Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16
The Implications of the Italian Banking Crisis Could Be Disastrous - 22nd Sept 16
TwinLakes Theme Park Summer Super 6 FREE Return Entry for Real? - 21st Sept 16
Has the Silver Bullet Run Out of Fire Power? - 21st Sept 16
Frack Sand: The Unsung Hero Of The OPEC Oil War - 21st Sept 16
What’s Happening With Gold? - 21st Sept 16
Gold vs. Stocks and Commodities, Pre-FOMC - 20th Sept 16
BrExit UK Inflation CPI, RPI Forecast 2016, 2017 - 20th Sept 16
European banks may be more important than the Fed this week - 20th Sept 16
Gold, Silver, Stocks and Bonds Grand Ascension or Great Collapse? - 20th Sept 16
Mass Psychology in Action; Instead of Selling Gilead it is Time to Take a Closer Look - 20th Sept 16
Hillary - Finally Well Deserved Recognition for Deplorables - 20th Sept 16
Fascist Business Model: Reich Economics - 19th Sept 16
Multiweek Correction in Gold and Silver Markets Continues - 19th Sept 16
Stock Market May Turn Ugly This Week - 19th Sept 16
China Is Digging Itself into a Deeper Hole - 19th Sept 16
Yellen’s Footnote 8 Would Put Interest Rates on Autopilot - 19th Sept 16
Central Bank Digital Currencies: A Revolution in Banking? - 19th Sept 16
UK Government Surrenders to China / France to Build Nuclear Fukushima Plant At Hinkley Point C - 19th Sept 16
Stock Market Correction Already Over? - 18th Sept 16
American Economics - 18th Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

Bernanke Loosens Up, Fundementally Misunderstands How Weath is Created

Economics / Economic Theory Dec 23, 2012 - 11:00 AM GMT

By: Frank_Shostak

Economics

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.

Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of M.F. Global. Send him mail. See Frank Shostak's article archives. Comment on the blog.

© 2012 Copyright Frank Shostak - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife