If media accounts are to be believed, Taylor Swift is presently the most famous person in the world. Imagine what it’s like to walk in her shoes.
For fun, and for the purposes of this write-up, imagine her situation if she no longer had shoes. What if the singer and global phenomenon emptied all of her bank and brokerage accounts, gave away ownership of all of her songs, houses and planes, only to be back at zero. It’s a ludicrous presumption, but sometimes ludicrous is useful as a way of explaining things.
If Swift really and truly gave all of her worldly possessions away it’s a safe bet that she could still walk into any pawn shop, bank, or investment bank only to exit any of those financial intermediaries with enormous amounts of money at her disposal. More important, her borrowing rate would be at or near the lowest in the world. Financial institutions all over the world would be competing heavily to match her with capital.
The simple truth is that with or without a personal fortune which is said to exceed $1 billion, Swift is credit personified. Getting more specific, her greatest source of collateral wouldn’t be physical possessions, but the future value of the immense talent that she would bring into any financial institution. It’s just a reminder that credit or interest rates can’t be decreed, rather credit is what we bring to financiers. Swift’s credit is Taylor Swift.
Swift is presently ubiquitous as readers know, and she came to mind while reading a recent piece by the Wall Street Journal’s Nick Timiraos on “rising real rates.” Timiraos observes that with government measures of inflation having “fallen much faster than expected,” nominal interest rates “adjusted for inflation” have “risen and might be restricting economic activity too much.”
Timiraos’s analysis imagines that the cost of credit can be decreed, and credit conferred, all care of the Federal Reserve. The problem is that theories hatched inside the Fed (Timiraos himself has increasingly acknowledged flaws in Phillips Curve theory) don’t mirror what happens in the marketplace.
Timiraos himself might agree that there’s no such thing as a singular interest rate, and since there isn’t it really doesn’t much matter what the Fed does or does not do. Credit is an individual notion, which means there are infinte rates of interest to reflect the happy fact that we’re all different.
To see why, imagine Timiraos walking into various banks and investment banks with copies of his columns for the Journal. The bet here is that they would be door-openers in the sense that someone with a prominent column in a globally known newspaper would likely rate bank finance of some kind. But Timiraos’s rate of interest paid on borrowed funds would be quite a bit higher than Swift’s, and the amount he’d be allowed to borrow would be quite a bit smaller.
Which is worth keeping in mind as Timiraos laments the possibility of overly restrictive real rates of interest that might be holding the economy down. Timiraos’s conclusion to “rising real rates” is that “the Fed needs to cut interest rates.” Ok, but how? Better yet, why?
As the Swift hypothetical demonstrates in concert with Timiraos’s, rates of interest are already much less than uniform as is, and as an obvious reflection of the fact that individuals, businesses comprised of individuals, and governments are all different. And those differences surely overwhelm a central bank’s attempt to set the cost and amount of credit. The Fed can do no such thing. See Swift yet again, only to reduce the notion of “rising real rates” to the absurd. What if instead of cutting rates as Timiraos and others think is the obvious choice for the Fed, the central bank were to continue hiking?
If so, does anyone seriously think Swift would suffer the Fed’s alleged tightness with higher borrowing costs? In a global economy? Hopefully the questions answer themselves. Even if the Fed did control the cost and amount of credit (it doesn’t), Swift’s name and creditworthiness would prove a magnet for global savings such that loans at low rates of interest would find her no matter what, and without regard to the Fed.
What’s true about Swift is true about the U.S. economy more broadly. Assuming the individuals who comprise the U.S. economy are engaging in useful, highly useful, or remarkable (Swift) economic activity, no one need worry about what the Fed funds rate is. Precisely because money always and everywhere goes where it’s treated well, we needn’t worry that bureaucracies in search of a purpose will block the flow. In other words, “rising real rates” don’t “present new Fed peril” simply because the Fed doesn’t control the cost of credit to begin with.
