“Are you kidding? How big is your fund?” These questions were asked by a top investment banker at Lehman Brothers in the early 2000s. He was on the phone with a top Australian investment banker; although in an investment bank that currently ignored the center of the financial universe: New York.
Although the Australian financier worked in his country’s most important investment bank, although he understood private equity financing in a particular way not yet understood by American experts, his expressed desire that his a largely unknown company (in the US) playing a major role in a pending infrastructure deal has been ridiculed. He was told, “Let me be clear. We would never partner with you. And we would never hire you.
What the Lehman exec missed was that “the Australians were there in desperation”. This is how Sachin Khajuria described it in his excellent new book, two and twenty. The Australians (presumably the bank was Macquarie) had to find a way to get into private equity and funding countless lucrative US deals. And they finally did.
It turns out that the Australians understood infrastructure financing much better than the Americans. While American private equity moguls offered expensive equity financing for highways, toll roads and other major infrastructure, Australians saw infrastructure as the personification of reliable revenue streams that would allow much cheaper. Their despair to break into lucrative finance forced them to think differently, only for them to succeed.
Why this detour in an article on the Fed? It’s useful to remind readers that contrary to the popular narrative that the Fed is the conduit through which finance flows in small or large amounts, the reality is that the Fed and its manipulation of short-term lending rates are not a postman. Precisely because credit is produced globally, and precisely because it flows around the world without regard to borders, there is no way for the central bank to control the amount of credit that reaches states. United States, any more than the Fed can control its cost.
Keep that in mind as economists and their mediators promote the laughable idea that a “tight” Fed will “inevitably” cause a “recession.” Oh please, the view isn’t even serious from a distance. See above. It’s not just that investors want to get into the United States, they’re desperate gain market share here. It’s a simple way of saying that even if the Fed could reduce access to bank credit in the United States with artificially high interest rates, what it takes away would be more than compensated for in seconds, a lot larger pools of non-bank capital in the United States, as well as global providers thereof.
John Greenwood and Steve Hanke, two economists who, at least in the past, have studied non-intervention, wrote recently in the the wall street journal that “in its panic to raise rates and begin quantitative tightening, the Fed in the three months to June allowed M2 growth to plunge to an anemic 0.1% annualized growth rate“. According to their reasoning, the Fed induces a recession. No, such an opinion is not serious. It is not just because dollars are circulating in the world and are destined for their highest use. Given the intense desire of financiers to have exposure to the United States, there is no way for the Fed to keep “money” out of the United States given its incessant flows regardless of border. It baffles the mind that two serious economists can believe that the Fed not only “allows” economic growth, but also apparently plans it.
After which, the definition of “recession” by economists is totally wrong. The inconvenient truth is that governments cannot cause recessions given the larger truth that real recessions paradoxically signal economic recovery. What governments cause are economic slowdowns born of barriers to production. The difference between the two is off the Pacific Ocean. For some governments, currency can devalue, tax, regulate, or price economies down to the downside, but that’s command and control. Recessions are something quite different.
Indeed, it cannot be overstated that the seeds of real recession are planted during good times, while the seeds of recovery are planted during bad times. Translated for those in need, during good times some of us develop bad habits, make bad hires, commit capital less carefully, and all sorts of other things that go against progress. It’s during recessions that we fix what we were doing wrong.
Equally important, not every individual or company develops bad habits, makes bad hires, invests capital less carefully, and all sorts of other things that are detrimental to progress during good times. Translated for those who need it, real recessions lay the groundwork for powerful economic expansion given the fundamental truth that the most cautious continue to buy lavishly during downturns. It is then that they can acquire human, physical and financial capital at relatively low cost.
All of this explains why real recessions could never be orchestrated by central banks simply because central banks could never plan to put crucial assets back into the hands of better managers, or central banks could never plan for the natural and healthy process by which the individuals who make up what we call an “economy” fix what they have done wrong.
Right now, economists and their mediators say the Fed needs to “tighten” credit and induce a “recession” to stop inflation. It’s the discredited Phillips curve wrapped in a non-sequential. It’s an embarrassment of stupidity. Not only is the Fed unable to make credit more expensive, credit would not cure inflation even if the Fed could do what it cannot. Stopping inflation is currency stabilization, which currently does not and never has been part of the Fed’s portfolio.
Economic growth does not cause inflation, and contraction does not cure it. And whatever the Fed does, it cannot induce a recession. For graduates and their facilitators to pretend it is possible is for them to gaudily wear on their sleeves an impressive misunderstanding not just of inflation, but of recessions themselves.