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[Editor's note: Bernanke has
further loosened the Fed's monetary stance. As economist Frank Shostak explains, this action is based on a fundamental
misunderstanding of how wealth is created and can only make things worse.]
On Wednesday December 12, 2012 Fed
policy makers announced that they will boost their main stimulus tool by
adding $45 billion of monthly Treasury purchases to an existing program to
buy $40 billion of mortgage debt a month.
This decision is likely to boost
the Fed’s balance sheet from the present $2.86 trillion to $4 trillion
by the end of next year. Policy makers also announced that an almost zero
interest rate policy will stay intact as long as the unemployment rate is
above 6.5% and the rate of inflation doesn’t exceed the 2.5% figure.
Most commentators are of the view
that Fed Chairman Ben Bernanke and his colleagues are absolutely committed to
averting the mistakes of the Japanese in 1990’s and the US central bank
during the Great Depression. On this Bernanke said that,
A return to broad based prosperity will
require sustained improvement in the job market, which in turn requires
stronger economic growth.
Furthermore he added that,
The Fed plans to maintain accommodation
as long as needed to promote a stronger economic recovery in the context of
price of stability.
But why should another expansion of
the Fed’s balance sheet i.e. more money pumping, revive the economy?
What is the logic behind this way of thinking?
Bernanke is of the view that
monetary pumping, whilst price inflation remains subdued, is going to
strengthen purchasing power in the hands of individuals.
Consequently, this will give a
boost to consumer spending and via the famous Keynesian multiplier the rest
of the economy will follow suit.
Bernanke, however, confuses here
the means of exchange i.e. money, with the means of payments which are goods
and services.
In a market economy every
individual exchanges what he has produced for money (the medium of exchange)
and then exchanges money for other goods. This means that he funds the
purchase of other goods by means of goods he has produced.
Paraphrasing Jean Baptiste Say Mises argued that,
Commodities, says Say, are ultimately
paid for not by money, but by other commodities. Money is merely the commonly
used medium of exchange; it plays only an intermediary role. What the seller
wants ultimately to receive in exchange for the commodities sold is other
commodities. [1]
Printing more money is not going to
bring prosperity i.e. more goods and services. Money as such produces
nothing,
According to Rothbard,
Money, per se, cannot be consumed
and cannot be used directly as a producers' good in the productive process.
Money per se is therefore unproductive; it is dead stock and produces
nothing.[2].
Contrary to popular thinking there
is no need for more money to keep the economy going. On this Mises argued,
The services which money renders can be
neither improved nor repaired by changing the supply of money. … The
quantity of money available in the whole economy is always sufficient to
secure for everybody all that money does and can do.[3]
Printing more money will only
result in the diversion of goods from those individuals that produced them to
those who have produced nothing i.e. the holders of the newly printed money.
According to Mises,
An essential point in the social
philosophy of interventionism is the existence of an inexhaustible fund which
can be squeezed forever. The whole system of interventionism collapses when
this fountain is drained off: The Santa Claus principle liquidates itself.[4]
What is required to set in motion a
broadly based prosperity is to enhance and expand the production structure of
the economy. Printing money however, will undermine the expansion and the
enhancement of the wealth generating infrastructure.
If by means of money printing and
the lowering of interest rates one can generate prosperity, why after all of
the massive pumping by the Fed are things not improving? The reply of
Bernanke and his colleagues is that the pumping wasn’t aggressive
enough.
If Bernanke’s way of thinking
were to be implemented, it would run the risk of severely damaging the
process of wealth generation and deepening economic impoverishment.
If money printing can create
prosperity then why are all the poor nations still
poor? These nations also have central banks and know well how to print money.
A good recent example in this regard is Zimbabwe.
Even if we were to accept that the
Fed ought to pump money to revive the economy, we would still have a problem
if banks refused to channel the pumped money into the economy.
It must be realized that after
being badly hurt in 2008, banks are likely to be reluctant to embark on
aggressive lending of the money pumped by the Fed.
For the time being, banks still
prefer to sit on the cash rather than lend it out aggressively. The latest
data for the week ending December 12 indicates that the banks’ holding
of excess cash increased by $25 billion from the end of November to $1.464
trillion.
We should be grateful to the banks
for resisting aggressive lending so far - it has prevented an enormous
economic disaster. Obviously if the Fed were to force the banks to push all
the pumped money into the economy then this could inflict severe damage.
Summary and conclusion
On Wednesday December 12, Fed
policy makers announced that they will boost their main stimulus tool by
adding $45 billion of monthly Treasury purchases to an existing program of
buying $40 billion of mortgage debt per month. This decision is likely to
lift the size of the Fed’s balance sheet from the present $2.86
trillion to $4 trillion by the end of next year.
The Fed Chairman Ben Bernanke, the
initiator of this plan, is of the view that aggressive money pumping is going
to strengthen US economic expansion. We hold that without the cooperation of
banks, the massive pumping of the Fed is unlikely to enter the economy.
If banks were to push the money the
Fed is going to pump into the economy, this would inflict serious damage on
the economy’s ability to generate real wealth.
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