In his recently released book The Last Kings of Shanghai, author Jonathan Kaufman wrote about Elias Sassoon’s travels up to Shanghai with an eye on expanding the reach of the Sassoon financial empire. While making his way to China’s commercial center, Elias “followed his father’s strategy of financing shipments of opium and textiles,” while “offering loans to smaller merchants.”
It’s the “offering loans to smaller merchants” that most stood out. Clearly it was a throwaway line for Kaufman given how it describes what financiers do to this day, but there’s bigger meaning to it. The short line is a reminder that if you’re productive economically, the money will find you. Access to credit isn’t so much a driver of productive economic activity as it’s a consequence. Where there’s productivity, there’s always “money” facilitating the exchange of the production.
Fast forward to the present, and there’s a reason that investment banking remains one of the most competitive professions in the world. It is because those skillful at financings, capital structurings, and corporate combinations are aggressively competing with countless other similarly skillful financial types eager to put money to work.
Why are they so eager to move money to a higher use? The answer is so obvious that it’s almost a waste of words to put on paper. Needless to say, investment bankers relentlessly search for production to finance precisely because the financial rewards are so great for doing just that. Where there’s innovation there’s always, always, always finance nearby.
All of this rates mention in consideration of a popular theme among monetarist-style thinkers of the present. Like the monetarists who misunderstood money before they did, their view is that the U.S. economy of the present suffers from a “dollar shortage.” If dollars were just more plentifully supplied, an economy that’s sputtering would soon be roaring.
No doubt some readers see this and detect a Keynesian quality to the monetarist school of thought. With good reason. Monetarism is the mirror image of Keynesianism. While Keynesians believe that more government spending will stimulate economic growth, monetarists believe that increased “money supply” will boost output. Each religion puts the cart before the horse.
Government spending is a consequence of economic growth that already happened, and that is expected to happen. It’s not that politicians in Honduras lack the zeal to spend in the way that U.S. politicians do. Arguably their zeal is greater. The reason they can’t spend with abandon is because there’s little growth to tax. U.S. politicians can spend enormous sums because they’ve captured for themselves a high percentage of an economy that booms. But to be clear, the government spending can’t stimulate vitality simply because it’s a result of it. Keynesianism is a monument to double counting.
So is monetarism. Money supply can’t be decreed on the way to growth. If it could, poverty in the U.S. and around the world would have long ago been erased by central bankers. Sluggish economic growth? Just add dollars, euros, yen, yuan….
What monetarists obsessed with money supply have long missed is that money is the sequel, not the original feature. That’s why it’s so plentiful where production is already abundant. Translated, there’s no “dollar shortage” in Palo Alto right now, nor is there one in Seattle or Austin. The Elias Sassoons of modern times are feverishly financing the productivity of the moment. Production first, then money. Get it?
Money flows reflect the flow of goods, services and labor. Monetarists think money growth care of central banks instigates activity, but the simpler truth is that money has no purpose in cities, states and countries bereft of economic activity. Trillions could be deposited in Mississippi banks, only for the funds to instantly flow well outside of it to more productive activity. Just as government spending is what happens after economic growth, “money supply” is what happens after production. There are more investment bankers aggressively trying to move money to its highest use in Washington State than there are in West Virginia. Keynesians and monetarists are incorrectly focused on the effects of growth rather than the drivers. They double count.
Right now, monetarists claim slow growth springs from dollar shortages. No, dollars are circulating less precisely because there’s less production. This is what happens when politicians lock down economic activity to varying degrees. Money supply reflects production, and there’s less production at the moment.
But wait, monetarists tell us, the Fed is paying interest on bank reserves such that there are fewer dollars circulating. The Fed is keeping “money supply” unnaturally low. Oh well, if we ignore how small a piece of the financial pie traditional banks are, and if we ignore that the Fed pays interest on reserves only to re-enter the market with dollars borrowed from banks, we can’t ignore the simple reality that any “shortage” created by the Fed represents opportunity for investment bankers and other sources of finance.
Assuming what’s laughable, as in monetary “tightness” caused by the Fed’s payment of microscopic interest for bank reserves; that just represents opportunity for domestic and global sources of finance. If the Fed is really making “money” more “costly” to attain, the higher margins ascribed to central bank meddling represent opportunity for financiers.
Some literally believe the Fed is sitting on money, plus “big business” is borrowing it only to similarly do nothing with it, but the greater truth yet again is that money is a consequence of production. Short of being stuffed in coffee cans, money never lays idle simply because there’s too much money to be made moving goods, services and labor to a higher use.
So when monetarists look at you in conspiratorial fashion, only to lay slow growth at the feet of “dollar shortages,” the only answer is to laugh. Where’s there’s growth there’s never a problem of too little money.