The Only Closed Economy is the World Economy
While the Sassoon family is most associated with London today, its grand commercial history goes back many, many centuries. The family first reached prominence in Iraq, only to migrate to Bombay, then on to China.
This rates quick mention because Elias Sassoon – with an eye on expanding the family’s financial footprint in Shanghai – financed all manner of opium and textile shipments while making his way to China’s commercial center. It’s all a reminder of a simple truth so easily forgotten by Fed-focused economists in modern times: the only closed economy is the world economy.
If You Have a Good Idea, Credit Will Find You
In recent years Jack Ma raised billions of dollar-based credit outside of China, and largely from U.S. investors. Hundreds of years ago, the then Bombay-based Sassoon family once again financed Chinese economic activity as Elias traveled up to Shanghai. More broadly, investment bankers are paid very well precisely because they often scour the world in search of finance for today’s and tomorrow’s companies.
This is worth keeping in mind when economists talk about what the Fed, or some other central bank, should or should not do. What it does isn’t of much consequence. Given the global constellation of credit sources out there, what the Fed allegedly taketh away with “tight money” or “higher interest rates” will rapidly be made up for by other sources of credit if the commercial ideas are good. See investment bankers once again, or even see the banks that the Fed projects its always well overstated influence through. Finance is everywhere. Central banks can’t cause “recessions” despite what economists tell us.
Time to End the Fed’s Mission Creep, But Wait …
Which brings us to a recent opinion piece co-authored for the Wall Street Journal by Texas Tech professor Alexander Salter, and Middle Tennessee State professor Daniel Smith. While the economists well overstate the Fed’s economic footprint, they make a reasonable case for ending “the Fed’s mission creep.” Of course, missed by the authors is the happy reality that market forces have been pushing the Fed aside since its creation (as discussed at length in my book Who Needs the Fed? ), thus to some degree explaining the mission creep.
The main thing, however, is that the argument made by Salter and Smith is contradictory. While they call for efforts to mission-limit the Fed, their actual goal is seemingly something more expansive for the central bank. Their expressed belief is that a “better choice” for America’s central bankers would be a “GDP target” that would allegedly “stabilize total dollar spending” which “is the best we can do when it comes to fighting recessions.” It seems the very central planning that was thoroughly discredited in the 20th century lives on in the musings of 21st century economists.
Why Target GDP When GDP is a Worthless Number?
To start, GDP is kind of a worthless number as is. Figure that this monument to economic conceit (most couldn’t measure the GDP of the street they live on, but economists pretend they can measure country GDP) rises when government spending rises. OK, but government spending is a consequence of economic growth, not a driver of it. In which case GDP is in a very real sense a monument to double counting.
After which, the rather bullish investment inflows from outside the country that boost so-called “trade deficits” actually shrink the GDP number. That production without regard to economic worth (see GM’s resumption of production in 2009 after its errant bailout) boosts the backwards number, is yet another demerit – of many – for the economic measure. Yet it’s a “better choice” for the Fed to plan GDP, or “target” it? No. Not really.
The economists don’t stop there. They claim a GDP target would re-focus “the Fed on money supply, which is the Fed’s main responsibility.” Except that if the Fed could control so-called “money supply,” it would have already done so. More specifically, a central bank that by the authors’ own admission is a tad politicized and mission-unlimited would have long ago boosted “money supply” in impoverished locales like Charleston, WV, East St. Louis, IL, and Stockton, CA. To no avail.
Money Flows to Where It’s Treated Well. Always.
While the helicoptering in of “money” to Charleston et al might stimulate a near-term consumption increase that would excite economists, no business expands based on a helicopter drop. In other words, the money, once consumed, would soon enough flow to locales where it could be productively put to work.
Speaking of, imagine the Fed aggressively selling bonds in Greenwich, Lake Forest and Palo Alto to drain those banks of credit. It would be of no consequence when it’s remembered that finance is a global concept. Financiers around the world are paid well precisely because they move resources to their highest use, and as such, they would correct any vain attempt by the Fed to control “money supply” in a matter of minutes.
Economists Can’t Alter Market Realities. Nor Should They.
Salter and Smith seem to view money injections from central bankers as instigators that are useful when it comes to “fighting recessions,” but the actual reality is that money is an effect of production. Where there’s production there’s always abundant money to finance its movement. Where production is scarce, so is money. Try as they might, economists can’t alter market realities. Nor should they. This includes recessions. Far from scenarios to avoid, recessions are bullish signals of growth on the way as bad habits, bad investments, and bad hires are cleansed by market forces.
Conclusion: There’s Nothing Free Market About Handing the Fed Powers to Plan GDP
What’s puzzling about their editorializing is that Salter and Smith claim a free market bent. Salter is a fellow at Texas Tech’s Free Market Institute in addition to being a professor there. The problem is that there’s nothing free market about handing the Fed powers to plan GDP, or to plan “money supply.” Since money is yet again an effect of production, attempts to plan its supply would be as successful as efforts to plan production. Meaning, not at all. Which means focusing the Fed on money supply is not at all free market.
Much of the above content was originally published here on Forbes.com.
Check Out My Books
When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason (Post Hill, 2021).
Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You about Economics (Regnery, 2015), a primer on economics.
Who Needs the Fed? What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter, 2016), about the central bank’s onrushing irrelevance.
The End of Work: Why Your Passion Can Become Your Job (Regnery, 2018), which discusses the exciting evolution of jobs that don’t feel at all like work.
They’re Both Wrong: A Policy Guide for America’s Frustrated Independent Thinkers (AIER, 2019).
Most economists forget that there’s always a buyer and a seller.
The Fed only can buy bonds in the secondary market if bond holders (mostly banks) are willing to sell.
They also forget when banks sell bonds to the Fed in exchange for reserves they are giving up interest income => less future money to spend for the private sector.
So, the banking sector is the driving force.
There are never too much or too less reserves in the system but it matches exactly the demand.
Besides that the Fed has to follow the futures markets (mostly Eurodollars) with her interest rates policy. Otherwise the Fed would create an arbitrage opportunity.
It's just going to get worse. As inflation picks up the government will force funds and banks to hold treasuries. It's the only way to prevent a collapse and kick the can down the road... again.
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Well written! It's frustrating to see people pretend to know what they're doing at such 'high' levels within society. Recessions will come and go, ebb and flow. The more someone tries to stop them, the more they seem to happen. And when they do happen, those who are the biggest offenders are deemed too big to fail, starting the cycle all over again.