The Fed cannot dictate all interest rates

I am quite bemused by the widespread puzzlement over decline in long term interest rate over the past year in the face of continuous rate hikes by the Fed.

If all of these economists and market analyst just read more Marx, they would be much less puzzled. They would know that Marx said money is just another commodity. The price of goods depends on their supply and demand and the price of money is the interest rate. The prevailing interest rates reflect the market conditions in terms of supply and demand for money (savings VS profitable projects in which those savings can be invested). The interest rates have been going down because more and more liquidity is available as economic growth continues and relatively few additional opportunities for investing are available.

The Fed can no more dictate the level of all interest rates than could a real estate market seller who would simply post a price for his house where his house accounted for 1% of the total market turnover in the city. For the Fed to truly be able to run the show, it would have to be willing to make markets meaning it would have to be willing to provide a bid ask quote on money and not just one side of the trade. The amount of money that actually gets transacted at the rates which the Fed sets (the discount window and the Fed Funds rate) is only a tiny portion of the overall credit markets. (The largest total amount lent by Reserve Banks to banks was $45.5 Billion on September 12, 2001 - even that is immaterial relative to the total size of the assets of the financial markets.)

Where money is not just like all the other goods is that it is also a unit of measure and a store of value and its price does not relate directly to its cost (of production). For anyone who has not read Das Kapital, Marx struggles with this in the 3rd volume and it is a point which he never manages to resolve. As a result, it remains a gaping hole which he needs to fix with his equivalent of the "cosmological constant". Too bad since the rest of it is pretty brilliant and it is really a shame that it does not get read more because the bunglers who followed tried to put philosophy into practice which is silly.


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