The Federal Reserve Cannot ‘Tighten’ Credit, and It Never Could

Back before Facebook was a public company, founder Mark Zuckerberg had a bit of a reputation with venture capitalists. He would show up to meetings in shorts, flip flops, and with messy hair. His not-so-veiled message to VCs was that Facebook had choices. Many choices. And since its funding options were abundant, those who wished to attain a piece of the super-unicorn of its time would have to compete for the opportunity.

Facebook would not be taking just anyone’s money.

Better yet, Facebook would not limit itself to investors stateside. Figure that investors around the world would line up for the chance to finance the doings of the world’s most prominent social network.

One of those foreign investors was Russian internet entrepreneur Yuri Milner. Like so many foreigners, Milner had long had a properly romantic view of the United States. As Sebastian Mallaby describes it about Milner in his brilliant new book, The Power Law, the always entranced by America Milner had “smelled it before he had seen it.” His business professor father was one of the lucky few able to travel outside the former Soviet Union during Milner’s youth, only for his dad to return with soap “mementos” from U.S. hotels. As Milner put it in a commencement speech at Wharton about the soap, “It was the scent of a new world.”

Milner’s story is an uplifting one, it’s hopefully one that anti-immigration Americans will keep top of mind about how the people in “enemy” parts of the world perceive us, but most important for the here and now is that it’s a call for relaxation about what the Federal Reserve does. It just doesn’t matter.

Concluding the Milner story at least somewhat, he was able to convince Facebook to let him invest $200 million. He was able to after agreeing that, among things, the shares he purchased would be non-voting.

Please consider all this in terms of all the thought and ink wasted on the Fed’s decision to “raise” interest rates 75 basis points. How could anyone who pretends to be serious take this seriously?

Milner is but one of countless reminders that contra the nail-biting pundits on the Left and Right, there’s only one economy. It’s global. And in this global economy capital flows to where it’s expected to be treated well. Milner’s was treated beautifully. A billionaire today thanks to successful investments in Facebook (among others), the man who smelled America first now lives in one of America’s most expensive houses. If that doesn’t make you proud to be American, it’s hard to know what will.

Back to the Fed, to read uncritically the commentary about its allegedly significant (“record”) hiking of rates, one would believe that the cost of capital just rose 75 basis points. It would be interesting to know Milner’s thoughts since he actually grew up under central planning. What must he wonder as he witnesses American economists and pundits who think credit is planned by the Fed.

Back to reality, the Fed can’t shrink what is coveted by those with capital, and it can’t elevate that which isn’t. In the real economy, credit is abundant where the creative are at work and it’s scarce where they aren’t. Assuming the Fed’s assertion of its well overstated power through a sclerotic banking system actually had any import, the reality is that what the Fed could take away in a parallel universe populated by the pundit class would and will be made up by global pools of capital lined up to match resources with the world’s talented.

Of course, the stated “support” for the Fed by Left and Right is to shrink inflation by shrinking lending. Ok, but if we have an inflation problem the thumbsuckers in our midst might stop to contemplate what markets do every second of each and every day: they factor in everything, including the implications of currency that’s losing value. About the previous assertion, inflation still is currency devaluation, correct? If so, the worried needn’t worry. If income streams and returns on investment will come in devalued dollars, the punditry can sleep easy that those with actual skin in the game will adjust credit costs to reflect the inflation.

Beyond that, we’re also hearing from both sides that the Fed’s efforts to “sweat out” the inflation will be painful. Yes, the Paul Volcker myth lives; the Volcker myth rooted in the idea that artificial rate hikes stateside won’t mobilize domestic and global pools of credit eager to operate around central planning. In other words, there’s nothing to the laugh line that the Fed can “tighten” money and credit. The global economy has a way of mocking alarmists.

Which leads to this write-up’s endpoint. In ending it, it’s useful to address the corollary to the above about how fighting inflation involves sacrifice, job loss, austerity…The promoters of these nonsensical narratives are remarkable for their unserious views on how the world works.

Indeed, if we have inflation, the only answer is dollar policy meant to arrest the greenback’s decline. This in mind, presidents have historically gotten the dollar they wanted. Are you listening President Biden? If so, no one is harmed by a strong, stable-in-value dollar.