John Carney at CNBC’s NetNet throws Hayek at those who can’t understand why cheap money won’t stimulate the economy.
Source link: http://archive.mises.org/17303/hayek-on-why-the-fed-cannot-create-inflationary-stimulus/
Hayek on Why the Fed Cannot Create Inflationary Stimulus
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He actually links to the mises.org online version of The Austrian Theory of the Trade Cycle…how badass is that?
The economy is in a terrible state and needs “stimulus” only because the government spends too much. Other countries understand that printing money doesn’t create prosperity. For instance, Chile has been continuously raising interest rates to avoid inflation in a booming economy. It offers a combination of pleasant climate and fewer government burdens than many others. If you’re ready to shed the debt your government has imposed upon you, it is a good destination to consider:
http://brophyworld.com/move-to-santiago-chile/
Stop promoting Chile…
…you’re making me want to move there
As W H Hutt has pointed out, amongst others, inflation financed state spending can only increase total output and employment in so far as it cuts the real wages of workers where they are in excess and releases spending power for buying, and therefore producing, elsewhere in the economy. Excessive wages being those that are higher than necessary to attract and retain suitable workers in the context of other employers bidding to take them for themselves. A mixture of public choice vote catching, minimum wage and ‘collective bargaining’ by unions makes this unlikely to happen.
This article seems to imply that monetary expansion can continue to pertetuity but it cannot. There are many reasons but one of the most striking that is being lived out today is that in a modern economy asset values are used to finance future development. Quantitative Easing artifically inflates the price of assets relative to long term contracts and many fixed costs that cannot inflate.
Ultimately asset prices exceed their ability to leverage assets and prices fall no matter how much additional money is pumped into the system. Borrowers become overleveraged and borrowing crashes becasue of a lack of qualified borrowers. Any additional injection of cash rushes foreign exchange, commodities – think gold – and excess bank reserves.
The manifestation is actually a liquidity crisis as discussed by Keynes, but Keynes misunderstood. He rejected Austrian analysis for demand side consumption analysis. He assumed that the boom created by the artificial leverage of prices could be continued by government “investment.” This has been proven over and over to be a fallacy but never to a greater extent than with our current economic crisis.
Keynesian economists correctly identify the problems but cannot even imagine solutions because their foundational theory is faulty. Their “solutions” are what created the problem in the beginning and they simply perpetuate the pain.
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