Best of the Week
Most Popular
1.UK General Election Exit Polls Forecast Accuracy - Nadeem_Walayat
2.What's Next for the Gold Price? - Axel_Merk
3.UK House Prices Correctly Forecast / Predicted Conservative Election Win 2015 - Nadeem_Walayat
4.15 Hours to Save England from SNP Scottish Nationalist Dictatorship - Election 2015 - Nadeem_Walayat
5.Exit Poll Forecasts Conservative UK Election 2015 Win - Nadeem_Walayat
6.Gold And Silver China’s Pivotal Role: More Questions Than Answers. Not So For Charts - Michael_Noonan
7.Conservative Win 2015 UK General Election, BBC Forecast of 329 Seats - Nadeem_Walayat
8.Investing and the Lollapalooza Effect - Niels C. Jensen
9.Gold Price Target - Rambus_Chartology
10.Gold Price Nearing An Important Pivot Point - GoldSilverWorlds
Last 5 days
Time To Get Real About China - 22nd May 15
Gold Lifeboat to Global Economies “Titanic Problem” Warn HSBC - 22nd May 15
One Investment Could Save Two Generations' Retirements - 22nd May 15
Investing is About Identifying Gifted and Talented Camps - 22nd May 15
One of Europe's Latest Debt Nightmares - 22nd May 15
UK Immigration Crisis Could Prompt BREXIT, Propelling Britain Out of EU Despite German Factor - 22nd May 15
America Superpower 2016 - 21st May 15
Stock Market Secular Versus Cyclical Investing - 21st May 15
Banking Stocks Break Out with Higher Bond Yields - 21st May 15
The Tech Portfolio Built to Beat the Market - 21st May 15
Gold “Less Sexy” Than Bitcoin … For Now - GoldCore on CNBC - 21st May 15
The Russia-West Rivalry in the Balkans - 21st May 15
The US Dollar and the Precious Metals Complex - 21st May 15
Gold GLD ETF Drawdown Continues Unabated - 21st May 15
Who’s Killing the Stock Market? - 21st May 15
Your Best Way to Profit from the Narrowest Market in 20 Years - 21st May 15
Government Regulation and Economic Stagnation - 20th May 15
It’s Time to Hold More Cash and Buy Gold - 20th May 15
Choppy Asian Stock Markets - 20th May 15
Countdown to Global Financial Collapse - 20th May 15
Will Interest Rates Ever Rise? - 20th May 15
How to Cash in on Amazon Stock’s Amazing Cloud Success - 20th May 15
Three Hidden Forces Pushing Crude Oil Price Back Up - 20th May 15
U.S. Housing Market Strong Numbers in Perspective - 20th May 15
Greece Debt Crisis - Obama Has A Big Fat Greek Finger - 20th May 15
Now Is the Time to Own the Oil & Gas Leaders - 20th May 15
UK Deflation Warning - Bank of England Economic Propaganda to Print and Inflate Debt - 20th May 15
Trading Gold and Silver along with the Pros - 19th May 15
Gold Ticks Higher as London Housing Market Crash Looms? - 19th May 15
Global Stock Market, Commodities Group Analysis - 19th May 15
How Stock Investors Could Profit from the Dark Net Pattern That Few Others See - 19th May 15
The Patriot Act is now USA Freedom Act - 19th May 15
Investing in Europe? 5 Critical Insights to Boost Your Portfolio Now - 19th May 15
Gold Price Trend Forecast - 19th May 15
Stock Market Continues Defying Gravity, Dow New All Time High - 19th May 15
Are Gold and Interest Rates About To Take Off Higher? - 18th May 15
Nikkei Japanese Stock Index Set To Get Smashed - 18th May 15
Silver Price Projections For 2020 - 18th May 15
The IMF Leaks Greece, Institutions Forcing a Debt Default - 18th May 15
Europe's Stocks Bull Market Continues After Correction - 18th May 15
European Banks Vulnerable Today As 2008 Financial Crisis - 18th May 15
Payments, Currencies, and Broken Money - 18th May 15
Learning to Trade Markets - Dealing with Losing Trades - 18th May 15
Stock Market Sell in May and Go Away - Last Hurrah - Take2 - 18th May 15
The No. 1 Reason Stocks Will Climb Higher - 17th May 15
Gold, Silver Distorted Markets, Financial Sophistry, and Moral Hazard - 17th May 15
Stock Market CAC40 Trend Forecast - 17th May 15
Stock Market Diagonal Pattern Nearly Complete - 16th May 15
Gold And Silver - Elite's Game Of Jenga In Place. Your Move - 16th May 15
You’ll Never See a Better Moment to Invest in China - 16th May 15
Are Gold and Silver Stocks Breaking Out? - 16th May 15
War On Cash - Why the IRS Seized All the Money from a Country Store - 16th May 15
Is China Economy a Fire-Breathing Dragon or a Dragon on Fire? - 16th May 15
Silver Buying Only Starting - 16th May 15
Why Opinion Pollsters Got UK Election 2015 Badly Wrong - 15th May 15
Double Black Diamond - What a Bond Bear Market Looks Like - 15th May 15
This “Bubble” Is Set to Kick Off New Energy Profits - 15th May 15
German Gold Demand "Spikes"- Investment Demand Surges 63% - 15th May 15
How GDP Metrics Distort Our View of the Economy - 15th May 15
McDonald's Future Is Hard to Digest (NYSE: MCD) - 15th May 15
Dry Bulk Shipping Index Chart Analysis Update 2015 - 15th May 15
Economic Expansion Ahead? World Stock Markets Analysis - 15th May 15
Why Not Tell Greece How To Run A Democracy? - 15th May 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Biggest Debt Bomb in History

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.


© 2005-2015 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

Biggest Debt Bomb in History