Remember “costless” credit? Neither do I, neither do you the reader, neither does Elon Musk. As Walter Isaacson’s biography of the world’s richest man makes very apparent, Musk was so desperate for cash during the 2010s to fund his various entrepreneurial ventures that at one point his then-wife’s parents offered to mortgage their house in England.
Yes, right as the Fed was at “zero,” there wasn’t a lender or investor in sight willing to back Musk. And it wasn’t just Musk. The unofficial motto at Nvidia, presently the world’s most valuable corporation, is that “Our company is thirty days from going out of business.”
You, me, plus Elon Mus and Nvidia’s Jensen Huang live in a world uninhabited by the Fed, along with the central bank’s naïve followers. In this world, there’s no such thing as costless, or “easy” credit. The genius of compounding is far too powerful to be felled by the simple and unoriginal minds who populate the central bank.
That’s why Fed Chairman Jerome Powell’s critics and supporters alike beclown themselves in their editorial battle over Powell, and whether he’ll be fired by President Trump. At the Washington Post, an editorial observed that if Trump were to replace Powell, “immediate disaster might result.” At the New York Times, frequent economic contributor Rebecca Patterson told her flock that inflation could surge to 35%.
It all sounds so scary until we recognize three things. First is that the Fed has never, ever been independent. An outsourced creation of Congress, the Fed has always existed to serve at the pleasure of presidents, senators and congressman who believe against all logic and empirical reality that the federal government can decree credit cheap. It can’t.
As for the “disaster” that would allegedly ensue in response to Powell being pushed out, forward-looking markets have logically already priced the possibility without any correction. Which brings us to the third reason to not worry.
As in travel back in time to 2009 and beyond to when the Fed was at “zero.” That’s plainly what Trump wants, but assuming he gets what he wants doesn’t mean markets will comply. See Musk yet again. See your own “costless” borrowing capacity assuming Trump can install one of his own at the Marriner Eccles Building. Markets bow to no one, least of all delusional presidents.
Which raises basic questions: did “inflation” zoom to 35 percent in the 2010s when the Fed was at “zero”? Did stocks and bonds plummet? Hopefully the questions answer themselves. Markets are way too smart for central bankers.
They’re also too smart for formerly reasonable conservatives so eager to jettison Powell. This isn’t a defense of Powell as much as it’s a comment on how ridiculous conservative critics of Powell are. While they would mock a left-winger presuming to tell Apple what to charge for computers, they somehow know what the proper interest cost should be for dollars exchangeable for every market good in the world? It’s accepted wisdom on the right that “rent control” results in apartment scarcity, but credit availability surges when the Fed decrees rates artificially cheap? Longtime Democrat Sam Altman describes himself as “politically homeless.” Semi-rational Republicans have to feel the same way.
The good news is that whether it’s Powell running the Fed next week, next month, next year, or if it’s someone who “likes” low interest rates a la Trump, it really won’t matter. Central planning was an unmitigated 20th century disaster. It still is. If the Fed had even a fraction of the power that Powell’s critics and supporters imagine it does, the U.S. economy would be too wrecked to care about.
