Could the Fed raise the interest rates charged on Taylor Swift?

According to media reports, Taylor Swift is currently the most famous person in the world. Imagine what it would be like to walk in her shoes.

For fun and the purposes of this article, imagine her situation if she no longer had shoes. What if the singer and global phenomenon emptied all her bank and brokerage accounts, gave up ownership of all her songs, houses and planes, but still came back to zero. It’s a ridiculous guess, but sometimes the ridiculous is useful as a way of explaining things.

If Swift really did give away all of her possessions, it’s a safe bet that she could still go to any pawn shop, bank or investment bank, only to be rejected by financial intermediaries who have a lot of money. There is power in money. More importantly, she could borrow at some of the lowest rates in the world. Financial institutions around the world would compete heavily to lend her money.

The simple truth is that with or without a personal fortune, which is reported to be over $1 billion, Swift’s credit is her personality. To be more specific, her greatest source of collateral wealth would not be physical assets, but the future value of her immense talent she would bring to any financial institution. This is just a reminder that credit or interest rates cannot be fixed. Instead, credit is what we bring to the financiers. Swift’s credit Taylor Swift.

As readers know, Swift is currently omnipresent, and she came to mind while reading a recent article wall street journal by Nick Timiraos on “Rising Real Rates”. Timiraos believes that the decrease in government measures of inflation “has soared and could restrict economic activity too much.”

Timiraos’s analysis assumes that the cost of credit can be reduced, and credit can be provided, which is completely overseen by the Federal Reserve. The problem is that the Fed’s theory (Timiraos himself has been quick to acknowledge the flaws in Phillips Curve theory) does not mirror what happens in the markets.

Timiraos himself might agree that there is no such thing as a single interest rate, and since there is not it doesn’t really matter what the Fed does or doesn’t do. Credit is an individual concept, which means there are infinite rates of interest to reflect the happy fact that we are all different.

To see why, imagine Timiraos going to various banks and investment banks with copies of his column. magazine, The bet here is that they will be door openers in the sense that someone with a prominent column in a globally renowned newspaper can rate some kind of bank finance. But the interest rate Timiraos will pay on the money it borrows will be significantly higher than Swift, and the amount it will be allowed to borrow will be significantly lower.

This is worth keeping in mind as Timiraos laments the prospect of overly restrictive real interest rates that could drag down the economy. Timiraos’s conclusion on “rising real rates” is that “the Fed needs to cut interest rates.” OK but how? Even better, why?

As Swift hypothetically performs in concert with Timiraos, interest rates are already much lower than uniform, and a clear reflection of the fact that people, businesses including individuals and governments, are all different. And these differences certainly affect the central bank’s attempt to determine the cost and amount of debt. The Fed can’t do anything like that. See Swift again, just for reducing the notion of “rising real rates” to absurd levels. What if instead of cutting rates, as Timiraos and others think is the obvious option for the Fed, the central bank should continue hiking?

If so, does anyone seriously think that SWIFT will face the Fed’s perceived tightness with higher borrowing costs? In the global economy? Hopefully the questions will answer themselves. Even if the Fed controlled the cost and amount of debt (it does not), Swift’s name and credibility would prove to be a magnet for global savings such that loans at low interest rates would get to her no matter what, and its Fed regardless.

What is true of Swift is true of the US economy more broadly. Assuming that individuals involved in the US economy are engaging in useful, highly useful, or notable (Swift) economic activities, one does not need to worry about what the fed funds rate is. Precisely because money goes always and everywhere where it is treated well, we do not have to worry that bureaucracy in search of some purpose will block the flow. In other words, “rising real rates” do not “present a new Fed crisis” simply because the Fed does not control the cost of debt to begin with.

Source: www.forbes.com