A ‘Monetary Rule’ Doesn’t Suddenly Validate Mkt. Intervention

The Federal Reserve doesn’t need to adopt a “Monetary Policy Rule.” Not only would the central bank shed the pretense of rules-based constraints on its power during times of upheaval and uncertainty as is, there’s no good time for meddling by central banks, or for that matter any governmental entity.

Market intervention is always and everywhere harmful simply because markets are people. And the people who comprise markets are making infinite decisions every millisecond on the way to information creation that is exponentially greater than the knowledge possessed by government officials.

It’s worth keeping in mind as the Cato Institute’s Jai Kedia and Norbert Michel lean on the Federal Reserve to “Adopt a Monetary Policy Rule.” The libertarians at what is a libertarian institute of thought justify their call for rules-based intervention with the line that “As long as the monetary system is based on government-issued paper (fiat) base money, some group of government officials must manage that issuance.” It’s an excuse that fails three times.

For one, it’s not even fully true what the scholars say about the U.S. having “a monetary system” that “is based on government-issued paper.” More realistically, production is a tautological signal of money in circulation, not the existence of central banks, mints, Treasuries, monetary authorities, or economists advising all four more broadly. In other words, if the “U.S.” had no monetary system at all, money would still flow abundantly stateside and as a reflection of production stateside.

For two, Kedia and Michel’s excusing of government intervention presumes that the government’s issuance of dollars means it must plan the markets for those same dollars, along with the cost of accessing them. The Fed couldn’t do either, nor is it required to.

Markets already speak their mind on money and credit every millisecond of every day. And they do because no one buys, sells, borrows, or lends “money,” rather producers of goods, services and labor buy all three with goods, services and labor, while borrowers of goods, services, and labor pay lenders of all three back with goods, services, and labor. Money is just the measure of value that producers use to exchange market goods, which is why markets for money and credit are so vibrant and exacting: since money flows through vibrant markets signal the movement of actual wealth, only certain monetary mediums actually circulate.

From the above, it’s easy to conclude (contra Kedia and Michel) that there’s no need for central banks to plan so-called “money supply,” nor could the Fed ever plan what is production determined in the first place. Dollars are where production is, where those who are productive have directed their dollars, and where financial intermediaries direct dollars entrusted to them. What is globally accepted in return for physical wealth would never have its “supply” planned by central planners.

Which is why central banks are powerless over where dollars go and in what amount. That’s why there are so many dollars circulating in San Mateo, but so few in Stockton. This isn’t central banks at work, it’s the tautological reality that money reflects production. Looked at globally, the Fed doesn’t place dollars in Caracas, Damascus, Teheran, but dollars liquefy exchange in all three.

Implicit in Kedia and Michel’s call for a “monetary rule” is that the Fed’s intervention in the quantity of money and the cost (interest rate) of accessing money empowers it to control inflation. Such a view suggests that inflation is an effect of too much money and/or too much credit. No, there can never be too much money and credit. To suggest otherwise is for Kedia and Michel to presume that there are limits to production. Actually, it’s limitless.

Inflation is currency devaluation, which is a policy choice. But as Fed officials would acknowledge, the dollar’s exchange value is not part of it portfolio, nor has it ever been. It’s a reminder that in calling for a “monetary price rule” Kedia and Michel aren’t calling for intervention meant to arrest inflation, they’re simply calling for rules-based market intervention by central bankers. Except that government intervention is harmful.

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  • John Tamny

    John Tamny is a popular speaker and author in the U.S. and around the world. His speech topics include "Government Barriers to Economic Growth," "Why Washington and Wall Street are Better Off Living Apart," and more.

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