Repeat it over and over again: there’s no interest rate, and there’s no such thing as interest rates. There are individuals, and individuals face a myriad of borrowing costs as numerous as there are people.
The Fed can’t nor does it make credit easy or tight simply because an economy is people. And the borrowing costs of people are as varied as their incomes, their expected future incomes, and the savings they do or don’t amass as they earn now and into the future.
What’s true about individuals is true about businesses staffed by individuals, along with governments that attain their borrowing power from the individuals they have taxable power over. Meaning rates are all over the map, or they don’t exist at all.
Whatever the Fed funds rate is right now, rest assured that Jeff Bezos, Larry Ellison and Elon Musk can borrow at costs lower than it, while the vast majority of borrowers in East St. Louis would pay many, many multiples of Fed funds to borrow. If able to borrow.
Apple could likely borrow well below Fed funds, while there’s probably not a rate in the double digits that Big Lots could borrow at right now. The world is lined up to lend to the U.S. Treasury at the lowest rates in the world as a reflection of those the U.S. Treasury (the American people) taxes, while there’s probably not an investor extant who would lend to Haiti.
It’s all useful to keep in mind as the PhD class debates whether the Fed should cut or increase. Norbert Michel and Jai Kedia work for the free-market Cato Institute, but they pen posts and reports with commentary of the kind that suggests “the Fed’s target rate may already be “too high,” and that “If anything, a case could be made to marginally reduce rates.” Fatal conceit, meet modern libertarians.
The simple truth is that there’s no way to have an opinion on rates or the central planning of same simply because the people are the marketplace, and the people who toil individually, work for businesses and whose industry is taxed are all different. As in debt issued by Beckley, WV would come with much higher rates of interest than would be debt issued by Beverly Hills, CA.
Yet the self-proclaimed free thinkers persist. Steve Hanke believes he knows how much of what he describes as “money supply” should circulate, but money in circulation is production determined. That’s why there’s lots of money in Palo Alto, and very little in Stockton. It’s a reminder that when Hanke critiques the Fed he’s merely substituting his Five-Year Plan for the Fed’s.
In a recent letter-to-the-editor, Texas Tech professor Alexander Salter made a case that the Fed shouldn’t “reassure markets about the interest rate,” but should instead “reassure markets about the price level or nominal gross domestic product.” Except that prices, like economic activity, are borne of limitless decisions made all over the world every millisecond. Contra Kedia, Michel, Hanke, and Salter, the Fed can plan nothing.
The surest sign that the Fed is only relevant to the economists it employs and the economists employed outside the Fed to critique it, is the U.S. economy itself. If the Fed had even a microscopic fraction of the power that the PhDs inside and outside the Marriner S. Eccles building imagine it does, the U.S. economy would be in too desperate of shape for there to be jobs for those who want to spend their days crafting graphs, equations, monetary aggregates, and theories inside and outside the Fed.
Basically the Fed’s critics and the Fed are like Alabama and Auburn fans, yelling at one another over a difference that can be reduced to location and team colors. Football fans vs. Football fans. Central planners vs. Central planners.
