Money Pumping – What Malinvestments?

Having faith in the Keynesian belief intends that government spending helps provide economic stimulus for the economy, in doing so this view can contradict itself when governments revenue exceeds government spending, causing malinvestment if anything. (Higgs, 2009) Additionally, it follows as the government is the largest net borrower then governments themselves are the ones who stand to gain from making borrowing cheaper. “[In preferring] easy money not only because it lowers the visible cost of financing the government’s deficit spending, but also because it induces individuals to borrow more money and spend it for consumption [goods]” (Higgs, 2009).

To prevent malinvestment and misguided policy decisions, one must consider the costs of not accounting for market price distortions, as such misdirected resources and periods of inflation and deflation. “[However, Keynesians] do not spend much time worrying about potential inflation; on the contrary, they are obsessed with an irrational fear of even the slightest hint of deflation.” (Higgs, 2009) The inflation rate is a measure of the increase in asset prices, measuring the percentage change in the average price level from the previous year. Where a positive inflation rate means rising prices, a negative inflation rate means falling prices, and a declining positive inflation rate means rising prices at a slow rate. Central banks effectively try to increase the spending of market participants, on grounds it would push up economic activity and increase inflation. Resorting to credit expansion through quantitative easing policy, is tempting to inflate away debt and raise seigniorage revenues. (Bassetto & Messer, 2013)

A worst case scenario is hyperinflation, consistent with the quantity theory of money hyperinflation shows credit expansion maxes out asset prices, therefore, halting credit expansion, and bond interest elevates as government debt defaults. “If inflation should become an undeniable problem, we may count on them to support price controls, which, on the basis of sketchy knowledge of such controls during World War II, they are convinced can be made to work well.” (Higgs, 2009) Price controls, however, distort capital goods and services in a similar fashion to the effect credit expansion distorts market price signals in the market for loanable funds. It is contradictory and absurd to impose price maxima or price ceilings/floors to prevent inflation. (Rothbard, 2006) Especially when directing capital through justified credit expansion, to increase spending and consumption from employments satisfying more urgent wants to correct for unsold commodities and services whose prices and wages asked for are currently too high. (Mises, 1949) Benefactors of wage rigidity are labour unions having discourage wage competition the union workers still remain in a secure job.

Here is Rothbard’s “Don’t Do” list (pp. 19–20), with my comments in brackets:

1. Prevent or delay liquidation

“Lend money to shaky businesses, call on banks to lend further, etc.” [Done. Tarp, auto bailouts, and the Fed’s mondustrial policy. See recently John B. Taylor in the Wall Street Journal: “The low rates also make it possible for banks to roll over rather than write off bad loans, locking up unproductive assets.”]

2. Inflate further

“Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments, which, in their turn, will have to be liquidated in some later depression. A government ‘easy money’ policy prevents the market’s return to the necessary higher interest rates.” [Done in spades.]

3. Keep wage rates up

“Artificial maintenance of wage rates in a depression insures permanent mass unemployment. Furthermore, in a deflation, when prices are falling, keeping the same rate of money wages means that real wage rates have been pushed higher. In the face of falling business demand, this greatly aggravates the unemployment problem.”

4. Keep prices up

“Keeping prices above their free-market levels will create unsalable surpluses, and prevent a return to prosperity.” [3 and 4 are both direct results of current Fed actions, including price inflation targets near 2%.]

5. Stimulate consumption and discourage saving

“We have seen that more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved-capital even further. Government can encourage consumption by ‘food stamp plans’ and relief payments. It can discourage savings and investment by higher taxes, particularly on the wealthy and on corporations and estates. As a matter of fact, any increase of taxes and government spending will discourage saving and investment and stimulate consumption, since government spending is all consumption. Some of the private funds would have been saved and invested; all of the government funds are consumed. Any increase in the relative size of government in the economy, therefore, shifts the societal consumption-investment ratio in favor of consumption, and prolongs the depression.” [The federal government has expanded from a bloated 18–20% of the economy to 23–25% of the economy under the current administration. The Bush fiscal stimulus in 2008 and the majority of the 2009 Obama stimulus supported consumption relative to investment as did the ineffective recently repealed temporary payroll tax cut.]

6. Subsidize unemployment

“Any subsidization of unemployment (via unemployment ‘insurance,’ relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.” [Does anything need added here?]

Source: (Rothbard in Cochran, 2013).


Reference List

Bassetto, M., & Messer, T. (2013). Fiscal consequences of paying interest on reserves. Fiscal Studies, 34(4), 413-436. doi: 10.1111/j.1475-5890.2013.12014.x

Cochran, P. J. (2013). Recessions: the don’t do list. Alabama, United States: Ludwig von Mises Institute. Retrieved [24/04/16] from <https://mises.org/library/recessions-dont-do-list>.

Higgs, R. (2009). Recession and recovery: Six fundamental errors of the current orthodoxy. The Independent Review. Retrieved [24/04/16] from <http://www.independent.org/pdf/tir/tir_14_03_10_higgs.pdf>.

Rothbard, M. 1970 (2006). Power and market: government and the economy, (4th ed.). Alabama, United States: Ludwig von Mises Institute.

Mises, M. 1949 (2010). Human Action, (Scholar’s ed.). United States: Yale University Press, Ludwig von Mises Institute.

Further Reading

Hazlitt, H. (1959). The failure of the new economics. Alabama, United States: Ludwig von Mises Institute. Chapter XXVII. Retrieved [24/04/16] from <https://mises.org/library/failure-new-economics-0>.

Featured image supplied from Unsplash.

Copyright © 2016 Zoë-Marie Beesley

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