Weekly Commentary: Walsh vs. Powell — What Lies Beyond the Sudden Collapse in Gold and Silver?

 

Weekly Commentary:
Walsh vs. Powell — What Lies Beyond the Sudden Collapse in Gold and Silver?

 

February 2, 2026
Tomo Nakamaru (Former World Bank Economist)

 

I. Walsh’s Nomination Has Cracked the “Debasement Trade”

Late last week, gold and silver—core assets in the Debasement Trade—fell sharply.
The most striking illustration comes from a chart shared by Kevin Brooks, former Chief FX Strategist at Goldman Sachs.
Brooks did not identify a single cause.
But since Powell hinted at rate cuts at Jackson Hole in August 2025, the Debasement Trade had surged as if it had no ceiling.
Last week, that trend finally broke.
Two developments mattered:
•     Kevin Walsh—widely viewed as the most hawkish candidate—was nominated as the next Fed Chair.
•     The December PPI jumped +0.5% MoM (equivalent to +6.2% annualized), signaling re-acceleration in inflation.
Markets are now beginning to price in a new reality:
“The Debasement Trade cannot run forever.”
“Policy tightening may return sooner than expected.”
Walsh’s nomination may well be the first signal of the endgame.

II. Walsh vs. Powell — Four Key Issues

Bloomberg’s article, “Fed Chair Nominee Walsh Faces Real-World Obstacles to Rate Cuts and Reform,” was insightful.
Here, I add four points from my perspective.


1. Walsh’s criticism of the 2021–22 Fed was justified
 

Walsh, alongside John Taylor and others in the “Shadow FOMC,” consistently criticized Powell for delaying rate hikes even as inflation exceeded 9%.
In my view,
renominating Powell in 2021 was a mistake.
Had a rule‑based, price‑stability‑focused chair been appointed,
the chain reaction—living‑cost crisis → political backlash → Trump 2.0—might have been avoided.

2. Walsh is right about AI-driven productivity, but policy missteps could be disastrous

Walsh correctly recognizes that generative AI could lift U.S. productivity by 0.3–0.9% annually, as discussed at the AEA meetings.
But if policymakers use this supply boost as an excuse to cut rates during an inflationary phase,
they risk repeating the Greenspan-era mistake:
asset bubbles → financial crisis → congressional mea culpa.

3. Calling Powell’s rate cuts “too slow” is simply wrong
 

Walsh reportedly argued that Powell’s three consecutive rate cuts in 2025 were “too little, too late.”
This is incorrect.
The U.S. economy is no longer trapped in the old “inflation vs. employment” binary.
The real issue is that nominal GDP growth has reached unsustainable levels:
•     Q3 2025: +8.3%
•     Q4 2025: likely even higher
•     December PPI: +6.2% annualized
On top of this, the Trump administration is rumored to be preparing a ¥200,000-equivalent per‑person tax rebate ahead of the midterms.
In such an environment,
Walsh will inevitably be forced—regardless of his intentions—
to return to his hawkish roots.

4. The core of Fed reform is transparency: the “Natural Growth Targeting Rule”
 

Balance sheet reduction matters, but the deeper reform lies elsewhere.
MIT’s Athanasios Orphanides has long advocated the Natural Growth Targeting Rule,
a framework reportedly discussed inside the Fed for years.
Given Walsh’s close ties to John Taylor,
his chairmanship could finally bring this rule into the open—
a major step toward transparency and accountability.

III. The True Culprit Behind the Erosion of Currency Credibility:
The Japan–U.S. Chain Reaction of “Currency Politicization”

The January 31 Nikkei editorial sharply criticized President Trump for pressuring the Fed to cut rates, warning that such actions “undermine trust in the currency.”
At first glance, this seems reasonable.
But the editorial contains a glaring omission—perhaps even a deliberate silence.
It ignores a historical fact:
The first country to open the door to currency politicization was Japan.

1. Abenomics created the prototype for Trump’s “central bank capture”
 

The Nikkei portrays Trump as a reckless disruptor of international norms.

But history is more ironic.
The prototype for Trump’s current behavior—
central bank subordination and fiscal‑monetary fusion—
was Abenomics.
•     “The BOJ is a subsidiary of the government.”
•     “Unlimited easing” normalized as policy.
•     Political control over interest rates.
Japan demonstrated to the world that such actions were “acceptable.”
Trump merely applied Japan’s heterodox logic to the world’s reserve currency.

2. Sanaenomics is the re-importation of Trumpism into Japan
 

Even more troubling is the feedback loop now unfolding.

In 2024, Sanae Takaichi declared:
“Raising rates now would be stupid.”
She continues to argue that “monetary policy should be decided by the government.”
This is Trumpism in Japanese form.
•     Abenomics: planted the seed
•     Trump 1.0: expanded it globally
•     Sanaenomics: re-imported the doctrine back into Japan
Japan and the U.S. are now simultaneously dismantling central bank independence,
the very brake that stabilizes modern civilization.
This is the true civilizational crisis.
 

3. The Nikkei refuses to confront the collapse of yen credibility
 

The editorial warns of declining trust in the dollar.

But why does it not mention the yen?
•     Largest fiscal deficit in the G7
•     BOJ holds over half of JGBs
•     Raising rates would break the fiscal structure
The yen is arguably the most fragile major currency in the world today.
The Nikkei’s silence is a structural blind spot.

IV. The Madness of “Yen Weakness Makes the FX Reserve Account Happy”

The claim that “yen depreciation boosts FX reserve profits” is detached from reality.

1. Yen weakness under inflation is “living‑cost destruction”

•     Higher import prices
•     Rising household costs
•     Falling real wages
To highlight FX reserve gains while ignoring this is
a profound misreading of the economic moment.

2. Sanaenomics contains a structural contradiction

•     Blocking rate hikes despite inflation
•     Expanding fiscal spending simultaneously
•     Result: inflation → yen depreciation → rising long‑term rates
This is a self‑inflicted spiral.
Japan risks becoming economically “engulfed in flames.”

V. The Three Arrows of Future Creation — A Civilizational Reconstruction

Japan now faces a fourfold crisis:

•     Demographic decline
•     Stagnant consumption
•     Currency depreciation
•     Inflation
Markets are asking a single question:
“Can Japan still create a future?”
The answer lies in the Three Arrows of Future Creation.

1. Arrow One: Interest Rate Normalization (Rebuilding the Time System)

When interest rates cease to function as prices:
•     Capital costs distort
•     Zombie firms survive
•     Creative destruction halts
•     Productivity stagnates
Interest rate normalization is the restoration ofcivilization’s time system.

2. Arrow Two: Abolishing the Consumption Tax (Rebuilding the Living System)
 

Abolishing the consumption tax is not populism.
It is the most powerful growth strategy available.
•     GDP: ¥600 trillion
•     Consumption: 60%
•     Cutting the tax by 5% → ¥18 trillion in demand (≈ +3% GDP)
This is the fastest way to reignite demand.

3. Arrow Three: Abolishing Industrial Policy (Releasing the Creative System)

Subsidies, special zones, government funds—
all preserve vested interests and block creative destruction.
The Aghion–Howitt model shows that
growth comes from creative destruction,
not government picking winners.
Industrial policy abolition is the third arrow.

VI. Conclusion:
Without the Three Arrows, Markets Will Not Stabilize**
Markets price the future faster than politics.
Recent volatility is a message:
“Show us the Three Arrows.”
•     Interest rate normalization
•     Abolition of the consumption tax
•     Abolition of industrial policy
Only when these three align
can Japan rebuild its future and move beyond the civilization’s boiling point.