Saturday, January 17, 2009

FIAT-PAPER MONEY IS NOT DEMAND!

There is no limit to the Fed’s ability to create money, so there is no limit to its ability to create demand.

from "Why 'Stimulus' will not Work" by Louis R. Woodhill 01-16-09

Neither government nor the Fed create real demand. This is the fallacy that all those in favor of government intervention into the economy of any type do not get.

Monetary demand is not real demand.
That is the meaning of Say's Law of Markets. Real demand is not pieces of paper. Real demand is the actual wealth which pieces of paper may or may not represent. And government does not create wealth: it only seizes and redistributes it.

The government can print fiat-paper money, or the Fed can conjure up in multiple ways its electronic equivalent, but NONE of it is real wealth and therefore NONE of it is true demand. To "stimulate" real, sustainable, efficient growth in the economy, what is required is real demand, which means production. Since monetary demand is not real demand, it can only create the appearance of real, sustainable, efficient growth, which must eventually come crashing down, just as it did in the dot.com bust and the housing bubble bust, and multiple prior recessions. The larger the amount of artificial demand used to "jump start" the economy, the larger and more destructive the adjustment back to real demand will be. Artificial demand destroys savings, wastes resources, encourages excessive debt and risk-taking, and perhaps worst of all, undermines confidence in free-markets and freedom itself.

I try to keep in mind that most of the people who are advocating government bailouts, public work projects, stimulus packages and the like, honestly think they are doing the right thing. But when I think about the destruction these policies will cause, I can't help but get angry.

7 comments:

Doug Reich said...

Beth,

Excellent post!

You say at the end that most of those who advocate government bailouts "think they are doing the right thing", but in light of all the evidence in theory and in practice to the contrary, I do not think those who are in positions of power or influence have an excuse. I think it's at the point of being equivalent to a doctor performing surgery without being aware of anesthetic or blood.

The whole topic of why the social sciences are so bankrupt can only be explained by more fundamental ideas. Anyway, this is an interesting topic for us to consider in the future.

Thanks again for simple explanation of a crucial topic.

Beth said...

RE: "most of those who advocate government bailouts "think they are doing the right thing"

I definitely had politicians in mind when I put in my qualifier. The "most" I had in mind are my friends, family, many economists, and my fellow citizens who advocate for government intervention.

RE: "I think it's at the point of being equivalent to a doctor performing surgery without being aware of anesthetic or blood."

And yet the reason those politicians are in office is because the well-intentioned (and I would argue misinformed) have voted them there.

Michael Labeit said...

Economic free-basing....

Do you want hit?

Michael Labeit said...

"A" hit...

Beth said...

Michael,
I don't understand your comment. I assume by "free-basing" you are referring to cocaine use, but I don't get the analogy you are trying to pose.

Philosophical Mortician said...

The economy is like an organism. Life, as Ayn rand noted, was a process of self-sustaining, self-generated action. In order for an organism to survive, it must take action - it must move, it must sustain its metabolism.

The economy is the same way. Exchange is to an economy as self-sustaining action is to an organism. Exchange sustains an economy by allowing people to possess those goods they need in order to satisfy their wants.

However, as simple movement is not enough to sustain life, simple movement is not enough to sustain an economy. Notice how some believe that taking caffeine pills will cure their sluggishness. This thinking is analogus to a Keynesian stimulus. The Keynesian stimulus is nothing more than giving an economy a "caffeine pill" boost - it involves "injecting" an economy with fresh dose of newly printed money (economic cocaine, if you will). The "high" will be the coming boom caused by artificially low interest rates. The relapse will be the subsequent "low" caused by the misallocation of capital.

The rehab will be the reasoned elimination of such stimulus packages.

Millionaire Maker said...
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