Critics of Trump's Fed Bashing Are As Mistaken As Trump
“I’m just saying this: I’m very unhappy with the Fed because Obama had zero interest rates.” – President Donald J. Trump
President Nixon’s 1971 decision to sever the dollar’s link to gold was an explicit devaluation of the greenback by the president. The result of his error was predictable: the dollar price of goods and services soared. Money is just a measure of value, so if the measure is shrunken, the nominal cost of goods is going to increase.
So while some prices are stickier than others, commodities reflect currency changes rather quickly. The latter explains surging oil prices in the ‘70s, along with an oil price today that is over five times what prevailed in the late 1990s: the dollar is quite a bit weaker today compared to 1998 as was it exponentially weaker in 1979 versus 1969.
The difference about the ‘70s is that always hysterical politicians, near-monolithically clueless about the why behind rising gasoline prices, imposed price controls. The result of political attempts to block out reality by decreeing fuel artificially cheap was similarly predictable: frustrating gasoline shortages. Why bring something to market that you can’t receive a market rate for?
So bad was it in California at times that a trip to the gas station could take hours, on the days drivers were legal to purchase gasoline. Yes, you read that right. So scarce was artificially priced fuel that the Golden State instituted an odd/even system: if your license plate ended in an odd number you were legal to buy gas on odd calendar days, if even you were legal to buy on even calendar days….Markets are rather stubborn. Though politicians regularly try to alter reality via decree, markets are truth tellers. If political force can bring about an artificial "bargain," the outcome will always and everywhere be defined by scarcity of the politically priced good or service.
Which brings us to recent bipartisan hysteria over President Trump’s jawboning of the Federal Reserve. Trump has expressed a great deal of unhappiness about the central bank’s rate hikes, and the central banker whom he appointed to the Fed’s top job. As the president put it about Jerome Powell, “He was supposed to be a low-interest-rate guy. It’s turned out that he’s not.” As the quote that begins this piece makes plain, Trump thinks Powell’s stance is unfair “because Obama had zero interest rates.”
Ok, but when individuals, businesses and governments borrow “money,” they’re not borrowing money. They’re borrowing the goods, services and labor that money can be exchanged for. Last this writer checked, none are costless. That they aren’t is a loud reminder that borrowing is never costless. If the Fed were actually powerful enough to declare credit cheap, then it would be powerful enough to unwittingly declare scarcity. Except that it can do no such thing. No sane human would ever take nothing for something.
No matter what the Fed does, interest rates will always ultimately reflect reality. No central bank or banker can bend the market’s truth. That’s what’s so ridiculous about Trump’s statements about the Fed: he at least rhetorically believes the Fed, because it’s the Fed, can set the price of access to the goods, services and labor in the economy. What a laugh.
Despite it being a laugh, Trump’s critics actually took issue with the president’s unserious laments about the central bank. Supposedly the Fed’s long-overstated “independence” hung in the balance. No, it didn’t. The Fed logically cannot do what Trump and his critics think it can. It quite simply cannot decree the cost of borrowing (which is once again the cost of accessing everything in what we call the “economy”) inexpensive, just right, or expensive. Markets informed by the infinite actions of the world’s billions of inhabitants every millisecond set the cost of credit, not central bankers.
That’s why commentary from central banking experts like Peter Ireland was so disappointing. Disagreeing with Trump, Ireland explained that the booming economy calls for the Fed to raise interest rates. Really? How? Implicit there is that the Fed can make resources expensive by decree, except that the latter is as unrealistic as the notion that the Fed (or politicians pricing gasoline) can decree access to resources cheap. It can do neither. See California.
Furthermore, such theorizing ignores yet again that the act of borrowing amounts to an attempt to access the goods, services and labor on offer in the marketplace. This is important mainly because the availability of all three is logically greater during an economic boom given that production is greater, not to mention that a growing economy acts as a lure to sidelined workers. Stating the obvious, a booming economy begets easier credit while a slowing economy defined by reduced production begets the opposite. The Fed has it backwards not just in terms of theory, but also its toothless policies.
Credit is always and everywhere created in the private sector, and is not something the Fed or any central bank could ever regulate access to. Markets are once again stubborn in their reflection of reality. That’s why Ireland’s assertion that the Fed can and should limit access to credit is as wrongheaded as Trump’s assertion that the central bank should make it easy. It can do neither. Just as the Fed can't stimulate the economy, it also can't slam the proverbial brakes.
Looked at through the policy non sequitur that was quantitative easing (QE), the Fed plainly stimulated nothing. Supply, demand and the cost of resource access is most certainly an effect of what’s happening in the real economy given the basic truth that the Fed cannot create goods, services and labor. This rates mention mainly because other critics of Trump’s call for low interest rates believe the Fed engineered economic activity and - more unrealistically - a stock-market boom with its QE machinations, and that it will do the opposite in “unwinding” its past policy. Such a view isn’t serious. The Fed can at best distort the allocation of precious resources, which means its QE program weakened the economy and dampened always forward looking markets. The unseen is how much healthier the economy and markets would have been from 2009 onward if the Fed had done nothing. For the central bank to now unwind what logically didn’t work couldn’t hurt the economy, and may help.
At some point Fed mystics on both sides of the easy/tight credit fantasy need to get in touch with reality. Price controls have never worked. Ever. That’s how we know the Fed’s actions in terms of credit ease/tightness have always been more theoretical than real. As California’s experience with price controls hopefully reminds readers, the U.S. economy would be in perpetually desperate shape if the Fed’s rate machinations were actually real.