The Fed can’t increase so-called “money supply.” If what you just read weren’t true, rest assured a never independent Fed would have all manner of programs to place so-called “money supply” in the poorest parts of the U.S. It would vanish in seconds. Money is ruthless, and it only circulates where there’s production.
Commentary like this is required repeatedly exactly because economists and their political mates continue to ascribe central planning-like powers to the Federal Reserve. Take a recent opinion piece co-authored by former Texas senator Phil Gramm with former Congressman Jeb Hensarling.
In it, they wrote that Fed Chairman Powell erred in describing the post-lockdown prices as “transitory.” They claim the argument “wasn’t credible given that the federal government was spending more in two years than it had ever spent in three and the Fed during the pandemic was expanding the money supply faster than in any other year since World War II ended.” The authors combine Keynesian fallacy with non sequitur overlaid with monetary mysticism.
Let’s start with government spending. The Keynesian waste signed into law by a panicked President Trump in 2020 subsidized the lockdowns that placed the economy on its back to begin with, after which the politicized allocation of resources that never makes sense in good times hardly gains virtue in the bad. That Joe Biden mimicked Trump’s waste once in office was equally mindless.
Still, none of the waste could have caused prices to rise. My source: Phil Gramm. At least historically the former senator has caucused with supply siders who’ve long known that government has no demand of its own, that only production fosters demand, which means any “demand” from government can only reveal itself insofar as there’s less demand coming from the private sector.
As for the Fed increasing so-called “money supply.” See above. There’s nothing to it. Money is an effect of production, nothing else. Only reasonably credible money circulates as is, which explains why the currencies “supplied” by governments in nations around the world frequently don’t circulate in them. See Iran, North Korea and Venezuela. The dollar circulates in all three not because the Fed helicopter drops so-called “money supply” into all three, but because credible money is wherever production is, and as though placed there by an “invisible hand.” Yes, the Fed is immaterial on the matter of money in circulation. There’s Gramm and Hensarling’s non sequitur.
They once again take Jerome Powell to task for correctly describing the higher prices post-lockdown as “transitory.” Except that Powell was right. All market prices are a remarkable effect of the staggeringly sophisticated cooperation of billions of hands and machines around the world. That the prices of those goods would be higher after months of cooperation-compromising lockdowns is a blinding glimpse of the obvious. For Gramm and Hensarling to say otherwise is for them to insult the very free trade and capitalism they claim to revere.
Comically, they credit Powell for “bringing inflation down from its 40-year high,” which is the duo yet again insulting capitalism and trade. Do they really think Powell’s blind stabs at market intervention could overwhelm globally interconnected markets? It seems they do.
The analysis is incorrect. Markets have always run roughshod over the Fed’s central planners. If not, the U.S. economy wouldn’t be the envy of the world. Gramm and Hensarling should know this, and maybe will know this once again if and when Republicans are no longer in control of Washington, including a Fed that was never independent to begin with.
That it’s not independent doesn’t matter. Yes, markets run roughshod over the Fed's would-be central planners.
