A remarkable and pleasant coincidence this Sunday! Two of my favorite Substack writers with columns on a similar topic - Prof. Graboyes with this article and Douglas Murray in this morning’s Free Press on RFK’s extemporaneous speech on the eve of the murder of Martin Luther King.
Having been in the uncomfortable position of having to speak in front of a large gathering without adequate preparation myself, I can sympathize with both gentlemen as well as attest to the fact that perhaps there are angels standing at the ready to jump in to assist when needed.
> Equivalently, if the Fed seeks a 3 percent inflation rate, it controls the mechanisms that determine short-term interest rates; but it is the inflation target of 3 percent, and not mere whim, that tells the Fed where short-term rates must be.
Here's the part I've never understood. Half of the Fed's statutory dual mandate is "price stability." Given that "stable" means "unchanging" and "resistant to being moved," from where does the Fed get the idea that it has any authority to target any inflation rate other than 0%?
What a great story! The lecture is also masterful. My thanks to the inspiring angels that whispered these thoughts. A case of “necessity is the Mother of invention” and cool thinking under fire.
Interesting exposition. Not ALL rates are tied/linked with the Fed's rates. Meaning the rates charged or paid to Ordinary Mortals didn't always immediately change; people assume that rates ARE rigidly linked. The Fed sets certain rates and then things may or may not happen.
I remember that in the late 1920's the Fed was setting rates both to influence Wall Street speculating AND to "help" the Bank of England because in those days that was important to trade and US business more than now. To grab your auto motor analogy what happened was the functional equivalent of "stripping the gears" on the lever and the Fed lost control of what they were doing. As in a rapid rate change; akin to if the Fed suddenly pegged the discount rate at 10%. (I recall that the Bank of England used to do that sort of thing in the 19th century and that created the "Panics" we had then.)
OK. Robert Sobell's PANIC ON WALL ST. works out an estimate that the 1927-9 NYSE trading involved maybe 60,000 active speculators so it wasn't everybody and their uncle--only lazy dishonest journalists say that. In a nutshell if the Fed sets rates etc. "wrong" they strip the gears and the lever is broken!
One sentence version--the Fed can only set certain rates and is at the mercy of everyone else on everything else!
I am an evil person who was saving his money in the late 1970's after I had finally gotten steady employment. Disintermediation in a Nutshell--you and I are old enough to remember that term. Suddenly people lucky enough to live in Fed cities (Boston, Cleveland, etc.) trotted down to the Fed and applied for non-competitive tenders for T-bills. That famous photo from 1974 of the hall of the Cleveland Fed chock full wall-2-wall of people applying for T-Bills in the days when $1,000 was the minimum. Now the Fed didn't like having The Little People doing things like that! So they increased the minimum to $10,000. So people started taking money out of commercial and savings banks to buy bigger T-Bills. Then some geniuses invented Money Market Funds! Even more money flowed out of "banks". The Fed briefly tried requiring money funds to hold funds (20% of assets) as Uninvested Cash (think the old non-interest-bearing Xmas clubs!); Speaker Tip O'Neill proposed outlawing Money Market Funds---and the Congress got upwards of TEN MILLION non-form letters saying NO! in so many different words!
Things changed eventually. The younger set won't believe that you or I could get over 12% for our deposits easily and for the record I was in on the 3-month bill auction that set the all-time discount record just below 18% in the fall of 1981.
In as few words, yes the Fed sets a few rates and the rest they rely on dumb luck.
Sad though there seems to b less and less knowledge How Things Used to Be. The Classical Gold Standard worked so well 1890-1914 because there was a serious gold inflation going on due to new processes for low-grade ores (cyanide process) and giant gold strikes capped off with the Klondyke. As in a 40% increase in the world's gold supply in 24 years! Few think of the consequences of how the world used to do things differently!
I am 59 years old and this is the first time I've ever really understood this. Wonderful. But also, showing up to a large audience with nothing? Terrifying. The stuff of nightmares. Angels indeed.
A remarkable and pleasant coincidence this Sunday! Two of my favorite Substack writers with columns on a similar topic - Prof. Graboyes with this article and Douglas Murray in this morning’s Free Press on RFK’s extemporaneous speech on the eve of the murder of Martin Luther King.
Having been in the uncomfortable position of having to speak in front of a large gathering without adequate preparation myself, I can sympathize with both gentlemen as well as attest to the fact that perhaps there are angels standing at the ready to jump in to assist when needed.
> Equivalently, if the Fed seeks a 3 percent inflation rate, it controls the mechanisms that determine short-term interest rates; but it is the inflation target of 3 percent, and not mere whim, that tells the Fed where short-term rates must be.
Here's the part I've never understood. Half of the Fed's statutory dual mandate is "price stability." Given that "stable" means "unchanging" and "resistant to being moved," from where does the Fed get the idea that it has any authority to target any inflation rate other than 0%?
What a great story! The lecture is also masterful. My thanks to the inspiring angels that whispered these thoughts. A case of “necessity is the Mother of invention” and cool thinking under fire.
Interesting exposition. Not ALL rates are tied/linked with the Fed's rates. Meaning the rates charged or paid to Ordinary Mortals didn't always immediately change; people assume that rates ARE rigidly linked. The Fed sets certain rates and then things may or may not happen.
I remember that in the late 1920's the Fed was setting rates both to influence Wall Street speculating AND to "help" the Bank of England because in those days that was important to trade and US business more than now. To grab your auto motor analogy what happened was the functional equivalent of "stripping the gears" on the lever and the Fed lost control of what they were doing. As in a rapid rate change; akin to if the Fed suddenly pegged the discount rate at 10%. (I recall that the Bank of England used to do that sort of thing in the 19th century and that created the "Panics" we had then.)
OK. Robert Sobell's PANIC ON WALL ST. works out an estimate that the 1927-9 NYSE trading involved maybe 60,000 active speculators so it wasn't everybody and their uncle--only lazy dishonest journalists say that. In a nutshell if the Fed sets rates etc. "wrong" they strip the gears and the lever is broken!
One sentence version--the Fed can only set certain rates and is at the mercy of everyone else on everything else!
I am an evil person who was saving his money in the late 1970's after I had finally gotten steady employment. Disintermediation in a Nutshell--you and I are old enough to remember that term. Suddenly people lucky enough to live in Fed cities (Boston, Cleveland, etc.) trotted down to the Fed and applied for non-competitive tenders for T-bills. That famous photo from 1974 of the hall of the Cleveland Fed chock full wall-2-wall of people applying for T-Bills in the days when $1,000 was the minimum. Now the Fed didn't like having The Little People doing things like that! So they increased the minimum to $10,000. So people started taking money out of commercial and savings banks to buy bigger T-Bills. Then some geniuses invented Money Market Funds! Even more money flowed out of "banks". The Fed briefly tried requiring money funds to hold funds (20% of assets) as Uninvested Cash (think the old non-interest-bearing Xmas clubs!); Speaker Tip O'Neill proposed outlawing Money Market Funds---and the Congress got upwards of TEN MILLION non-form letters saying NO! in so many different words!
Things changed eventually. The younger set won't believe that you or I could get over 12% for our deposits easily and for the record I was in on the 3-month bill auction that set the all-time discount record just below 18% in the fall of 1981.
In as few words, yes the Fed sets a few rates and the rest they rely on dumb luck.
Sad though there seems to b less and less knowledge How Things Used to Be. The Classical Gold Standard worked so well 1890-1914 because there was a serious gold inflation going on due to new processes for low-grade ores (cyanide process) and giant gold strikes capped off with the Klondyke. As in a 40% increase in the world's gold supply in 24 years! Few think of the consequences of how the world used to do things differently!
Good Lord! I've spent hours here!
I am 59 years old and this is the first time I've ever really understood this. Wonderful. But also, showing up to a large audience with nothing? Terrifying. The stuff of nightmares. Angels indeed.
What would our economy look like sans the Fed? Isn’t this really an attempt at central planning?
Your automobile analogy was very enlightening!