The Fed Can't Save the Economy Any More Than Gosbank Could Save the U.S.S.R.
Somewhere along the way economists, pundits and politicians got it in their heads that people exchange, invest and lend with “money.” No, money is merely the agreement about value that enables buyers to exchange actual production with sellers for the seller’s production. Just the same, lenders don’t lend money as much as they transfer to someone else near-term access to goods, services and labor with an eye (in the form of interest) on attaining even greater access to goods, services and labor in the future. Investment is yet another way that those with near-term access to real economic goods transfer it in the hope of attaining exponentially greater access down the line.
Repeat it over and over again that no one exchanges, invests and lends “money.” The latter merely facilitates the movement of real things.
Sadly, the incorrect belief that money on its own has magical powers has led some great minds to some very odd conclusions. Guido Hulsmann is a highly prominent scholar of the Austrian School who once oddly argued that “…fiat money allows the government to take out loans to an unlimited extent because fiat money by definition can be produced without limitation, without commercial limitation or technological limitation, and can be produced in whatever amount is desired."
No, that's not true. Money has no value or purpose without production. No one buys debt for the income streams, they buy it for what the income streams can be exchanged for. Think about it. When we buy, sell, lend or borrow we’re exchanging products for products. The butcher sells you a ribeye for $15, but only insofar as he can exchange that $15 for something else of reasonably equal value. Money flows and exchanges always and everywhere equal goods flow and exchange. Money creation doesn't magically summon market goods despite what you're told.
That’s why the calls from the monetarily naïve among us for “helicopter money” are kind of charming. Annie Lowrey of The Atlantic means well, no doubt the very real struggles of Americans have her quite a bit more than downcast, but her call for “helicopter money” is just her way of expressing a misunderstanding of money itself. Money never instigates; rather it’s a consequence.
If money drops could improve economies, Baltimore would have been saved decades ago. Assuming a drop there now, the money would depart the Charm City almost as quickly as it arrived. Even assuming the unlikely scenario of residents spending it all within the city's limits, the funds would be banked by business owners not so thoughtless as to expand based on a helicopter drop. Once banked, the money would rapidly flow to more productive climes.
Walter Wriston was someone who understood money well given his high-profile tenure as head of Citi, and as he long ago observed, “Capital goes where it’s welcome and stays where it is well treated.” The well-meaning Lowrey would benefit from a read of Wriston. It might change her view of the world. Or she could look back to the old Soviet Union, a central planning and human rights tragedy that likely predates her interest in economics and policy, and perhaps her date of birth.
The Soviet Union had a central bank, called Gosbank. It operated from the 1930s to 1987, and "operated" is past tense precisely because it’s defunct now. That the U.S.S.R. had a central bank only for the thankfully former country to have essentially gone bankrupt toward the end of the 20th century will hopefully open the eyes of Austrians like Hulsmann, along with commentators like Lowrey who rather romantically equate money with wealth.
If ever a central bank existed to do the bidding of the government it served, it was Gosbank. Better yet, the U.S.S.R.’s currency, the ruble, was of the fiat kind. If fiat money allowed “unlimited” borrowing then it’s safe to say that the Soviet Union would still exist today. Except that contra the musings of Hulsmann about paper money, the issuance of it by Soviet monetary authorities in no way resulted in market good abundance. You quite simply can’t issue debt denominated in a currency that few providers of market, or black market goods will accept.
Looked at through the prism of Lowrey’s idealism about “money” equaling wealth, rubles were in grand supply in the old Soviet Union. The “savings rate” denominated in rubles was through the roof, but not in a good way. People saved rubles precisely because they were exchangeable for very little of market value. Lowrey might pick up Hedrick Smith’s spectacular book The Russians to see that central planners tried “money drops” long before she entered the world. That they failed is a waste of words, but sadly a necessary waste in modern times.
Missed by those who ascribe mystical, and sometimes nefarious powers to the Fed and other central banks, is that their well overstated power is a consequence of productive economic activity, not the author of same. The Fed can’t monetize federal spending as much as it can credibly purchase federal debt that is already credible in the markets themselves. The Fed is a follower, not a leader.
Which brings us to a recent assertion from Pioneer Natural Resources CEO Scott Sheffield that he was trying to “prevent the oil-and-gas sector from disappearing over the next 18 months" through requests for support in Washington, D.C. About this, the sector was largely non-existent in the U.S. of the 1980s and ‘90s, yet the U.S. economy and stock market boomed. There’s lots of sectors that don’t exist stateside, raising a question of why the oil industry's ongoing existence in these fifty states is uniquely important.
Odd is that Fed Chairman Jerome Powell believes the Fed can and should prop up what investors wouldn’t, and won’t. As he put it on The Today Show, “When it comes to lending, we’re not going to run out of ammunition.” He’ll achieve less than nothing. As the Wall Street Journal’s Nick Timaraos and Heather Gillers reported last week, Fed buying of municipal debt “appears to have made little dent” in the value of munis. Well, of course. If investors don’t trust the solvency of U.S. cities, it’s not as though the Fed can alter that truth.
Nor can it save the U.S. energy industry. More than most want to admit, the energy sector only grew in the 21st century U.S. insofar as the price of oil was five, and sometimes ten times the price that broadly prevailed in the ‘80s and ‘90s. Saudi’s industry can operate at $20/barrel, but not the U.S.’s. Even if Powell lends freely to oil companies, actual market sources of credit will overwhelm its actions through resounding rejection of lending requests. The Fed can’t keep afloat what markets won’t, which is one of those statements of the obvious.
Money flows always and everywhere reflect the flow of real goods and services. Money has no purpose, and achieves nothing without production first. Money from central bankers or helicopters doesn’t alter the previous truth. To fix the U.S. economy, free it from the lockdowns. Everything else is just worthless paper.
