Everything is so predictable at this point: minutes of the Fed offering clues to its future plans come out, and the economic commentary goes into a frenzy. Supposedly, if the central bank “slackens”, it “will” allow “more economic growth. Conversely, if the Fed “tightens”, growth will be limited. Historians will marvel at how far economic types have been taken by an entity so irrelevant to actual access to credit.
Fed obsessives have apparently forgotten that credit is product in the private sector through the production of real goods and services like desks, chairs, computers, desks, software, not to mention human capital which is the most important resource of all. The Fed cannot reduce or increase what we borrow money for. Likewise, it cannot control the rate of interest we pay to access “money” redeemable for resources.
Despite this obvious statement, the panting about the Fed continues. More recently, widely read commentator Louis-Vincent Gave warned Mark Dittli against the Swiss publication The market that if the Fed “tightens”, the end result will be a collapse in stock prices. Oh my God… .pass Mr. Gave the fragrant salts.
To get back to a semblance of reality, of all US dollars in circulation, more than half migrate out of the United States. Does this happen randomly, or just for fun? Obviously not. Dollars are everywhere in the world simply because the dollar is the primary value agreement arbitrating the exchange of goods and services on a global scale. While the toman, won, and bolivar are the official currencies of Iran, North Korea, and Venezuela, all three nations are for all intents and purposes. dollarized. That they are is also a statement of the obvious.
To see whey, remember that all trade is products and services for products and services. Always always, always. As is the case, it is rare that the producer is willing to accept unreliable paper for actual products and services. To do so is to accept the paper which most often (the Iranian rial, the currency before the Toman, was devalued more than 3,000 times after 1971) exchanges for less goods and services than those initially provided. Hence the dollar.
Although the greenback has suffered devaluations and volatility since the 1970s, it remains widely recognized around the world as a reliable medium of exchange. Its reliability ensures that the dollar is almost always everywhere production takes place.
Please think of this simple truth in terms of the fear often expressed by the deep thought that the Fed will reduce the so-called “money supply” through higher interest rates. The idea that the Fed could block access to “money” or credit is far from serious.
The more informed know this because money is not plentiful in places where economic activity is managed by the American central bank; a rather abundant currency is a logical consequence of economic activity. In other words, the class of economic experts completely reverses the causal link when they denounce the alleged “ease” or “tightness” of the central bank. Their ramblings assume that economic growth occurs on the basis of the relative willingness of the Fed and other central banks to provide “money” to producers. Please.
Really, does anyone seriously think that the Fed has satellite offices in Tehran, Pyongyang, and Caracas that buy bonds from banks in each in order to “liquefy” trade? This isn’t a trick question, or it shouldn’t be. The reality is that production is a magnet for money which facilitates its movement towards ever higher uses. In other words, an individual, city, state or nation never has to fear lack of “money”. If you are productive, the money will find you.
The above is yet another such obvious statement; made evident by the prosperity of the symbol that is “Wall Street” and other global financial centers. The immense wealth gained in these places is a consequence of the relentless competition among financiers to liquefy the exchange of goods and services as well as the movement of resources to their highest uses. Again, if you do something valuable, the money will find you.
Applied in the United States, even if it were true that the Fed could reduce the so-called “money supply”, it would have no consequences. To understand why, let’s once again consider all of the dollars that are migrating around the world right now. They cross the globe with a simple click of the mouse in order to smooth the movement of real resources.
In this case, readers can only imagine that the Fed is somehow crushing the supply of dollars to the United States. The central bank’s attempt to rewrite reality would be overthrown by real market forces within minutes. Damn, if the dollars were to pass through Tehran, does anyone seriously think the hypercompetitive financiers around the world wouldn’t rush to increase their market share in the world’s most economically dynamic nation? The question answers for itself.
Even though the Fed could creating tight credit would exist as the mother of all market opportunities for private sources of finance willing to provide access to resources at rates unrelated to the price controls attempted by the anointed. Assuming the Fed could make real credit cheap (hint, it can’t), doing so wouldn’t reduce credit as much as global financiers would migrate their capital-matching skills to where prices were and reflect the reality.
The bottom line is that readers don’t have to worry about the two scenarios mentioned above. The Fed is a rate follower, as opposed to a rate fixer. And again, he cannot rewrite reality. In a global market defined by globally produced credit, good ideas are a powerful magnet for credit. The Fed cannot stifle you or uplift you.