Relax, the Fed Can’t Do What David Stockman Thinks It Can

An enduring monetary myth is that Germany was awash in marks amid the “money printing” extravaganza that took place after World War I. A perhaps apocryphal story of a wheel-barrow full of marks being pushed to market has fed this narrative. Except that whether the story was true or not, the narrative that emerged from it was and is nonsense.

The simple truth is that the mark disappeared from Germany’s cash registers in the 1920s, as hyper-debased money always does. And for obvious reasons. No one buys, sells, borrows, or lends with “money.” Underlying all monetary exchanges is the exchange of goods, services and labor, and those exchanging any of the three always require trusted money as the referee in transactions so that they can attain value roughly equal to what they’re bringing to market.

It’s just a reminder that whatever central banks, treasuries or mints do on the matter of “money,” powerful market forces regulate what mediums of exchange do and do not circulate. That’s why a U.S. dollar unearthed all manner of goods and services in post-WWI Germany in much the same way it did in Soviet Russia, and in much the same way the dollar will buy you market goods in North Korea today that the local won decidedly will not.

It’s a good jumping off point to recent commentary by David Stockman in concert with his new book. Stockman believes the Fed all powerful, and all enabling, and his worries have his flock, but also supply siders, fearful. They would be better off shifting their focus to the Kansas City Chiefs vs. San Francisco ’49ers. Stockman is a very nice man with a mean vision of how money works, a vision that’s rarely (if ever) come true. 

In particular, Stockman is alarmed about a 45x increase in so-called “money supply” versus a 5x increase in the nonsensical number that is GDP. Inflation! Hyperinflation! Wheel barrows full of dollars on the way? No, not at all.

If we ignore the odd conceit of economic types about so-called “money supply” and their alleged knowledge about how much is too much, too little, or just right, the Fed quite simply cannot increase money in circulation. Imagine it dropping billions from the proverbial helicopter into East St. Louis. The money would exit as soon as it arrived simply because money only has a purpose insofar as there is production and productivity to exchange. If the Fed could actually do as Stockman thinks it can, it would have long ago stuffed voluminous dollars into pockets of poverty like East St. Louis, west Baltimore, Pueblo, or name your wrecked locale.

Just the same, imagine if the Fed sold bonds en masse to banks in Palo Alto with an eye on draining dollars from it. Global market forces would reverse the Fed’s actions within minutes. Money always and everywhere finds the production without which it serves no purpose.

The happy, market truth is that no individual, no business, no city block, no city, state, or country ever needs to worry about having too much or too little money. Market forces are rather exacting on this matter given the aforementioned truth that we desire roughly equal to what we bring to market. Since we do, trusted money will always circulate (as if by “invisible hand”) wherever there are real market goods to exchange. That’s why the dollar, though surely not perfect, is the currency of exchange in so much of the world.

Regarding Stockman’s fear of a 45x increase in so-called “money supply,” something that has supply-siders all worked up, oh the conceit! Seriously, who knows what the proper quantity of money should be? In my case, I couldn’t measure the GDP of the street I live on. Since I can’t, I certainly couldn’t proclaim the proper amount of money circulating on that same street. Yet neo-Austrians close to Stockman, conspiratorial libertarians, and supply-siders still deluded by the Paul Volcker myth continue to comment on what they imagine is the proper “supply” of money. It’s the equivalent of commenting on what’s the right amount of cars, trucks, or computers in the economy. Soviet Five Year Plan stuff. And it’s wholly unnecessary. As evidenced by massive dollar circulation in Palo Alto, Beverly Hills, and Manhattan, versus relatively little in East Palo Alto, El Monte and the Bronx, market forces set the quantity of money rather well. 

Stockman of course believes that all this “printing” is a source of debt monetization, which is his way (and that of his flock) of communicating the odd view that markets aren’t just stupid, but incredibly so. Seriously, who would buy future income streams that, if Stockman et al are to be believed, are worthless? Tick tock, tick tock…

In answering the above question, hopefully readers see the broader weakness of Stockman’s view of the world. A really nice guy, Stockman yet again has a mean view of how the world works. And it’s incorrect. If it were correct, rest assured that readers reading this reply wouldn’t have the time, means, or technology to read such a reply. Which means we should all relax as Stockman understandably talks his book.

Republished from RealClear Markets


  • 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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