Bernanke loosens further the monetary stance
In this excellent article Dr Frank Shostak, an adjunct scholar of the Mises Institute and a leading Austrian economist, exposes the fallacy that central bank money creation can create prosperity.
Dr Shostak’s consulting firm, Applied Austrian School Economics Ltd, uses the Austrian School methodology to assess the direction of various markets. Here he applies Austrian thinking to the subject of central bank monetary policy.
From the article:
“If by means of money printing and the lowering of interest rates one can generate prosperity why after all the massive pumping by the Fed are things not improving? – The reply of Bernanke and his colleagues is that the pumping wasn’t aggressive enough.
We suggest that if Bernanke’s way of thinking were to be implemented he runs the risk of severely damaging the process of wealth generation and deepening economic impoverishment.”
The fact is, money printing does not and cannot create wealth. Wealth is created when people save and invest in productive enterprises.
Four years of QE from the Fed has already been very damaging to the purchasing power of the US dollar, however as Dr Shostak points out, the damage could have been much worse if the banks had pushed the newly created money into the economy.
“The latest data for the week ending December 12 indicates that the banks’ holding of excess cash increased by $25 billion from the end of November to $1.464 trillion.
We suggest that we should be grateful to the banks for resisting aggressive lending so far – it has prevented an enormous economic disaster”.
As we have said before, QE is designed in large part to help recapitalise the banks, however it is because they have held onto the new money that money velocity has remained low and we haven’t yet seen massive inflation.
During 2013 we can expect the Fed (and other central banks) to find new ways to spur money velocity and kick off a period of stagflation.
For more on the solution to the problems we face, see How To Solve The Global Financial Crisis: A 20 Point Plan.