The Fed As the Inflation Fix? Sorry, But Markets Aren’t That Stupid

That markets are incredibly stupid is pretty much implied in all the Federal Reserve commentary from the various economic religions. Think about it.

Members of the Austrian School imagine that central banks have unchecked power to “flood the system” with money. Except that they don’t. And they don’t simply because markets aren’t stupid. And since they’re not stupid, actual market participants only transact in currencies that are trusted and that will command roughly equal value for what they bring to market.

Not so notable here is that Princeton professor Alan Blinder is the opposite of Austrian, and through his Keynesian lens he imagines that central banks can cure inflation by fiddling with interest rates. In a recent piece for the Wall Street Journal, Blinder wrote of “The job” that was done by the Fed last year in restraining inflation that was “way too high.” To Blinder, it was as simple as Fed Chairman Powell coming out with “rhetorical guns blazing” before raising interest rates. More commentary that implies markets are stupid.

Lest readers forget, no one lends or borrows money as much as they lend or borrow access to resources. Simple stuff. Lenders forego near-term resource access now in order to achieve greater resource access in the future care of the interest rate they charge for funds borrowed. In which case it’s a statement of the obvious that in response to inflation, lenders across the board would command higher rates of interest to compensate for resources and other market goods that will cost more in the future.

To believe otherwise is to believe that those with title to money are incredibly dumb, and that they’ll blithely hand over money cheaply without regard to what that money will purchase when it’s paid back. Sorry, but the previous characterization in no way describes how markets work. Don’t worry, it gets dumber.

As the various religions imply with their support for the “tough choices” central bankers have to make with “tighter credit” (listen to supply-siders wax rhapsodically about the Volcker years for a better understanding of what’s absurd), lenders would always have the proverbial “punch bowl” out absent the presence of sober-minded central planners like Volcker, Greenspan, Bernanke, and Powell. How else to explain to explain the expressed support of market pundits for alleged Fed “austerity”?

All of which requires a pivot back to reality. Markets are relentlessly fluctuating to reflect the infinite happenings of every millisecond of every day. Put more simply, markets are information personified. Assuming what’s broadly believed but that’s not true, that the impossibility that is “excess” or “cheap credit” causes inflation, those who would be quickest to the scene of the proverbial inflation crime wouldn’t be central bankers, but capital allocators with actual skin in the game.

What’s surprising and disappointing at the same time is that something so elementary about markets and credit needs stating. But it clearly does as evidenced by all the clamoring over the past year by “free market” and “mixed economy” proponents alike that the Fed must “do something” to lick inflation. Yes, to fix what they deem “inflation,” the various ideologies have called for market intervention. And what does market intervention imply other than that markets are stupid?

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