Dear Federal Reserve Hagiographers, Market Interventions Never Work
No act of saving ever subtracts from demand. Ever. Short of a saver literally stuffing unspent wealth under a mattress, saving is merely the act of shifting consumptive ability to someone else with the saver intent on attaining the ability to consume more (via interest paid) in the future. Either those with consumptive desires acquire monetary savings, which is just an act of acquiring the right to secure near-term access to goods and services, or producers access savings either through loans or investment in order to purchase capital goods with the goal of expanding or enhancing their ability to produce.
Translated, to save is in no way to play a role in forcing contraction on an economy. Quite the opposite, really. Economists will tell you otherwise, they’ll tell you what’s impossible, that savings subtract from demand and growth, but that’s just them advertising their illiteracy. Saving is once again just a shift of wealth from savers to consumers or producers, and the shift to producers in the form of lending or investment is the very definition of growth. Without savings, progress would stop. Economists are incorrect in their expressed disdain for savings, as are their media enablers who report the misunderstandings of economists to readers.
Readers might internalize the above ahead of reading the opening sentence of Wall Street Journal Fed-watcher Nick Timiraos’s Friday report on the central bank. Timiraos wrote seemingly with great excitement that “The Federal Reserve is going further than ever to shore up the U.S. economy, unveiling programs to lend directly to states, cities and midsize businesses that have seen revenues evaporate amid efforts to combat the coronavirus outbreak.” Let’s translate the sentence:
Thanks to lockdowns imposed on economic activity by politicians on the local, state and national level to fight a virus, businesses are rushing toward bankruptcy and, as a consequence, the cities and states that suffocated their ability to operate are in the midst of a revenue crunch since that which is unable to operate cannot produce taxable revenue. As for the part “amid efforts to combat the coronavirus outbreak,” some clarity is needed. What Timiraos perhaps meant to write was that in response to a virus that has proved lethal at times, politicians in odd fashion chose to suffocate the very wealth creation that has historically produced abundant resources for doctors, scientists and tinkerers to pursue all manner of costly experimentation meant to vaccinate away that which used to cripple, maim and kill us.
Yes, that’s right. The answer to a virus was to foist cruel unemployment on 17 million and counting, as though poverty, starvation and desperation haven’t claimed their own, much more numerous body counts over the millenia. But don’t you get it, they say, politicians are trying to save lives. Wow.
In consideration of Timiraos’s skepticism-free reporting on the Fed and its Chairman that borders on hagiography, it’s hard not to wonder if he really and truly thinks he needs a law. As in would Timiraos, assuming no lockdowns or decrees from politicians about the coronavirus, be moving about without a care in the world, without handwashing, masks, or “social distancing”? The question answers itself. One-size-fits-all rules are for other people, then? Ok, that’s a digression.
Returning to the purpose of Timiraos’s report, the Fed is essentially trying a little bit of everything to resuscitate an economy that’s contracting. Lots of luck there. Missed by Timiaraos and the Fed he reports on is that liquidity can’t be decreed. Liquidity is a consequence. As fixed income analyst Seth Levine puts it oh so correctly, “where there’s free movement of capital and price, there’s liquidity.”
Presently the most important capital of all, meaning human capital, is enduring varying degrees of lockdown. There’s your illiquidity. It’s not some kind of randomly arrived at unnatural state that happened out of nowhere, rather it’s a consequence of the lockdowns.
Readers might think of all this in terms of ventilators. No doubt they help people breathe, but they would be wholly worthless if those intubated were simultaneously being suffocated. Get it?
Applied to the individuals who comprise what we call an “economy,” they’re presently having their ability to produce restrained, thus rendering the “liquidity” that excites Timiraos, Fed officials, former Fed officials, along with the Journal’s editorial board, a massive non sequitur. It’s the equivalent of a doctor insouciantly calling for a ventilator to save a gasping-for-air individual rendered breathless by a strangler. “Liquidity” misses the point. Unfortunately, it gets worse.
It’s not just that reporters like Timiraos are missing the actual asphyxiation for the central bankers “going further than ever.” Individuals of his ilk also misunderstand the nature of money itself. It’s seemingly lost on them that money flows always and everywhere signal the flow of goods, services and labor. Money, like liquidity, is a consequence of production. That’s why there’s so much in Chicago, IL, but so little in Cairo, IL. Where there’s very little production money serves no purpose.
Implicit in all the excitement about the Fed “going further than ever” is that in resuscitating the U.S. economy this way, the Fed could similarly enter the U.S.’s most impoverished locales in the future, only to go “further than ever” in them. Such actions would be corrected by market allocators of capital quite literally in minutes. Money movements yet again signal the movement of capital, and capital goes where it’s treated well. Translated, just as the Fed can’t fix Cairo, IL’s tragic decline, it similarly can’t overcome the tragic Rule of Man that's presently smothering the U.S. economy.
Timiaraos surely means well, so it’s almost not fair what Fed officials are asking him to do. Unaware that the central bank can’t rewrite reality, but wholly taken in by central bankers and the entity (the Fed) for which they toil, Timiraos is presently the central-banking publicity equivalent of Sean Spicer citing “alternative facts.” The good news, however, is that markets always talk over central planning of resources, and those so easily gulled by it.
“Going further than ever” won’t work. Market interventions never do.