print“Quantitative Easing” is state-speak for the government monkeying with the money supply. “Fed head Ben Bernanke,” who tinkers all the time, has announced that inflation is too low, no less. “The solution?” writes Larry Kudlow, is to “punch up the money supply and punch down the dollar.” By another $1 trillion, I believe.
The increase in the money supply is in fact inflation. This legalized counterfeiting raises prices; the new money generates price hikes throughout the economy. However, it reaches the politically connected first. They get fat checks well before the general price increases caused by all the new money affect their purchasing power. Depreciation of the dollar spells higher prices and hardship for those of us who are removed from power and from the new money.
Then there’s hyperinflation.
“In a system with fractional reserve requirements, an increase in bank reserves can support a multiple expansion of deposits,” explains economist Anna J. Schwartz. “An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending.”
They feel wealthier, but they are not, Schwartz ought to have added. Yes, and the outcome of “easing” is “malinvestment,” never sustainable investment. Any “recovery” invariably reported by the polls is a result of this “easing,” which further serves to mask economic reality.
UPDATE (Sept. 29): Such artificial expansions of the money supply cannot but result in a massive misallocation of scarce resources, enormous waste, and, eventually, a drastic lowering of the standards of living for all.
As is argued in the July 2010 issue of The Free Market, a publication of the Ludwig Von Mises Institute, the current, unprecedented expansion, will impact our very civilization, throwing us backwards to more atavistic times.
Ilana
It may not be inflation if money supply is falling as indeed it has been for the past 6 months.
It would in fact be reversing a drop in the money supply/deflation.
Ilana
To properly understand monetary policy, you should approach the Monetarists. I would recommend Scott Sumner who has turned me from a proto-Austrian Business Cycle Theory believer to a new monetarist on this issue. You don’t need to agree of course, but just grasp the basics of the theory.
The popular or financial press is NOT a good place to try to understand it, as its full of old-keynesian language which does not comport with macro monetary theory.
I’ll use your example from the Iran-Israel post on the murderer saving someone from rape. Similarly, because the State has assumed the responsibility and power of money creation which most libertarians view as illegitimate, does not mean that everything it does with that power is illegitimate or would not be done in a market setting either.
[See my response, vis-a-vis the role of the state in classical liberal theory, in UPDATE II of the post to which you refer.–IM]
Simple increases in money supply DO NOT guarantee inflation. Inflation is dependent on EXPECTATIONS of market participants. For example, if Bernanke prints $5 trillion today, but announces that he will pull the $5 trillion out in 12 months, there will hardly be any inflation IFF Bernanke has CREDIBILITY. This is called anchoring.
Also Austrian economists like Larry White and Steve Horwitz agree with monetary easing based on their models of Monetary Disequilibrium, where sticky wages (which the state makes worse) combined with a demand shock produces a market failure of unemployment.
Am I the only one who gets the feeling we’re all just a bunch of guinea pigs in a test of these theories?
Dan
If there was some rational basis of the currency, it would hardly matter if it were scaled into dollars or pounds or lira or yen. However, there are 3 real effects that go beyond currency scaling caused by this counterfeiting:
(1) MALINVESTMENT – which will always have dire consequences as a loss to be absorbed by many or all – such as your retirement pension now resides in a Chevy Clunker junkyard or an Afghan mud-pit
(2) Government can keep EXPANDING– with all the negative consequences for civil liberties, freedom etc. with a new “example” here (slight aside):
http://www.rutherford.org/articles_db/commentary.asp?record_id=676
(3) Higher TAXES – as real losses get turned into paper gains and small gains become monumental gains in a “progressive” tax system
Sadly, many people are pro-statist and deeply in debt. Most of the rest are confused, apathetic, or have given up. The few who protest are easily led astray by the hypocritical Republikeynsians looking for their turn at power.
{{ P.S. If economic Armageddon is not depressing enough, here is some depressing but thought-provoking reading on the cultural/civil-libertarian front:
http://www.nationalreview.com/articles/print/243587 }}
Never mind theory, contemplationist. Study History. None of this is new. Again and again in the recorded past, governments have first run up enormous debt, then tried to prevent the debt bomb from going off via the monetization racket. It always leads to blasts of inflation and eventual regime collapse. We’re no different.