I’ve heard often lately, “people don’t have any money to spend.” While seemingly true, that would lead one to the erroneous conclusion that more money is needed. In reality, some people don’t have any money to spend now, but that is a reflection on their individual consumer time preferences. Others in fact have plenty of money to spend.
Austrian Business Cycle theory teaches us that the rate of interest is vital to the economy as it alone tells businesses consumer time preferences. As we already know, the fed distorts that when it artificially pumps money and credit into the economy. By sending businesses the completely incorrect signals, production shifts (when rates are pushed too low) into higher order, i.e. longer term, projects. [please read Thomas Woods’ Meltdon for a much more detailed and expert analysis] And for so many businesses right now, they timed their production for a time when consumers had already spent, over spent, and borrowed to the hilt to spend some more. [again, Meltdown provides the perfect description of what happened in a manner that anyone can fully understand.]
But that leads us back to the solution, which is exactly the opposite of what is being prescribed and administered. It was too much money in the first place that created the current crisis.
Too much money, what has always been known classically as inflation, is destructive. It destroys the value of people’s money holdings. It destroys capital valuation and wealth. It leads individuals and businesses to do things they otherwise would not, nor ever, do.
A simple analogy will help explain this. Yes, there are millions of examples already describing the destructive power of excessive money and the effects of inflation. And it’s not as if history hasn’t shown us the exact problem multiple times throughout the centuries either. But lets do another!
Rather then starting off with a desert island and two people, we’ll start with a modern economy. This would of course be a money economy, which simply means that they use something that serves as a medium of exchange. We can call it gold, or silver, or any other commodity that is readily accepted, or the paper certificates that require redemption for said commodity upon presentation. Whichever the case, the money supply is fixed according to the quantity of the commodity.
In this economy, there is a level of production already occurring, there are consumers, businesses that invest in capital, and a thriving international trade sector as well. Then, the government decides that the key to prosperity is printing money and begins to replace the commodity currency with fiat currency. Now, lets also stipulate that at the end of the replacement, the amount of fiat money is exactly equal to the commodity money so that there is no inflation initially.
Okay, the economy should not experience any ill effects even though the commodity currency has been taken out of circulation. Had both currencies been kept in circulation, we’d of course have seen Grisham’s Law take hold.
Now, all is ostensibly running smoothly until the printing presses go to work. If there’s an extension of credit via central banking, we’ll get an unsustainable boom fueled by malinvestment. That alone leads to much destruction and good investments are shunned for the bad, as the bad become much cheaper than they otherwise would. And as resources are diverted which should have gone to more productive ventures, the economy is impoverished.
But instead, this government decides that they’re going to helicopter the money in so to speak. It could do this through a variety of measures, so we’ll choose the easiest, and oddly enough, mot politically expedient and rewarding: direct cash transfer. Maybe the central bank buys up the government debt, or maybe the government just prints the money and deposits it into the central bank. Does it really even matter? The checks are still going to households, being deposited in banks, and increasing the cash holdings of consumers.
The idea hatched as a scheme to help speed the economy up through greater demand. If people have more money, they’ll spend more, businesses will need to sell more, produce more, hire more, and so on. Such logic seems so simple, and hey, some economists even became famous for such trickery. But it too is a destructive path.
With the increased money, yes, consumers will demand more. But, there won’t be the level of goods commensurate with the new amount of money. Soon, businesses will catch on and prices will rise. However, prices will not all rise at once. The asynchronous changes in the price level create a major problem: new money at old prices versus old money at new prices. In other words, whomever receives, or spends, the money first, wins. Those who wait, or get the money late, lose.
But here’s the real destructive part: prior cash holdings have been reduced in value. Everything saved previously has been seen its value eroded, simply from the act of printing money. The economy isn’t producing more, and probably is producing less as resources were diverted away from wealth creating activities into unsustainable ones. Even if producing at the same level, prices will have risen, meaning that to consume the same amount, more needs to be spent. Wealth has been destroyed.
So, as we can see, printing money is a destructive act. Since more money is not only destructive, but the root of the current mess, the answer is obviously less money.
Too much money is a bad thing, and the remedy, oddly enough, is to reduce the supply of money. Now, this runs counter to every “mainstream” text on recessions. But as we’ve learned all too well, about all “mainstream” economics has done for the past century is create boom and bust cycles, followed up with more interventionist policies, which creates more boom and bust cycles. And our current situation is the ne plus ultra of busts created by the mass creation of money.
Reducing the money supply (yes, that’s “artificial” too, as the real remedy is 100% commodity currency.) will restore value to the currency, or at the least initially, stem the destructive process. For all those that saved, their holdings will increase in value. For others, the purchasing power of their incomes will increase. And in the most ironic of outcomes, there is gain from destruction, so long as the destruction is only of fiat currency.
I don’t expect to hear dear leader, or any of his minion, pressing for less money. I certainly don’t expect to hear it from our overlords at the Fed. But the answer is actually less money, strange as it seems.