He who tries to borrow ‘money’ needs it solely for procuring other economic goods.” – Ludwig von Mises, The Theory of Money and Credit

As is well-known now, President Trump is conducting a search for the next Federal Reserve Chairman. Naturally this has economists all riled up simply because the Fed employs more of the credentialed than any other entity in the world.

That economists would worship at the altar of what supports their conceit is logical, and can be explained by basic self-interest. What’s less understandable is that Trump’s Fed search has normally right-leaning media all breathy about his choice having some kind of profound economic significance, one way or the other.Apparently the policies of Janet Yellen, a Barack Obama appointee who succeeded George W. Bush appointee Ben Bernanke, engineered economic growth that has “stumbled along at 2%.” Implicit in the latter is that if Trump picks the right central planner, growth will take off. Really?

The Fed conversation has a decidedly 20th century feel to it back when governments thought they could manage economies, but the fact that the U.S. economy remains the envy of the world despite the alleged “2%” rate of growth is a happy reminder that there’s very little planning of economic activity in the U.S., and this includes planning from the Federal Reserve. Economies centrally controlled from the proverbial Commanding Heights are invariably poor, but the U.S. is the richest nation in the world. That the U.S. is so rich exists as a clue as to the truth about the Fed’s economic relevance. It’s well overstated. Whom Trump appoints will be of little consequence despite what pundits want us to believe.

Credit

Explicit in the belief that the Fed is economically consequential is that its central plans, if wisely executed, ensure the proper, economy-maximizing flow of credit into the economy. The latter is not a serious view. The Fed can neither expand nor shrink credit, and to see why, readers need only summon a tiny bit of common sense. They need only remember that when we access dollars it’s not the dollars we want as much as we want the goods and services (what Mises referred to as “economic goods”) that dollars can be exchanged for.

We know this because banks in total just aren’t that important anymore as a source of total dollar lending.

What’s important is that the Fed cannot engineer an abundance (or a decline) of goods and services we’re either in search of, or seeking to lend out. In that case, the Fed has no ability to control whether credit is “easy” or “tight.” When we borrow we’re once again borrowing access to economic goods, but the supply of those goods is solely a function of productivity in the real economy. Credit is rarely “easy” no matter the Fed’s fiddling with its overnight rate target, and despite what people read. Resource access is nearly always a major challenge.

No doubt the Fed can liquefy banks with “money” through purchases of interest bearing assets owned by banks, but then so can any buyer of assets that banks sell to in return for loanable dollars. Assuming the Fed didn’t exist, banks would still be lending, plus they’d still be selling assets in return for loanable funds.

If the Fed were to tighten so-called “money supply,” readers can rest assured that credit would still flow simply because people don’t produce only to sit on their production. Money supply is an effect of production owing to the basic truth that producers use money to exchange the fruits of their toil for what they desire in return for the fruits of their toil. If dollars are scarce, non-dollar replacements will logically find their way to the U.S. to liquefy the trade that is the purpose of all production. Readers should never forget that money was not initially a creation of the state.