Binance Shows Why Your Fears of Fed ‘Tightness’ Are Unfounded

Binance operates the world’s largest cryptocurrency exchange in terms of daily trading volume. Notable about Binance’s exchange is that it’s outlawed in China. Which is where it gets interesting.

Despite China’s central bank having outlawed it (”The Binance.com website is blocked in China and is not accessible to China-based users.”) cryptocurrency trading within China and the 900,000+ users within China is massive. According to the Wall Street Journal, $90 billion+ monthly massive.

So, while the law in China says no to Binance, the markets in China say otherwise. Cryptocurrencies are increasingly a thing in the market-based world that China is a part of. Markets have a tendency to speak over government, or work around it. They do here.

More broadly, Binance is the answer to the central bank question, or the central bank lament. We read endless and very breathy analysis of the Fed and other central banks. What will they do? According to members of the economic profession, future economic vitality is a consequence of central-bank actions in the here and now. Don’t you know, central banks like the Fed can “tighten” credit on the way to “recession.”

Except that they can’t. In the real world credit availability is a logical consequence of real production, only for the credit that springs from production to be directed to its highest use. China instructs once again here.

Even though it’s illegal for foreign investors to own Chinese companies that operate websites, among others, it’s not illegal for Chinese companies to float shares offshore in locales like the Cayman Islands. Translated, China’s technology boom has largely been financed by American investors despite the “illegality” of their investment. Markets talk over government again, which is the point. And it’s one that calls into the question the endless obsession with the Fed and other central banks.

Indeed, as U.S. investment’s role in China’s growth hopefully attests, where there’s innovation there’s always and everywhere investment to fund it. Laws and other decrees simply don’t matter. Put another way, investment and so-called “money supply” are a consequence of productive economic activity, not a driver.

Keep this in mind domestically as deep-in-thought economists continue to promote the Milton Friedman-authored fiction that a “tight” Fed caused the Great Depression. On its face, it’s amazing that someone so associated with free markets would promote such a statist vision of economic progress whereby markets and economic growth work their magic only insofar as the Federal Reserve does its job. Imagine thinking innovators would be reliant on people with names like McChesney Martin and Burns, or more modernly Bernanke, Yellen and Powell.

Beyond that, Friedman’s much embraced narrative about a “tight” Fed and subsequent economic decline did and does presume that the Fed exists as the barrier (or not) to credit inflows. Let’s be serious. Figure that China’s economic history did and does have authoritarian qualities, yet somehow foreign capital has routinely the country’s best and brightest when they’ve been operating in best and brightest fashion.

In which case it’s worth contrasting China with the exponentially more open United States. If capital finds its way to the enterprising in China despite all manner of barriers put in place, can anyone seriously pretend the Federal Reserve capable of battening down the proverbial capital-inflow hatches? Hopefully the question answers itself.

At which point it’s easy to say that Fed attempts to make credit more costly fail, and do so every time. Capital is produced, and it’s always looking for a good home. The Fed can’t alter this truth, nor can the Bank of China. Binance is the latest proof of this truth.