Tuesday, 21 May 2013

Austrian Economist Pat Gunning on "Creating Money and Spreading it Around"

Here is Austrian economist Pat Gunning setting it out clearly, during a discussion in the American Economics Interest Group (on Linkedin), why "injecting liquidity" in an economy will not solve economic problems,

"Inject liquidity" is just a more obscure term than "create money and spread it around." Paul Krugman and Helicopter Ben notwithstanding, isn't it obvious that the consequences of such money creation policy are twofold? First, it dilutes purchasing power and, as a result, amounts to robbing the money holders. Paul and Ben are like thieves from our piggy banks, taking our money for their purposes.
Second creating money upsets economic calculation. On the one hand, it turns many previous entrepreneurial decisions based on expectations about future prices into errors. It thus reduces the efficiency with which resources are transformed into consumer goods. On the other hand, it creates expectations of future prices that can only be fulfilled if even more money is created and spread around. Thus, the policy can only have effects for a while before, in order to achieve the same goal, the money supply must be increased again, albeit at a faster or higher rate. Ultimately, either the injection must stop, in which case even more errors are caused, or people shift to barter to avoid the robbery. "Injecting liquidity" is like injecting heroin, as Milton Friedman used to say.
In my view, the proposition that economic problems can be solved by "injecting liquidity" is like a proposition that a trip to the countryside can be shortened by deciding to measure the distance in miles instead of kilometers. It is delusional. 

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