Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

After the QE Taper: The Fed’s Non-Plan Is Unchanged

Economics / Inflation Dec 21, 2013 - 11:49 AM GMT

By: MISES

Economics

Frank Hollenbeck writes: As an economist, it is getting more difficult to understand the logic underlying current monetary policy in the U.S. There are two main channels by which economists think monetary policy can influence growth and employment. The first is to lower interest rates to spur investment and consumption spending. The second is to induce inflation so real wages drop, spurring output and employment.


Since 2008, the central bank has reduced interest rates to almost zero with little to show for it. You can bring a horse to water in a trough, pond, or lake, but you cannot make him drink. Most of the added liquidity has found its way into excess reserves. Banks are not lending because they have few creditworthy customers who want to borrow. The household sector is still deleveraging and has less appetite for more debt, and the business sector is careful about making future investments in a financial and economic environment on unstable footing. Businesses are keenly aware of the malinvestments never cleaned up after the last bubble and of the price distortions of current monetary policy. Why would businesses stick their necks out if they suspect a painful adjustment is around the corner?

Since the first channel has failed, only the second channel remains. Economists are generally in agreement, however, that there is no long-run trade-off between inflation and unemployment. The Keynesians and monetarists believe that there may be a short-run trade-off. If people have adaptive expectations, (based on the recent past) then monetary policy that creates inflation will reduce unemployment by lowering a worker’s real wages. Of course, once a worker realizes he has been fooled, he will demand an increase in nominal wages to bring his real wages back up to previous levels. The gain in employment is only temporary. If, instead, people base their expectations rationally and are not fooled, the neo-classical position, there is no short- or long-run trade-offs between inflation and unemployment.

In a capitalist economy, relative prices play a crucial role in sending information to producers about what society wants. When one price goes up and another goes down, these are signals that tell producers to make more of the first good and less of the second. It is a complex system of signals with price changes reflecting the urgency of the needs within the reality of the law of scarcity. The most important aspect of a price system is the information it conveys to guide production.

Inflation causes an “information extraction” problem. When all prices are going up by different degrees, it is very difficult for an entrepreneur to distinguish between a relative and an absolute price change. Is a rising price a reflection of greater demand or inflationary pressure? That is, does it reflect a society’s changing needs or simply reflects a changed measuring stick (i.e., the value of money)? The same information extraction problem holds true with the prices of resources and labor. We have different labor markets with a wage gradient established along the production process. The printing of money interferes with this wage gradient and the information it conveys about the right proportion of capital and consumption goods to produce. Overall employment may initially improve but the gain is not worth the cost from the adjustment that must occur once the printing stops.

Looking at historical evidence, inflation leads to higher, not lower, unemployment. This should not be surprising. Inflation is like a wrench thrown into the workings of a capitalist system.

If economists agree that there is no long-term trade-off between inflation and unemployment, and the current Fed strategy to lower interest rates has failed miserably to boost growth, then we must ask, why is the Fed, even after this week’s taper, in effect printing $75 billion a month? It’s likely the goal is to induce inflation for a short-term gain in employment. Things are no better if the Fed’s strategy is to raise asset prices to induce an imaginary wealth effect. Yet multiple bubbles may pop before any wealth effect takes place. The Fed should not be playing the economy as a stake in a poker game.

Through multiple bubbles, Alan Greenspan’s monetary policy was responsible for massive human suffering worldwide. Yet Greenspan is living high on the hog with a comfy government pension, spending his spare time penning op-ed articles and dispensing his expert advice on the lecture circuit. He informs us that he was only human and that no one saw the bubble coming. This is less than ingenuous. If you play with fire, and you burn down the forest, it is criminal to say “I did not realize that playing with matches was dangerous.” The sad situation is that we recently replaced him with even bigger arsonists!

One can be certain that interest rates will shoot up once inflation picks up. Since most of the U.S. debt is short term, it is going to be very difficult to inflate prices to reduce the real value of the debt. How will the U.S. government react if it has to refinance at interest rates of 12 percent or more, like in 1981? Yellen is no Volker; will she be able to tame the inflation beast as Volcker did? The independent German central bank was powerless to stop the German government from using the printing presses during 1921-23.

Napoleon and Hitler, both responsible for millions of deaths, rode to power on a wave of discontent that followed periods of excessive monetary printing. Why are we taking such risks?

Frank Hollenbeck, PhD, teaches at the International University of Geneva. See Frank Hollenbeck's article archives.

You can subscribe to future articles by Frank Hollenbeck via this RSS feed..

© 2013 Copyright Frank Hollenbeck - 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.


© 2005-2019 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

6 Critical Money Making Rules