Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Chinese Tech Stocks CCP Paranoia and Best AI Tech Stocks ETF - 26th Oct 21
Food Prices & Farm Inputs Getting Hard to Stomach - 26th Oct 21
Has Zillow’s Collapse Signaled A Warning For The Capital Markets? - 26th Oct 21
Dave Antrobus Welcomes Caribou to Award-Winning Group Inc & Co - 26th Oct 21
Stock Market New Intermediate uptrend - 26th Oct 21
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Economic Stimulus Scam

Politics / Economic Stimulus Mar 12, 2010 - 07:48 AM GMT

By: MISES

Politics

Best Financial Markets Analysis ArticleAntony P. Mueller writes: The recent improvement of the global economy, with particularly high economic-growth numbers for the United States, is just one more deception in a long series of deceptions that have plagued policy makers and investors. While official statistics register a rising gross domestic product, the long-term production potential of many economies around the world is actually contracting. The present economic expansion is brought about by massive stimulus policies. This kind of economic expansion does not constitute genuine economic growth.


It is quite common for policy makers, economic analysts, and commentators of all kinds to fail to distinguish between economic growth, which enlarges the productive capacity of an economy, and mere expansion of demand. Yet there is a huge difference between the kind of economic growth that comes as a consequence of victories in the battle against scarcity and the kind that is merely an output expansion resulting from increased spending.

The Austrian business-cycle theory emphasizes the problem of intertemporal misallocation due to monetary and fiscal stimuli. According to Austrian economic theory, stimulus packages induce the launch of projects that are bound to fail because their completion will be cut short by the lack of sustainable funding. In the short run, stimulus policies will bring an increase of the nation's gross domestic product, yet what matters for long-term economic growth is not credit-induced demand but the nation's capacity for production.

There is general agreement in the economics profession that the much-vaunted expenditure multiplier of Keynesian theory has quite different real and monetary effects depending on the state of the economy. However, the negative impact of stimulus policies on productivity is much less understood. When the economy expands due to fiscal or monetary stimulus, the productive capacity of the economy will actually decrease because the artificial expansion will mainly encourage malinvestment, i.e., the pursuit of business projects that are not viable in the long run.

It is easy indeed to fall into the trap of phony economic growth; as long as capacity utilization is below the normal level, demand expansions fueled by monetary and fiscal impulses increase economic activity. But the more the economy approaches full capacity, the more the effect on the production of real goods gets weaker and the effect on prices gets stronger. Eventually, this reaches the point when the monetary expansion only has inflationary price effects, and its impact on real production becomes nil.

When distortions in the economy are still small, and only a minor recession would be necessary to correct the misallocation, a modest amount of monetary or fiscal stimulus often will be sufficient to make the boom continue; this represents another source of deception. Central bankers and finance ministers enjoy praise for this cheap feat of having prevented what would otherwise have been only a mild and short slump. Yet by not letting mild recessions happen, these policy makers heap one pile of economic distortions upon another until the big downturn becomes unavoidable.

When finally confronted with the threat of a severe depression, these same authorities fall into panic. Acting in fear, they tend to deny experience and to flout prudence and rationality. In the face of a major economic downturn, monetary authorities resort to flooding the economy with even more easy money. Furthermore, their deficit spending heaps new debt upon old debt.

"There is a huge difference between the kind of economic growth that comes as a consequence of victories in the battle against scarcity and the kind that is merely an output expansion resulting from increased spending."

This pattern, which can be observed in many parts of the world, has also characterized US economic policy. By avoiding the small slump that most likely would have come after the stock-market crash of 1987, US monetary policy became highly expansive. It has continued that way ever since. Along the way, one bubble has followed the next, and consequently one bailout has led to the next.

After the economic dip of 2000, the US central bank's loose monetary policy laid the groundwork of the housing bubble. When the bubble burst, government implemented a series of stimulus packages, and monetary authorities set the interest rate down close at the zero bound. As of now, new packages are on their way and the Federal Reserve's reluctance to initiate its exit strategy is all too obvious.

As the collapse of the real-estate markets in the United States demonstrated, the credit boom has produced misallocations on a massive scale. The costs of many houses that were built when loans appeared easy to finance turned out to be unbearable. Projects that seemed to be financially manageable during the time of easy money had to be abandoned when the reality of scarcity was revealed. Investors and consumers were forced to retrench. Capital was lost, yet the debt burdens remain, and the fallout is felt throughout the entire economy.

As if economic history is to repeat itself, with each cycle getting worse, policy makers around the world repeat the old mistakes again and again. They have embraced, almost in unison, the rather crude belief that low interest rates and government spending will create wealth.

In the 1970s, in the face of the first oil-price shock, many governments and economists had great expectations of the stimulus policies in Europe and the United States. But the result was global stagflation. Japan practiced fiscal and monetary expansion on a grand scale since its economy entered a recession in the early 1990s, and the result has been stagnation ever since.

Despite the colossal efforts to sustain the boom in Japan, Europe, and the United States, the systemic fragilities of the global financial markets have not vanished, and business bankruptcies and unemployment are on the rise. What has been accomplished, however, is the formation of unsustainable levels of debt and of excess reserves in the banking sector, which could explode at any moment into a surge of inflation.

Fabricating bogus economic growth is highly appealing to policy makers because they can easily produce such "growth" by wasteful consumption for war, welfare, and all kinds of popular government programs. Each stimulus package at first incites irrational jubilation but leaves behind a wasteland of failed projects and frustrated expectations. This mental discouragement of investors and consumers will linger on for years after the boom has ended.

While monetary spending is limitless, and there is no scarcity of zeros to add to the price tag, production remains limited by the scarcity of the factors of production.

Fake booms and their consequent busts are directly linked to financial cycles, which in turn reflect the swings in money creation. Fiat money lies at the heart of this process. Credit-based economic expansion and its consequent malinvestments create economic illusions. The true tragedy of a fiat money regime is that bogus economic growth by way of monetary and fiscal stimulus can go on only until either the collapse of hyperinflation brings an end to the artificial boom or the amount of accumulated debt makes state bankruptcy inevitable.

Antony Mueller is a German-born economist who lives in Aracaju in Northeastern Brazil where he teaches at the Federal University of Sergipe (UFS). He is an adjunct scholar of the Mises Institute USA and academic director of the Instituto Ludwig von Mises Brasil. See his website and blog. Send him mail.

© 2010 Copyright Antony Mueller - 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