The Federal Reserve Can Neither Suffocate You, Nor Elevate You

It’s all so predictable at this point: Fed minutes offering clues about its future plans come out, and the economic commentariat goes into a frenzy. Supposedly if the central bank “loosens,” it will “allow” more economic growth. Conversely, if the Fed “tightens,” growth will be limited. Historians will marvel at how taken economic types were by an entity so irrelevant to actual credit access.

It’s seemingly forgotten by the Fed-obsessed that credit is produced in the private sector via production of actual goods and services like desks, chairs, computers, office space, software, not to mention the human capital that is the most important resource of all. The Fed can neither shrink nor expand what we borrow money for. It similarly can’t control the interest rate we pay in order to access the “money” that is exchangeable for resources.

Despite this statement of the obvious, panting about the Fed continues. Most recently, widely read commentator Louis-Vincent Gave warned Mark Dittli of Swiss publication TheMarket that if the Fed “tightens,” the end result will be a collapse in equity prices. Oh dear….pass Mr. Gave the smelling salts.

Back to some semblance of reality, of all the U.S. dollars in circulation over half migrate outside the United States. Does this happen randomly, or just for fun? Obviously not. Dollars are all over the world simply because the dollar is the primary agreement about value refereeing exchange of goods and services globally. 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 similarly a statement of the obvious.

To see whey, just remember that all trade is products and services for products and services. Always, always, always. Since it is, rare is the producer willing to accept untrustworthy paper for actual products and services. To do so is to accept paper that more often than not (Iran’s rial, the currency before the toman, was devalued over 3,000 times after 1971) exchanges for fewer goods and services than the ones initially provided. Hence the dollar.

Though the greenback has suffered devaluations and volatility since the 1970s, it remains broadly trusted the world over as a reliable medium of exchange. Its reliability ensures that the dollar is nearly always everywhere that production is taking place.

Please think about this simple truth in terms of the oft-expressed fear by the deep-in-thought that the Fed will shrink so-called “money supply” via higher rates of interest. The idea that the Fed could choke off access to “money” or credit is much less than serious.

The mildly sapient know this because money isn’t abundant in locales where there’s economic activity care of the U.S. central bank; rather abundant money is a logical consequence of economic activity. Put another way, the economic pundit class wholly reverses causation when its rants about alleged central bank “ease” or “tightness.” Their ranting presumes that economic growth happens based on 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 Teheran, Pyongyang and Caracas that buy bonds from banks in each in order to “liquefy” exchange? It’s not a trick question, or it shouldn’t be. The reality is that production is a magnet for the money that facilitates its movement to ever higher uses. In other words, an individual, city, state, or nation needn’t ever fear a lack of “money.” If you’re productive, money will find you.

The above is yet another one of those statements of the obvious; one made obvious by the prosperity of the symbol that is “Wall Street,” and other global centers of finance. The immense wealth earned in those locales is a consequence of relentless competition among financiers to liquefy the exchange of goods and services along with the movement of resources to their highest uses. Again, if you’re doing something valuable, money will find you.

Applied to the U.S., even if it were true that the Fed could shrink so-called “money supply,” doing so would be of no consequence. To see why, consider yet again all the dollars migrating globally at the moment. They cross the globe at the click of a mouse in order to liquefy movement of actual resources.

In which case readers can only imagine the Fed somehow crashing supply of dollars stateside. The central bank’s attempt to rewrite reality would be reversed by actual market forces in a matter of minutes. Goodness, if dollars course through Teheran does anyone seriously think hypercompetitive financiers the world over wouldn’t rush to expand market share in the world’s most economically vibrant nation? The question answers itself.

Even if the Fed could engineer tight credit, doing so would exist as the mother of all market opportunities for private sources of finance eager to provide resource access at rates unrelated to price controls attempted by the anointed. Assuming the Fed could make actual credit cheap (hint, it can’t), doing so wouldn’t shrink credit as much as global financiers would migrate their capital matching talents to where prices were and are a reflection of reality.

The main thing is readers needn’t worry about either scenario mentioned above. The Fed is a rate follower, as opposed to a rate setter. And it yet again can’t rewrite reality. In a global marketplace defined by globally produced credit, good ideas are a powerful magnet for credit. The Fed can neither suffocate nor elevate you.