he answer the question about the primary cause of the debt?
Mr. Warsh: “Inflation comes when the government spends too much and prints too much. Why is that money and financial conditions are so loose on Wall Street and considerably tighter on Main Street. Because the Fed has the policy mix exactly wrong. It has a big balance sheet like we are in the ‘08 crisis and the 2020 pandemic and it has rates that are too high. It needs to shrink the Fed balance sheet and cut interest rates.”
In this response to Ms. Bartiromo’s question, Warsh makes the all-too-common error of defining inflation as price inflation – and then he pins the blame on something that had little to do with the price increases of 2020 – 2025: government money printing. It doesn’t work that way. The only money supply that matters is money in circulation - and wealth builders’ control that.
Warsh then doubles down with the all-too-common lament from Populist Land USA: those nefarious Wall Street types must “be held accountable.” But it gets worse. The infamous “08 crisis” was a normal and healthy response to heavy-handed and destructive mortgage regulations. And the “2020 pandemic” conditions were caused by heavy-handed and destructive lockdowns that were unprecedented in their ethical, economic, medical, educational, and social treachery.
Certainly, this was only one exchange between an interviewer and Mr. Warsh - and it was meant to communicate what President Trump and his legions wanted to hear: cut interest rates. But in reality, these people control little, and they certainly don’t control the consequences of their actions. Markets do that.
Trump Accounts
In another economic development from the Trump administration, there has been a lot of chatter about the so-called Trump account. These are savings and investment vehicles intended for the benefit of young children. They offer tax-deferred growth until the child beneficiary reaches age 18 - at which time it will be treated like a Traditional IRA, including conversion privileges to a Roth IRA.
Some of the sizzle includes seed money of $1000 per eligible child, a teaching opportunity about the virtues of capital markets, and low-cost US equity index funds for investment choices. The annual contribution limit is $5000 per child (no tax deduction), and employers can match up to $2500 to the accounts of their employee’s children (pre-tax) with a $2500 maximum each by employer and employee.
This is better than a sharp stick in the eye. If your child is born between the years 2025 and 2028, the government seed money is an incentive, and the employer match can be generous, but the rest of it anyone can do on their own. Stocks generally grow tax deferred anyway and equity index funds are cheap and easy to buy in custodial accounts or 529 plans.
Not surprisingly, the growth projections being made by administration spokesmen are bought hook, line and sinker by their interviewers on business network shows. For example, the US Department of the Treasury website says:
The compound growth from Treasury’s initial seed funding alone stands to make young Americans wealthy. Assuming historical growth rates continue, a single $1,000 deposit into a Trump Account at birth should grow to an estimated amount of at least half a million dollars by the age of retirement.
But what is that compound growth rate? And how is that treated when making projections? According to the Trump Accounts website, $5000 per year invested each year, starting at birth, will have an estimated value of $271,000 at the child’s age 18. To summarize, $1000 seed money plus $5000 per year of contributions compounded annually grew to $271,000. What rate of return is that you ask? Conveniently, it is the long-term historical annual return of the S&P 500: 10.5%.
It seems that the Trump Administration, in concert with the US Treasury Department, has assigned a constant growth rate to a variable return index. And in the terms of The Moneyball Method – a volatile index has been assigned an annual return with a standard deviation of zero. It doesn’t work that way. The projections are far higher than likely.
Fortunately, the Council of Economic Advisors does a slightly better job with their estimate values. Their test runs use rolling returns, inflation-adjusted contribution limits, and different rate of return scenarios. But even then, the high and low projections are worthless because they are fixed throughout the calculations.
As an objective investor, paying attention to the Fed chair nominee is not worth your time, but setting up a Trump account for a child or grandchild when they become available in July could be a great idea.