Paul Volcker, the Fed and “Tight Credit”. The myth that will not die.


In a recent article for the New York Times

, Lananh Nguyen and Matt Phillips wrote of a happy and all too easily forgotten business reality between the United States and China: coveted the deep pockets and cachet of foreign investors. Please think about the above arrangement with comments on Federal Reserve priority.

All of this points to a very edifying truth: credit is by far the most fungible commodity in the world. Innovative Chinese entrepreneurs and enterprises are not limited by the amount of credit flowing in China itself. And as evidenced by the massive flows of capital from savers around the world to American visionaries, the United States is also not limited by the credit produced in the United States. And It is “Product credit”.

Contrary to popular belief that the availability of credit is a consequence of the generosity of the central bank, the reality is that credit is always and everywhere a production effect. Entrepreneurs and businesses look for money for what it can be exchanged for (think trucks, tractors, computers, phones, desks, chairs, paper clips, etc.), in which case people lightly Sensitive people can logically see the link between the production and availability of credit. In other words, no one borrows money. They don’t lend it either. Lending and borrowing is always, always, always the transfer of resources from one group of hands to another at a rate of interest sufficient for the lender to forgo access to the resources.

All of this brings us back to China. Nguyen and Phillips note that “in October, there were 282 Chinese stocks listed in the United States, valued at around $ 1.7 trillion.” The total is about 3 percent of the US stock market according to reporters, but that’s 3 percent of a huge number. Not only do Chinese companies covet “the deep pockets and cachet of foreign investors,” they actively access their capital. Please think of this in terms of recent comments and comments dating back decades. In his weekly conversation with Gail Collins, the very excellent New York Times Columnist Bret Stephens remarked on inflation that “we could bring it down with higher interest rates, and we probably have to eventually, although it would most likely cause a recession, as it was. case in the early 1980s ”. In the the Wall Street newspaperFormer Fed Vice President Kevin Warsh said that when “monetary policy is too restrictive, it slows aggregate demand.” More broadly, it is claimed to this day that the late Paul Volcker “whipped up” inflation by raising the federal funds rate to double digits in the early 1980s. According to those who think they are aware, the “tight” credit slowed down inflation. False, false and false.

And if the above argument is in doubt, consider China again. It doesn’t really matter what the Bank of China does, or the CCP, or the monetary authorities in general in China. As long as there are productive and innovative business ideas in China, there will be capital to finance them.

The globalized nature of credit testifies to the fallacy of assumptions that the Federal Reserve could cause a “recession” or a slowdown in “aggregate demand” by raising the fed funds rate. Such a view assumes that the United States is an impregnable island in the credit sense. Except no. Hell, if Chinese companies can easily bypass domestic credit barriers, can we seriously believe that the Fed is capable of cutting off access to credit in the very country that is so attractive to the world’s savers? And if you think that the Fed, by “fixing” the short-term credit rate, can make it “tight,” think again. The cost of credit is fixed in world markets. To pretend that the Fed can control it is just plain silly. And naive.

All of this puts an end to a never-ending myth about the early 1980s that simply won’t die. Supposedly Paul Volcker stopped inflation with “tight money”. Belief is absurd on too many levels to count. But for the sake of brevity, we must first say that inflation is a fall in the value of the unit; in our case, the dollar. Measured in gold, the dollar hit an all-time low of $ 875 with Volcker as Fed chairman. To which those with a reasonable understanding of monetary history will point out that the dollar’s exchange value has never been part of the Fed’s portfolio as it is. On this subject, the reasonable would be right. The Fed is not empowered to control inflation as historically believed.

Volcker’s myth also assumes that economic growth causes inflation, and that the contraction Volcker supposedly designed (he didn’t, but that’s another column) is an inflation killer. Except that the Phillips curve is a myth that is easy to discredit. Precisely because economic growth stems from investments to improve productivity, what economists believe to be inflationary is the surest sign of a rapid fall in prices. Too bad Republicans embrace what is discredited in pursuing the hagiography that Ronald Reagan (the president Volcker served after the loss of Jimmy Carter) himself would likely reject if he was there to reject it.

Finally, it cannot be stressed enough that the Fed cannot control total credit in the United States as it is. Without a doubt, it is fun for economists and pundits to imagine the central bank withdrawing the proverbial “punch bowl,” but the happier reality is that credit is once again a global concept. And as such, the world’s resources are relentlessly pushed by investors to their highest level of use. It is a long or short way of saying that access to credit is not so much a consequence of the “ease” or the “rigor” of the central bank as a certain consequence of productive ideas. Translated for those who need it, if you have a good idea the money will find you.

It’s no surprise that economic types want to believe that all good things go through central planners, but readers of political and economic commentaries would be wise to be skeptical. The power of the Fed is grossly overestimated. Fortunately. If he had the power some believe, economies around the world would be so destroyed that it wouldn’t be worth talking about.


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