In his speech
at Jackson Hole, Wyoming, on August 26, 2011, the Fed chairman disappointed
most pundits. He did not promise another massive infusion of fake money,
i.e., QE3. I suspect that a strengthening in bank lending is an important
factor behind the Fed's decision to postpone the pushing of more money into
the economy.
The yearly rate of growth of our
measure for banks' inflationary credit jumped to 8.2 percent so far in August
from 4.3 percent in July. A visible strengthening in commercial bank inflationary
credit, i.e., credit "out of thin air," will provide the
"necessary" monetary stimulus. This means that the massive amount
of money pumped by the Fed since 2008 (over $2 trillion) is starting to be
funneled into to the economy by the banks.
This has long been the hope of the
Fed, and the goal of the huge increases in bank reserves that have been
created during the downturn. Until recently, these reserves have been stuck
in the system — unable to find lenders and borrowers willing to make a
deal. This has been a good thing because prices have been held somewhat in
check.
That is now changing. As the pace
of lending picks up, and the fractional-reserve system of loan pyramids kicks
in, we could see new floods of money pouring through our economic life and
causing untold damage.
For the time being, the pace of
pumping by the Fed remains buoyant. The yearly rate of growth of the central
bank's balance sheet stood at 23.6 percent so far in August against 23.1 percent
in July. The growth momentum of our monetary measure for the United States
(AMS) jumped to 13.1 percent this month from 11.8 percent in July.
Now, according to most experts,
massive monetary pumping is going to ignite inflationary expectations, which
in turn will give the necessary push to consumer outlays.
Once consumers start spending more,
via the famous Keynesian multiplier, this will reinvigorate general economic
activity and will put the economy onto a path of self-sustaining economic
growth. The key in this way of thinking is that currently there is a problem
with consumer outlays that, for various reasons, are not strong enough to
revive the economy.
For instance, rising unemployment
causes people to be cautious in their spending, which, according to popular
thinking, is bad news. Hence policies aimed at lifting employment must be
introduced in order to get the economy going. Digging ditches or introducing
various public projects, such as building roads, is strongly recommended.
According to this way of thinking,
if the private sector is reluctant to boost spending then it is the duty of
the government and the central bank to do so in order to bring the economy
onto a self-sustaining economic-growth path.
This means that government and
central-bank policies must err on the loose side, implying that the Fed
should aggressively push money, which together with very low interest rates
and loose fiscal policies, is expected to revive consumer confidence and push
economic activity forward.
This is a good summary of the views
of Bernanke, who believes that the key cause behind the Great Depression of
the 1930s was inadequate pumping by the then-Fed. This time around Bernanke
is determined not to repeat the same error.
Note again that, according to
popular thinking, boosting the overall demand for goods and services is the
key for the strengthening of US economic growth.
It's true that a strengthening in
the demand for goods and services is required for an economic revival.
However, any increase in demand must be fully backed up by an increase in the
prior production of final goods and services. This increase in demand must be
supported by the prior increase in saving and not by loose fiscal and
monetary policies.
Neither monetary pumping nor any
form of stimulatory policy can generate more real funding; rather they lead
to the diversion of funding from wealth-generating activities to
non-wealth-generating activities. These types of policies reduce the amount
of available real funding to wealth generators and thus undermine the process
of real wealth generation — economic growth comes under pressure on
account of these policies. (It leads to capital consumption. Instead of
planting the seeds in order to reap a crop in the future these policies cause
people to consume the seeds. Obviously one shouldn't be surprised that no
future crop could emerge as a result. Yet policy makers are trying to
convince us that one can eat the seeds and also have a crop.)
Contrary to most experts —
including Bernanke — the more aggressive the Fed's policies are, the
worse the economy is going to be. If all that is required to revive the
economy is pushing more money, then all third-world economies would be very
wealthy by now.
The latest trends in banking
foretell the possibility of very dangerous times ahead where developed
economies go the way of such undeveloped economies and destroy wealth through
inflation in the name of stimulating production. As we may soon discover yet
again, printing money is no substitute for real wealth creation.
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