Reason Magazine: We Need To Print More Money

I always though Reason Magazine was decent enough on economic issues until I read this latest article by Steve Chapman, which attempts to make the case for more money printing by the Fed.

Steve Chapman writes for Reason:

By now, it should be obvious that the problem is not that the Fed has injected too much money into the economy but too little. The price of gold — which jumps at the slightest whiff of inflation — has plunged from more than $1,900 an ounce last year to less than $1,630.

Chapman, who is a columnist and editorial writer for the Chicago Tribune, goes on to say that:

When banks or individuals hold on to cash, he notes, the effect is the same as if the Fed were shrinking the money supply. By refusing to spend or invest, they stifle economic activity.

Chapman cites economist Scott Sumner of Bentley University in Massachusetts, and David Henderson, an economist at Stanford University’s Hoover Institution, to back up his call for more “stimulus.”

I personally find it rather disturbing that the editors at Reason found this article to be worthy of publication, given the bad economics it contains.  Do they always publish articles promoting socialism simply because they have a prominent name attached to them?  Chapman typically sticks to civil rights issues, on which he is apparently much better informed than economics.

So this article is for you Mr. Chapman, I hope you enjoy it.

For starters, lets ask the question, “who will get the printed money first?”  Mr. Chapman makes it clear in his own article that the banks aren’t lending and people aren’t spending, so who is going to spend this new money into the economy to get things kick-started?

If the banks get it, they will either pad their reserves with it, since they can park it at the Fed in order to earn risk free money on their deposits, or buy treasuries with it in order to earn even more risk free money!  Bank reserves are still near their all time highs, so giving them even more money isn’t going to cause them to suddenly start lending to the public again.  After the Fed printed up trillions of dollars, which it used to purchase junk assets from all the major commercial banks, those banks were left with trillions in reserves which they then parked right back at the Fed.  While I’m sure the banks would like to start lending to the public, the facts of the matter are that the public is underwater and can’t afford to keep taking out more loans no matter how low the interest rates are.

So what about consumers?  Obviously the public is heavily in debt, so it stands to reason a large portion of any major cash handout is going to be used to pay down private debts or be blown on consumption.  Very little of it will make its way into investment grade projects.  Buying a new T.V. with money you got from a handout doesn’t create more American jobs if that T.V. was made in China (where every consumer good is made these days.)

Clearly we are left with a problem here.  Any new printed money must be directed into productive, wealth building, job creating investments if it is to be effective in creating a sustainable recovery.  Does Chapman think bureaucrats are more capable of making wise investment decisions than the market?  Need I mention Solyndra, Amtrak, General Motors, the Post Office, the Big Dig, the Bridge to Nowhere, etc.. etc..?

I suspect Chapman, and his Keynesian cohorts, have fallen into the classic “digging ditches and filling them back up” wealth creation fallacy.  The state loves to “create jobs” that waste resources rather than create them.  Consider that if a start-up corporation takes out a business loan to get itself started, if that business is unsuccessful because it did not produce goods that consumers wanted or was inefficient in its operations, not only are those jobs eventually going to be wiped out in bankruptcy, so too will their creditors.  When the state creates jobs, it NEVER creates businesses that achieve a self-sustaining profit which could be used to pay back the creditors (the tax payer.)

In order for a job to be profitable, it must be focused on the creation of new wealth, which is the same as saying it must be focused on the production of goods or services that have market value to consumers.  Think of it this way, sustainable jobs must create goods or services that have trade value.  China doesn’t want to be paid back in funny money.  China wants to be paid back with real goods and services for any money it lends us.  China doesn’t care about how many bridges or warships we build.  In order to reduce our trade deficit and improve the human condition, we need to create goods that real individual people in other nations want to buy from us.  For example, if the U.S. government printed up a quadrillion dollars and then used it to put everyone in America to work building warships, what resources would be left to build televisions?  Is the human condition improved because the U.S. government now has thousands of warships?  Everyone would be employed, so what’s the problem?

Obviously the problem is that warships don’t make people’s lives better, nor do they have trade value, and bridges only improve the human condition if the improvement in transportation efficiency they create is greater than their cost.  Why shouldn’t the steel that went into the warship go into building toasters or refrigerators instead?  Should the state get into the toaster manufacturing business?  No you say?  Well then why should it get into the ship building business?  Are we facing an invasion threat?

This leaves Chapman and his economist friends with a bit of a problem.  They have to explain how the state is going to create “sustainable” (i.e. profitable) jobs with any money that it should print.  This is something that no government in the history of the world has ever been able to accomplish.

At its core, the printing of money only accomplishes one thing: it redistributes the control over real physical resources to those who get the new money first.  It does not create more material resources, it only changes who has the ability to control already existing resources.  Obviously the people who get the freshly printed money will be able to exercise control over existing resources by spending that money.  And since they get to spend that new money before prices inflate, they get the most benefit from it before it circulates into the economy and drives up prices.  By the way, this is the primary mechanism that is presently causing our growing wealth disparity.

From this, we can draw the conclusion that printing money cannot create more profitable and sustainable jobs because the state is incapable of spending that money into the economy wisely.  Further, banks are incapable of lending that new money into the economy wisely when they can borrow at zero and earn a risk free profit by buying up treasury debt or parking their money at the Fed, while at the same time their deposit base is backstopped by the FDIC and the Fed is ready and willing to hand them all the bailout money they could ever need no matter how dumb their investments turn out to be – can we say “moral hazard?”

Further, that debt (printed money) has to be paid back at some point!  If sustainable and profitable jobs are not created with the new debt that is issued, how will that debt ever be repaid?  We have been taking out more debt to pay our existing debt for some time now.  This is completely unsustainable.  You can’t solve a debt crisis by piling on more debt.  Obviously a business that can’t turn a profit is going to eventually find itself in bankruptcy, and this same economic law also applies to governments.  Since governments earn their “revenues” by stealing from those who actually produce things of trade value, if their citizens aren’t producing things of trade value, the state isn’t going to have anyone to steal from!

On top of all these problems, printing money artificially drives down interest rates which distorts the structure of production.  This means not even private investors can wisely spend that new money into the economy!  They are fooled into investing in things like housing bubbles, dot com bubbles, and student loan bubbles!  You can learn more about how artificially low interest rates distort the structure of production in this lecture by economist Roger W. Garrison.

By now I hope you see why printing money will not create an economic recovery, but you may be wondering what should we do get things moving again?

Presently there are only two choices.  The Fed can continue to print, which will eventually result in hyperinflation.  When hyperinflation may occur cannot be known, but we do know that if we keep printing money, eventually other nations are going to stop accepting it in exchange for their goods.  At that point, hyperinflation would happen virtually overnight.  Think about what prices would be like at your local Wal Mart if suddenly China didn’t take dollars in exchange for its goods.  Why should China keep taking our money if we never produce anything for them to buy with it?  What good are all those dollars doing them? Are they going to burn them to heat their homes?  It’s worth noting that since we produce nothing of trade value, the Chinese have taken to buying up our real estate.  Hey, they need to spend all those dollars on something!

Fundamentally international trade is about swapping physical resources for physical resources, it is not about swapping paper tickets for televisions.  It does China no good to keep buying up our debt if we aren’t using the money they give us to produce more physical goods that we can pay them back with.  If China stopped giving us money to buy the goods that they produce, their own people could buy those goods!  MARKETS ALWAYS CLEAR!  Prices in China would adjust so that the Chinese people could afford to buy all their own goods!  If the goods exist, someone is going to buy them!

So what happens if the Fed stops printing?

In short, financial Armageddon.

However, like the biblical Armageddon, after the battle is over everyone except the evil people are going to be better off for it.  All the major commercial banks would be wiped out in a cascade of defaults and all of their assets would be liquidated at fire sale prices to responsible investors.  The U.S. government would default and be forced to liquidate a lot of its assets (its presently the largest land owner in the U.S.), along with having to massively cut its spending.  The Social Security system and Medicare would be wiped out.  Most state governments would find themselves in default as well.

Millions of bureaucrats and all of their crony business partners (defense industry) would be out of work, which also means private businesses would now have a larger labor pool to draw from.  Since unemployment insurance would most likely also be drastically cut, people would have to actually start working again instead of riding the gravy train for years on end.  Also, the student loan bubble would burst, forcing lots of useless, yet highly educated, professors into the private sector where they will have to put their talents to more productive uses.

The defense industry would have to re-tool its tank factories into making trucks, and all the rest.  Prices for everything would fall dramatically as the money supply shrank in a deflationary default spiral.  All of the steel and manpower presently devoted to unproductive purposes would suddenly be cheap enough for private manufacturers to buy up since they wouldn’t have to compete for resources with the state, etc.. etc..

Note that the Fed doesn’t have to actually do anything for this to occur in terms of taking some positive action.  All the Fed has to do in order to put financial Armageddon into motion is to simply stop printing money.   Interest rates would rise, and the rest is history.  U.S. annual tax revenues are more than a trillion dollars short of what they are presently spending, and the assets the Fed is holding aren’t worth a hill of beans.

In other words, it will never happen, so it’s pointless to even talk about it.

Nothing can be done except to prepare for a hyperinflationary disaster.

If you plan on riding it out, buy guns, ammunition, nonperishable food, emergency medical supplies, generators, oil tanks, etc.. etc..  Otherwise it’s best to just leave the country now and move somewhere that actually produces consumer goods.


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  • Bill Woolsey

    When the Fed purchases government bonds from the businesses and households that currently hold them, then those businesses and households have more money in their checking accounts. Their banks also have more money in their reserve accounts.
    Anyway, the reason for expanding the quantity of money is that the households and firms that get the extra money will spend it on goods and services.
    To the degree that banks with additional reserves use them to purchase securities as well rather than just keep even more reserves, then those who sell the securities–businesses and households, have even more money. But if they don’t, then the quantity of money still increases.
    Just because reserve demand is really, really high, doesn’t mean that it will increase without limit. If more banks have more reserves than they want to hold, then they will buy some kind of security–bonds.
    That households have high debt is irrelevant. For every borrower there is a lender. For every debtor there is a creditor. While people who want to pay down their debts may reduce their spending out of income, those receiving the debt payments have money beyond their income to spend.
    So, increases in the quantity of money can increase spending, even if banks don’t want to make new loans and housholds (and firms) have high level of debt.
    Spending currently is 12% below its trend from before the recession. Increasing the quantity of money enough to get it back to that trend and then making whatever futher adjustments as needed to keep it there is the last bad approach.
    You should read some libertarian monetary economists. Sumner, for example:
    I would say your primary problem is that you are assuming that the demand to hold money is always constant and so are treating any increase in the quantity of money as if it is an excess supply of money.
    The demand for money is how much money people want to hold. If people choose spend less and hold more money this frees up resources to produce whatever those receiving the newly created money want to buy.
    Again, who gets the new money “first?” It is those that are currently holding the securities that are purchased with the nearly created money.
    If the quantity of money equals the demand to hold money, and then the quantity of money is increased, so that there is a surplus of money, then there are effects more or less as you describe.
    But if the demand for money is increasing (people want to hold more money,) and the quantity of money rises to match it, then spending on output continues to grow with the productive capacity of the economy. This means that money incomes grow at that same rate, with the productive capacity of the economy. And that money income is sufficient to buy all of the output.
    How decides what is produced, the people who get the new money spend it like they want. They decide.

    • “So, increases in the quantity of money can increase spending, even if banks don’t want to make new loans and housholds (and firms) have high level of debt.”


      However, the problem is a lack of production, which you completely ignore in that long response you provided. Simply spending more money does not mean the productive capacity of the economy will increase.

      Countries are “rich” when they produce an abundance of consumer goods. The more goods that are being produced, the cheaper and more available those goods become to the general public. Simply spending money on Chinese made junk does nothing to increase our productive capacity.

      To make an economy grow, money must be saved and invested into the expansion of production. What I’m pointing out with my article is, that doesn’t happen when people spend printed money into the economy.

    • throughthewire

      The term “money” is thrown around loosely by statists and keynesian types. When you believe money is ‘created’ out of thin air it’s easy to believe that money and the demand for it can be easily managed. This can lead to the assumption that debt is an asset, as our fractional system allows today. Fact is, debt is not an asset and the world is finding that out now, albeit slowly. In 2008/09, mark-to-market accounting was suspended. This hid the truth and continued the foolishness that debt was an asset. If you believe assets will eventually be marked to their true value you should load up on real assets like
      gold and land and guns and food. If you believe debt is an asset then you should be taking out all the loans you can, interest rates are very, very low!!!!