Monetarism Imagines a World That Doesn’t Exist…And That Never Has

Last Monday Johns Hopkins economists John Greenwood and Steve Hanke penned an opinion piece for the Wall Street Journal that made a confident case for the Federal Reserve as planner of so-called “money supply.” The economists of the “Monetarist School” called for the Fed to hit a growth rate for the “money supply” that in their imagination would be a “’golden growth’ rate of around 6%.”

On its face, readers should be skeptical. “Money supply” cannot be planned. Money’s only purpose is to move human capital and the fruits of human production to ever higher uses. Put another way, the movement of money signals the movement of workers, trucks, tractors, computers, desks, chairs, paper-clips,” and the trillions of other goods and services to what is generally a market-determined higher use.

All of which explains why “money” is abundant in say, Manhattan and Beverly Hills, but not very plentiful in locales that neighbor the two coastal centers of commerce, Bronx and El Monte. Money’s sole purpose is as an agreed upon measure of value among producers that facilitates the exchange of their production, so it’s only natural that money would be ample where production is, and scarce where it isn’t. In other words, so-called “money supply” is production determined. Which is a screaming statement of the obvious.

Yet Greenwood and Hanke are calling for what’s production determined to be planned by our central bank. Which means they’re calling for the Fed to centrally plan production. This plea for the management of the world’s most dynamic economy from the proverbial Commanding Heights should at least on its face worry readers. Is this where economic analysis is heading? Figure that Greenwood and Hanke have a tendency to caucus with free market types, but they’re promoting the Fed as the planner of the market. Bad times ahead? Fear not. The world that Greenwood and Hanke imagine to exist does not exist. Translated, the Fed couldn’t plan “supply” of money in its own headquarters, at which point a plan for all of the United States insults absurd.

It’s now useful to digress briefly into what money is. It’s not an instigator of production; rather it’s a consequence. This is why the Fed can neither increase nor shrink credit, and it similarly can’t increase or shrink the money that some errantly deem credit. With credit, it’s always and everywhere produced. We know this because no one borrows money; rather they borrow what money can be exchanged for. Credit is resources. Think again workers, trucks, tractors, computers, etc. Money is just the agreement or measure of value that makes it possible for producers to place a value on their unconsumed production so that it can be loaned elsewhere or invested elsewhere in return for a rate of interest or equity in the endeavor invested in. For those who borrow the money, or who provide equity in exchange for money proffered, they’re not taking in money as much as they’re once again taking in what money can be exchanged for.

Which brings us to another bit of news that hit the front pages of major publications on the same day that Greenwood and Hanke ran their op-ed. The column 1, A1 New York Times headline was that “Kushner Firm Got $2 Billion From Saudis.” Jared Kushner, a former senior advisor in the Trump White House has formed a new private equity boutique, Affinity Partners. And as the aforementioned headline indicates, a not insignificant amount of Affinity’s investment capital will be provided by Saudi Arabia’s sovereign wealth fund.

Of course, that’s only the beginning. While Affinity surely has a deal in place to get all of the Saudi billions invested reasonably quickly, it’s no stretch to point out that by the time Affinity has fully invested the Saudi billions (and the funds of others), Affinity will have assets valued at many, many multiples of $2 billion, or whatever the amount Kushner et al raise. Figure that investment banks are competitive, and the investment bankers in their employ will be lined up to finance investments that well exceed the announced size of Affinity’s fund. The bankers will scour the world in search of the funds that will help Affinity put its billions to work.

It’s all a reminder of a basic truth about money and credit. It’s being relentlessly moved to its highest use around the world precisely because there’s production taking place around the world. Much as U.S. producers possess unconsumed wealth that they put to work globally in pursuit of returns, so do producers outside the U.S. Yet Hanke and Greenwood are calling for a “’golden growth’” rate of U.S.-circulated “money supply” from the Fed? Lots of luck there. It can’t be stressed enough that credit is produced globally, and the monetary fruits of credit produced move around the world in search of returns.

Which explains why readers needn’t worry the central planning sermons of economists. Though they desire a great deal more control over the economy, money and credit are a market phenomenon that economists and central bankers can’t hope to corral. In short, market forces will run circles around the central-planning fantasies of economists.

Ultimately Greenwood and Hanke imagine a United States that’s an autarkic, wholly impregnable island of finance and subsequent economic activity. Except that such a United States thankfully doesn’t exist, and never has.