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Thread: Money Printing Can't Replace Saving and Production as the Real Engine of Economic Growth

  1. #1

    Money Printing Can't Replace Saving and Production as the Real Engine of Economic Growth

    08/19/2019 • Frank Shostak

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    There are some signs that the pace of US economic activity is starting to slow down. For instance, the yearly growth rate of industrial production, which closed at 5.4% in September 2018, fell to 1.3% by June this year (see chart).

    In addition, the annual growth rate of the consumer price index (CPI) eased from 2.9% in July last year to 1.6% by June this year (see chart).

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    Once economic activity indicators begin to display softening, policymakers at the Federal Reserve begin to show their eagerness to prevent the economy from falling into a recessionary hole by softening their monetary stance. In response to the recent weakening in economic data, policymakers have lowered the federal funds rate target at the end of July by 0.25% to 2% (see chart).

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    By the popular way of thinking, the lowering of the interest rate is likely to strengthen the overall demand for goods and services and this in turn is going to strengthen the production of goods and services (i.e., going to strengthen economic growth). Note that a decline in economic activity, according to this way of thinking, is a result of a weakening in the overall demand. Once demand is given the necessary boost, the economic growth should follow suit.


    To Strengthen Demand, Strengthening Supply


    Observe that individuals are engaged in the production of goods in order to maintain their life and well-being. The fact that each individual is likely to have difficulty to produce all the goods they require to maintain their life and well-being provides the impetus for trade.

    By means of trade, individuals can exchange goods that they have produced for goods produced by other individuals. For instance, John the baker not only produces bread to accommodate his personal requirements with respect to bread, but he also produces bread in order to be able to exchange it for other goods and services.

    The ability to trade permits each individual to focus on the production of goods and services that they are best at, enabling individuals to specialize.

    John the baker can exercise his demand for various goods such as shoes and fruits, by exchanging for them loaves of bread that he has produced. Through the increase in the supply of bread, John can also increase his demand for other goods. Note that his demand for goods is imbedded in his production of bread, i.e., his supply of bread. Also, note that his demand is constrained by the production, i.e., by the supply of bread. The greater the production, i.e., his supply of bread is the more goods and services John could acquire.

    However, it is not enough for producers to offer a supply of goods, there must also be a market for their products. We can thus deduce that an individual must produce something useful to other individuals in order to secure for himself goods that are going to support his life and well-being.

    We can also infer that through trade individuals, exchange something for something else. The exchange of something for something means that individuals are paying for the goods with goods.


    Money Cannot Replace the Need for the Production of Goods


    The introduction of money does not alter the essence of the above. Money is just the medium of the exchange. Money makes it possible to expand the trade among various individuals. The introduction of money does not alter the fact that individuals still have to produce something useful in order to secure some other useful goods for themselves.

    The introduction of money makes the emergence of various trades possible. For instance, rather than trying to exchange directly meat with a vegetarian producer of apples the butcher can now secure apples not through a direct exchange but through indirect exchange. The butcher could exchange his meat for some other more accepted commodity such as gold and then exchange gold for apples. (The more accepted commodity we label as money.)

    Note that an individual exchanges something for money and then exchanges money for something else. This means that money serves as a facilitator it enables the exchange of something for something. By itself, however money does not produce anything — it is just the medium of the exchange. According to Rothbard in Man, Economy, and State,


    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.


    Note again, that money does not replace the need to produce goods and services. The role of money is to facilitate trade through the replacement of a direct exchange by an indirect exchange. This means that contrary to popular thinking in the money economy individuals pay for goods by means of other goods and not with money, which only provides the services of the medium of the exchange. Again, money is not the means of payment but just the medium of the exchange. Payment is always done by means of goods and services.


    Counterfeiter Effect and Monetary Growth


    Now, consider the case of a counterfeiter that generates faked money that masquerades as proper money. The counterfeiter uses the forged money to exchange it for goods and services. What we have here is an exchange of nothing for money and then the exchange of money for something, i.e., we have here an exchange of nothing for something. (Note that the counterfeiter did not produce any useful goods hence why nothing is exchanged for money.)

    We suggest that in the present fiat system an expansion in the money supply always leads to an exchange of nothing for something or to the counterfeiter effect. Whenever the central bank through easy monetary policy makes it possible for the increase in the money stock, it permits the expansion of money out of “thin air.” This in turn sets in motion the process of the exchange of nothing for something.

    The early receivers of the newly generated money are in the same position as the counterfeiter. The early receivers of money are getting wealthier since they now have more money than before the increase took place. The early receivers can now acquire a greater amount of goods while the prices of goods are still unchanged. The last receivers of money or the non-receivers of money are going to endure the burden of price increases and a decline in their living standards.


    Idle Resources Emerge Because of Previous Boom

    What those commentators who advocate monetary pumping to absorb idle resources have overlooked is the fact that these resources have become idle on account of the previous boom brought about by the previous loose monetary policy of the central bank. Because of the previous loose monetary stance various non-productive or “bubble” activities, have emerged. These activities depend on the loose monetary policy for their existence, which diverts to them real wealth from wealth generators.

    A tighter stance of the central bank stops this diversion, thereby reducing the number of bubble activities and ultimately strengthens the process of wealth generation. The damage, however, that was done by the previous loose monetary policy cannot be undone in the short term. Once, the process of wealth generation gains momentum the expansion in the pool of real wealth makes it possible for the absorption of various idle resources. According to Mises in Human Action,


    Out of the collapse of the boom there is only one way back to a state of affairs in which progressive accumulation of capital safeguards a steady improvement of material well-being: new saving must accumulate the capital goods needed for a harmonious equipment of all branches of production with the capital required. One must provide the capital goods lacking in those branches which were unduly neglected in the boom. Wage rates must drop; people must restrict their consumption temporarily until the capital wasted by malinvestment is restored. Those who dislike these hardships of the readjustment period must abstain in time from credit expansion.



    Furthermore says Mises,



    If commodities cannot be sold and workers cannot find jobs, the reason can only be that the prices and wages asked are too high. He who wants to sell his inventories or his capacity to work must reduce his demand until he finds a buyer. Such is the law of the market. Such is the device by means of which the market directs every individual's activities into those lines in which they can best contribute to the satisfaction of the wants of the consumers.


    Because of a recession according to experts, resources that can be utilized in normal times to promote economic prosperity are now made underutilized. Hence, it is held the strengthening of the demand will not only strengthen the economic growth but it will also prevent the emergence of idle resources. On this Ludwig von Mises wrote,


    Here, they say, are plants and farms whose capacity to produce is either not used at all or not to its full extent. Here are piles of unsalable commodities and hosts of unemployed workers. But here are also masses of people who would be lucky if they only could satisfy their wants more amply. All that is lacking is credit. Additional credit would enable the entrepreneurs to resume or to expand production. The unemployed would find jobs again and could buy the products. This reasoning seems plausible. Nonetheless it is utterly wrong.


    Commentators are correct by saying that what prevents the increase in the production of goods and the absorption of idle resources is the lack of credit — there is, however, the need to emphasize that the credit that is lacking is the productive credit — the one that is fully backed by real wealth.

    Briefly, productive credit emerges when a wealth generator lends some of his real wealth to another wealth generator. By giving up the use of the loaned real wealth at present, the lender is compensated in terms of the interest rate that the borrower agrees to pay. As a rule the greater the expansion in the real wealth the lower the interest rate that the lender is likely to agree to accept, i.e., his time preference is likely to decline.

    From this one can deduce that interest is just an indicator as it were — it is not responsible for the expansion in real wealth. Consequently, any policy that tampers with interest rates makes it much harder for wealth generators to assess the true state of the productive credit. This in turn leads to the misallocation of productive credit and to the weakening in the wealth generation process. Because of distorted interest rates an overproduction of some goods and under production of other goods emerges.

    Bubbles, booms, and eventual crashes result.


    https://mises.org/wire/money-printin...conomic-growth
    “The right to life is the source of all rights—and the right to property is their only implementation. Without property rights, no other rights are possible. Since man has to sustain his life by his own effort, the man who has no right to the product of his effort has no means to sustain his life. The man who produces while others dispose of his product, is a slave.”

    Read the RPF trolls' playbook here (post #3)



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  3. #2
    No, money printing doesn't cause economic growth. But not printing money to keep up with its demand sure can hinder growth and production.

    The Great Depression was caused by letting the money supply collapse. Guys like this author always worry about inflation and printing money but think letting money collapse is just swell and depression that follows is "cleansing" making up for all the rottenness the preceded it.

  4. #3
    double post
    Last edited by r3volution 3.0; 08-21-2019 at 01:46 PM.
    "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

    -H. L. Mencken

  5. #4
    Excellent article @PAF

    Quote Originally Posted by Krugminator2 View Post
    No, money printing doesn't cause economic growth. But not printing money to keep up with its demand sure can hinder growth and production.
    It sure can't.

    Any quantity of money is always adequate, as prices will adjust.

    ...with the minor caveat that the unit of money must be infinitely divisible for this to work.

    The Great Depression was caused by letting the money supply collapse. Guys like this author always worry about inflation and printing money but think letting money collapse is just swell and depression that follows is "cleansing" making up for all the rottenness the preceded it.
    The Great Depression was caused by inflationary monetary policy in the 1920s. The initial collapse was indeed a "cleansing" of those malinvestments. What could have been a steep and short recession became a decade long depression because the state attempted to prevent the necessary liquidation. Prices are indeed "sticky downward" when it is the policy of the federal government to keep them high!
    "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

    -H. L. Mencken

  6. #5
    Quote Originally Posted by r3volution 3.0 View Post
    E
    The Great Depression was caused by inflationary monetary policy in the 1920s. The initial collapse was indeed a "cleansing" of those malinvestments. What could have been a steep and short recession became a decade long depression because the state attempted to prevent the necessary liquidation. Prices are indeed "sticky downward" when it is the policy of the federal government to keep them high!
    I am sure I have talked about this in the past so no need to rehash why letting the money supply collapse is the reason for the Great Depression.

    Simple question, if it were government intervention that caused the first part of the Great Depression when it was most severe, then why has there never been anything close to a Great Depression since? The government intervenes heavily in every recession yet no Great Depressions.

    Also why does the guy who won a Nobel Prize for the theory you are espousing think letting the money supply collapse was the cause? https://austrianeconomists.typepad.c...epression.html
    Last edited by Krugminator2; 08-21-2019 at 02:58 PM.

  7. #6
    Quote Originally Posted by Krugminator2 View Post
    I am sure I have talked about this in the past so no need to rehash why letting the money supply collapse is the reason for the Great Depression.
    Your theory is predicated on sticky prices, no?

    Simple question, if it were government intervention that caused the first part of the Great Depression when it was most severe, then why has there never been anything close to a Great Depression since? The government intervenes heavily in every recession yet no Great Depressions.
    In which post-1945 recession do you think the government intervened to the extent it did in the 30s?

    On the other hand, you might consider the papering-over power of inflation.

    It's quite possible for intervention (of a certain kind) to end a recession without solving the underlying problems.

    Also why does the guy who won a Nobel Prize for the theory you are espousing think letting the money supply collapse was the cause? https://austrianeconomists.typepad.c...epression.html
    I couldn't tell you why Hayek made that error.

    If you're familiar with his reasoning on the topic, I'd love to hear it.
    Last edited by r3volution 3.0; 08-21-2019 at 03:08 PM.
    "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

    -H. L. Mencken

  8. #7
    Quote Originally Posted by r3volution 3.0 View Post
    Your theory is predicated on sticky prices, no?



    In which post-1945 recession do you think the government intervened to the extent it did in the 30s?

    On the other hand, you might consider the papering-over power of inflation.

    It's quite possible for intervention (of a certain kind) to end a recession without solving the underlying problems.



    I couldn't tell you why Hayek made that error.

    If you're familiar with his reasoning on the topic, I'd love to hear it.

    Prices are sticky. I had a neighbor who didn't pay their mortgage for 18 months in the financial crisis before the bank got around to kicking them out. Bankruptcy and home foreclosures are a slow process. Markets doesn't just adjust instantly. People have to move to find new jobs. That is a slow process.

    I would imagine Hayek changed his mind because all of the evidence suggests letting banks fail and thus letting the money supply collapse made servicing debt much more difficult. That means less spending and investment and also more bankruptcies and since the bankruptcy process is slow. Businesses that otherwise would have hung on in the theoretical Rothbard adjustment world end up running out of cash and going out business. You get a deflationary spiral.

    Hayek called what I just said a secondary deflation. http://hayekcenter.org/?p=1537

  9. #8
    Quote Originally Posted by Krugminator2 View Post
    Prices are sticky. I had a neighbor who didn't pay their mortgage for 18 months in the financial crisis before the bank got around to kicking them out. Bankruptcy and home foreclosures are a slow process. Markets doesn't just adjust instantly. People have to move to find new jobs. That is a slow process.
    The inefficiency of the bankruptcy courts doesn't make market prices sticky.

    The state implementing minimum price controls on labor (as it did in England in Keynes' time) doesn't make market prices sticky.

    I would imagine Hayek changed his mind because all of the evidence suggests letting banks fail and thus letting the money supply collapse made servicing debt much more difficult. That means less spending and investment and also more bankruptcies and since the bankruptcy process is slow. Businesses that otherwise would have hung on in the theoretical Rothbard adjustment world end up running out of cash and going out business. You get a deflationary spiral.

    Hayek called what I just said a secondary deflation. http://hayekcenter.org/?p=1537
    I have it on the best authority that reflation is a dumb policy.

    If the foregoing analysis is correct, it should be fairly clear that the granting of credit to consumers,which has recently been so strongly advocated as a cure for depression, would in fact have quite the contrary effect; a relative increase of the demand for consumers' goods could only make matters worse.
    --Frederich Hayek,
    Prices and Production, Second Edition, p. 97
    Last edited by r3volution 3.0; 08-28-2019 at 09:46 PM.
    "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

    -H. L. Mencken



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  11. #9
    While I agree with the title of the OP I think everyone under estimates just how long it can drag on .
    Do something Danke

  12. #10
    Quote Originally Posted by r3volution 3.0 View Post



    --Frederich Hayek,
    Prices and Production, Second Edition, p. 97
    Yeah. He did write that... in the 1930s. Then completely recanted that viewpoint at least to the extent that he though letting credit and the money supply collapse was a horrible mistake.

  13. #11
    Quote Originally Posted by Krugminator2 View Post
    Yeah. He did write that... in the 1930s. Then completely recanted that viewpoint at least to the extent that he though letting credit and the money supply collapse was a horrible mistake.
    For what reason?

    I've not been able to find one.
    "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

    -H. L. Mencken

  14. #12
    Quote Originally Posted by r3volution 3.0 View Post
    For what reason?

    I've not been able to find one.
    I am the last to deny – or rather, I am today the last to deny – that, in these circumstances, monetary counteractions, deliberate attempts to maintain the money stream {NGDP], are appropriate. I probably ought to add a word of explanation: I have to admit that I took a different attitude forty years ago, at the beginning of the Great Depression. At that time I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy. Perhaps I should have even then understood that this possibility no longer existed. … I would no longer maintain, as I did in the early ’30s, that for this reason, and for this reason only, a short period of deflation might be desirable. Today I believe that deflation has no recognizable function whatever, and that there is no justification for supporting or permitting a process of deflation.
    https://www.themoneyillusion.com/wha...-of-deflation/

  15. #13
    Quote Originally Posted by Krugminator2 View Post
    What rigidity did he have in mind? Does he elaborate anywhere else? Was he talking about a (fictitious) "stickyness" of wages in a market economy, or very real state-implemented rigidity via unionism, minimum wages, etc? Keynes, whose great work ought to have been named "The Very Special Theory Of How To Lower Real Wages When Idiot Socialists Ruin the Labor Market," was talking about the latter, though he apparently didn't realize it.
    "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

    -H. L. Mencken

  16. #14
    Quote Originally Posted by r3volution 3.0 View Post
    What rigidity did he have in mind? Does he elaborate anywhere else? Was he talking about a (fictitious) "stickyness" of wages in a market economy, or very real state-implemented rigidity via unionism, minimum wages, etc? Keynes, whose great work ought to have been named "The Very Special Theory Of How To Lower Real Wages When Idiot Socialists Ruin the Labor Market," was talking about the latter, though he apparently didn't realize it.

    He said unions, min wage laws elsewhere.

    Also worth a read. https://www.econlib.org/archives/201...vatives_b.html

    Conservatives better hope that wages and prices are sticky

    But suppose it were shown that I am wrong, and that wage/price stickiness is not an issue—what then? That would be very bad news for my laissez-faire ideology. Now I’d have to concede that events like the Great Contraction of 1929-33 showed that capitalism is indeed inherently unstable, and that this problem could not be fixed with good monetary policy. Now I’d have to entertain other solutions, such as big government and or comprehensive economic planning.

    But my reading of economic history is that it not possible to develop a general theory of the American business cycle based on bad government policies. Indeed even where bad policies play a role, such as Hoover’s policy of high wages, high tariffs, and high taxes, they don’t even come close to explaining the 1929-33 downturn. The same policies during a period of stable NGDP growth would have simply meant a bit of stagflation. And lots of periods of “big government” policies are associated with strong growth, such as the period of LBJ’s Great Society (1965-69).
    So thank God that the right is wrong about wage/price stickiness! It is a major issue, and when combined with bad monetary policy it leads to economic instability. Without wage price stickiness it pretty hard to argue in favor of conservative economic policies. The Great Depression directly led to immense human suffering and indirectly led to WWII, which caused even more suffering. Those things simply cannot be allowed to happen. Without wage price stickiness, the right would not have any persuasive arguments against those who want to use much more interventionist policies to prevent economic Depressions.

  17. #15
    Quote Originally Posted by Krugminator2 View Post
    He said unions, min wage laws elsewhere.
    Then his, like Keynes', is a special theory (for situations in which state interference in labor markets is present), not a general one.

    Quote Originally Posted by the article you quoted
    But suppose it were shown that I am wrong, and that wage/price stickiness is not an issue—what then? That would be very bad news for my laissez-faire ideology. Now I’d have to concede that events like the Great Contraction of 1929-33 showed that capitalism is indeed inherently unstable, and that this problem could not be fixed with good monetary policy. Now I’d have to entertain other solutions, such as big government and or comprehensive economic planning.
    That makes no sense.
    Last edited by r3volution 3.0; 09-01-2019 at 07:34 PM.
    "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

    -H. L. Mencken

  18. #16
    Quote Originally Posted by r3volution 3.0 View Post
    What rigidity did he have in mind? Does he elaborate anywhere else? Was he talking about a (fictitious) "stickyness" of wages in a market economy, or very real state-implemented rigidity via unionism, minimum wages, etc? Keynes, whose great work ought to have been named "The Very Special Theory Of How To Lower Real Wages When Idiot Socialists Ruin the Labor Market," was talking about the latter, though he apparently didn't realize it.
    Even without minimum wages and unions, wages are hard to push down. An employer will rarely tell you he is going to cut your wages. Instead, they will cut hours to reduce payroll costs and push the remaining workers to try harder to make up the difference. Or fire you and hire somebody at a lower wage. But they won't reduce your wage. Or try to replace you with technology (automation). Fewer workers required to produce the same output as before.

    "Business is slow this year. I will be reducing your pay from $12 an hour to $8 an hour." More likely you would get your hours cut from 40 hours a week to 30.
    Quote Originally Posted by Swordsmyth View Post
    The quality seems to have dropped significantly since I came here, I guess you get what you pay for.
    "There is always a tweet. That has become accepted fact in the Trump presidency: For every pronouncement the President makes, there is at least one tweet from his past that directly contradicts his current view." -CNN

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  20. #17
    Quote Originally Posted by Zippyjuan View Post
    Even without minimum wages and unions, wages are hard to push down. An employer will rarely tell you he is going to cut your wages. Instead, they will cut hours to reduce payroll costs and push the remaining workers to try harder to make up the difference. Or fire you and hire somebody at a lower wage. But they won't reduce your wage. Or try to replace you with technology (automation). Fewer workers required to produce the same output as before.

    "Business is slow this year. I will be reducing your pay from $12 an hour to $8 an hour." More likely you would get your hours cut from 40 hours a week to 30.
    No one said wages adjust instantaneously; no prices do.
    "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

    -H. L. Mencken



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