Inflator-In-Chief Ben Bernanke defended today his third round of quantitative easing and additional $45 billion monthly purchases of U.S. Treasuries (totaling $85 billion per month in Fed balance sheet expansion) as efforts to combat “transitory factors” dragging down the economy. Yet there has been nothing “transitory” about the almost five-year recession lasting since 2008.
As I explain in Forbes, Bernanke is no more than a magician attempting to paper over the real problems within the U.S. economy with the sleight of hand of the printing press. Ultimately, he and his central banker cohorts cannot defy a fundamental law of economics known as Say’s Law: People supply what they demand.
By focusing solely on demand-boosting measures, inflationary economists do not address the root cause of the current malaise.
Economists who advocate raining down dollar, euro, and yen bills from their high-flying helicopters say this needs to be done to gin up flagging demand, but this puts the cart before the horse. One cannot demand anything without first having something to supply. The crisis today is not that economies aren’t demanding enough value, but that they aren’t creating enough value.
Printing money isn’t just ineffective. It’s redistributive and distortionary.
In recent years, redistributive monetary policy has benefited finance at the expense of other productive industries. Consider the U.S. bubble economy of the mid-1990s. Cheap money from the U.S. Federal Reserve redistributed value from the rest of the economy to primary dealers within the financial industry. Even after the 2008 crisis exposed the industry’s inefficiencies and bloated size, the Fed continued to support the employment of its financier friends through zero-interest rate policy.
According to my calculations on data from the Bureau of Labor Statistics and the Federal Reserve, employment in business management and finance during the past 20 years correlated negatively at a moderate magnitude with changes in the interbank interest rate. Simply, financial employment increased when interest rates decreased. Moreover, production suffered while finance boomed. Industrial employment had a strong positive correlation with the interbank rate over the same period.
Another pernicious effect from the printing presses running overtime is inflation. The signs are already out there. Major stock indices have recovered to their pre-crisis highs, despite the global economy still being stuck in a rut. The International Monetary Fund’s commodity price index has increased by over 100 percent in just over two years. And a trip to the grocery store these days requires bracing for a case of sticker shock for fresh produce like apples. Once primary dealers start lending their new money, generalized inflation will be a real danger, threatening price stability.
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