WHAT WOULD JACKSON DO? (Guest: Marvin Barth)

Marvin Barth’s guide to interpreting Donald Trump is “what would Jackson do?” He sees Trump and his political base as instinctively Jacksonian: distrustful of centralized finance and Washington bureaucracy, and inclined to assert presidential authority over unelected officials. Barth said inflation and federal deficits and spending were voters’ leading concerns in 2024, making him expect Trump to favor a hawkish Fed chair despite his rhetoric. Kevin Warsh fit that profile through his opposition to balance-sheet expansion and centralized finance; Barth put Warsh’s chances of selection at about one in 10, while Kevin Muir recalled odds closer to one in 20.

Barth described Andrew Jackson as a populist who appealed to ordinary voters and ran his administration through an informal “kitchen cabinet.” Jackson vetoed the Second Bank of the United States’ recharter, and Barth said he blocked efforts to override the veto, dating the bank’s demise to 1832. He linked that fight to modern skepticism of central banks, contrasting Jacksonian suspicion of centralized finance with Hamiltonian support for it. Jackson also claimed the 1824 election had been stolen, although no candidate won an Electoral College majority and the House chose John Quincy Adams; Barth said Jackson had fair grounds to feel Adams’s allies had robbed him. Jackson expanded voting rights to all white men, while remaining a slave owner.

Warsh’s interest-rate views, Barth argued, have followed economic conditions rather than party: he supported cuts when growth weakened and hikes when it boomed. Barth said Trump had considered Warsh for the chair before the election was settled, and that loyalty between the two mattered to the choice, but Warsh also had reason to protect his reputation and legacy rather than simply follow Trump. With investment growth broadening beyond AI and inflation returning, Barth expected a difficult policy setting. Before the June meeting, he thought a 50-basis-point hike would be the clearest way to flatten the yield curve and restore Fed credibility; he read Warsh’s hawkish messaging without a hike as an effort to build consensus. Barth said he called June correctly but was “disastrously wrong” about July, when Warsh did not raise rates and voted with the doves. His September hike call was low-conviction and conditional on CPI; the speakers disagreed about whether inflation’s decline had stalled and how hot the reading was.

Barth sees balance-sheet reduction and bank deregulation as connected parts of Warsh’s longer-term agenda. He said the Fed holds six trillion dollars in Treasuries and argued that Basel III rules, implemented in the U.S. through Dodd-Frank, encourage banks to hold high-quality liquid assets and can favor reserves over Treasuries. Banks’ need for reserves, in turn, supports demand for Fed assets. Barth argued that easing these requirements could let the Fed shrink its balance sheet while freeing banks to lend more to households and businesses rather than the government, without necessarily causing a recession. He framed the administration’s conflict with the Fed chiefly as a fight over bank regulation, not rates or fiscal dominance, with the Fed’s examiners and stress tests giving it a central role alongside the Comptroller of the Currency and the FDIC.

Barth warned that attempts to shrink the balance sheet in 2019 and 2024 coincided with SOFR and repo rates misbehaving as liquidity demand rose. He expects the Fed may return to a scarce-reserves system, but said Warsh is more agnostic and the Fed’s depleted market staff may lack experience operating one. Abundant reserves have encouraged expectations of unusually stable short-term rates, Barth said; repricing that risk could marginally lower asset prices, though he expects changes in risk-taking to be gradual. Another speaker said moving away from abundant reserves would shift more risk from government back to private markets.

Barth said national generic House polls put Democrats ahead by about 9–10 points, but polling in marginal districts is thinner and suggests a closer contest. He was not predicting a Republican hold, but considered a narrow hold of both chambers reasonable and expected a tighter midterm contest than many anticipated. Trump’s removal of Republican opponents has left some races with loyalist candidates Barth viewed as more extreme and less popular, including in North Carolina and Texas. He expects markets to rise if Republicans outperform expectations, arguing that Democratic control could threaten AI investment and equities, though he cautioned that AI may be less important to markets than some claim. A Republican hold could bring initial spending cuts; Barth noted real federal spending fell from fiscal 2024 to fiscal 2025, only the third such decline in data going back to the 1960s, and expects significant fiscal consolidation over six years as entitlement policy becomes unavoidable.

Barth sees European economic and political strains converging: energy costs he put at five to seven times U.S. or Chinese levels weaken manufacturers and constrain energy-intensive computing and AI, while poor growth and returns make debt harder to sustain. He said strong national balance sheets have obscured Europe’s overall debt burden, with TARGET2 transfers adding to the strain, and argued that Germany has lost its role as fiscal anchor after Friedrich Merz weakened its balance sheet. Immigration disputes and rising populist parties, Barth said, threaten political unity and could lead partners to leave Schengen. Unlike during the 2011–12 debt crisis, he questioned who could credibly stop a debt run now, arguing that the ECB may lack credible German backing.