Wall Street And China Trample On Dollarization And The Federal Reserve

“Chinese companies are pushing across the globe to conquer new markets, and U.S. financiers are making a mint by helping them.” That’s how the Wall Street Journal’s Rory Jones reported it in a recent front-page article from the newspaper.

Jones reports that as of September, Chinese companies have raised $23 billion. Notable about the impressive sums of money raised for 65 newly listed companies in Hong Kong, Jones writes that “Morgan Stanley and Goldman Sachs are the top banks for fundraising.” The only “closed economy” is the world economy. Robert Mundell lives!.

All of this is worth remembering as the Federal Reserve obsessed continue to – yes – obsess over whether the central bank will remain “easy” or “tight.” The worrying is more than pointless as the China/Hong Kong/U.S. investment bank story indicates.

While it can’t be said enough that the Fed has no credit to be easy with in the first place, it can be said that whether it’s easy or austere is immaterial in a world of globalized credit. If machinations succeed in rendering the price of credit higher than the market itself, then it’s safe to say that non-bank and non-U.S. sources of credit will eagerly pounce on financing opportunities that Fed fiddling might take away for certain U.S. sources of finance. The reasons are many, but just two will be mentioned here.

For one, credit is produced in the private sector as opposed to being allocated by central bankers. This being true, the only limit to investment, loan, or in-between credit is the amount of production in the world.

From there, or second, money goes to where it’s treated well. Which is a reminder that assuming what’s impossible to begin with, that the Fed can artificially elevate the true, market-based cost of capital, global sources of money will mobilize to profit from undercutting the Fed’s vain stabs at price control. Markets always speak.

Jones adds that while Chinese companies used to simply raise money in New York, “Beijing authorities have grown suspicious of U.S. listings,” while conversely, U.S. stock exchanges have grown “wary of wading into politically sensitive territory.” Government barriers to the natural flow of capital? Most certainly, but also easily surmountable for reasons already discussed.

Hong Kong’s capital markets are filling the funding breach, while aided by U.S. investment banks. Here’s your “closed” global economy, and here’s the globalized rejection of popular notions that just won’t die about the Fed causing “recessions,” and more ridiculous, supposed “tightness” from the Fed having caused the Great Depression. Not a chance.

That’s because credit is an effect, not an instigator. It once again goes where it will be rewarded for going. Assuming Fed tightness in 2025, or Fed tightness in the 1930s, markets run roughshod over central bank intervention. Fewer dollars were circulating stateside in the 1930s precisely because there was reduced economic activity as a consequence of horrendous government policy.

Which is useful to keep in mind amid ongoing calls by Milton Friedman-worshipping pundits who claim a failure to dollarize is what’s holding Argentina’s economy back. No, not really. See Hong Kong once again. Since there are myriad innovative companies in China, dollars are being matched with them by American investment banks by the billions.

Dollarization, like credit, is an effect as opposed to an instigator. If Javier Milei wants dollars in abundance in Argentina, he’ll have to attract the kind of human capital for whom dollars are always matched with.

Like central banks, decrees are toothless. Dollars migrate toward production, and run from a lack of it.