How Central Bank Stimulus Kills the Economy — Failing Monetary Policy

‘Someone who is smart enough to know what he is getting paid to say.

Definition of an expert, offered by a
Dear Reader’s college professor

No weight loss expert was ever invited onto the Oprah show to showcase his new book, Don’t Eat So Much.

Nor did any household finance book, with the self-explanatory title, ‘Save Your Money’, ever make it onto the bestseller list.

And if you are waiting for an economist at the Federal Reserve to tell colleagues to ‘back off and let the economy do its thing,’ we hope you are not holding your breath.

HOODWINKED! Why Australia’s ‘miracle’ economy is a farce

Borrow from tomorrow

The ‘experts’ most in demand are those that tell the lies the public wants to hear. Such as…how to bail out the US economy.

The latest news from USA Today:

Stimulus checks part of looming COVID-19 relief deal as Congress finalizes negotiations

Lawmakers closed in on a roughly $900 billion COVID-19 relief deal Wednesday morning that may include another round of checks and other much-needed financial benefits for Americans, according to a source familiar with negotiations who wasn’t authorized to speak on the record.

More money! Whoopee!

The idea is simple enough. The experts say that if we just give people money, they will spend it. Businesses will make sales. Consumers will consume. It will look like a healthy economy again.

But where do the feds get the money?

Never mind. You know as well as we do that they don’t have any. The federal government is already scheduled for a $2 trillion deficit this fiscal year.

The feds will ‘print’ the currency.

But as you also know, there is no wealth that is not created by the people themselves, trying to ‘give and get’ in the Main Street economy.

And ultimately, one way or another, the ‘money’ the feds distribute today has to come from the people tomorrow.

Well, that may not be so bad…if drawing on the resources of tomorrow helps us out of a problem today…what’s so bad about that?

Loaded question

But wait…the burden of today’s letter is that the funny money does funny things to the economy. That is, the ‘stimulus’ actually depresses investment and output. Over the long haul, people will be worse off not better.

According to Bonner’s Law, bad capital drives out good capital. Free money is not just a fraud, but a curse.

There is no example in history where giving people printing press money — that is, money not connected to real products and services — ever did any lasting good.

The US’ money supply rests, at least to some measure, on the Federal Reserve’s balance sheet. The Fed creates or ‘prints’ money to buy its ‘assets’ (mostly, US Treasury bonds).

Over the last 30 years, the Fed’s balance sheet has grown nearly eight times faster than the American economy itself.

This might cause some experts to wonder whether bailouts…stimulus spending…and deficits (all funded by the Fed’s balance sheet…aka ‘money printing’) do any damned good.

But that is a question the experts are paid not to ask.

Real capital

Besides, maybe this time is different?

We note that you can print all the pictures of dead presidents you choose…but that ‘money’ is not real wealth.

Real wealth comes from real capital — machines, time, know-how, businesses, technology, infrastructure, sweat and a web of connections and systems far too vast ever to be catalogued, let alone understood or controlled.

Except for improvements in infrastructure — which may or may not be good investments — the feds do not even attempt to increase the US’ capital. Instead, they use it…waste it…and spend it.

Das Kapital was a bestseller, at least for the genre. In it, Karl Marx grouched about how he thought the world works.

A man gets rich because he sets up a factory to make shoes and exploits cobblers. Wouldn’t it be better to have an elite few in charge…and let them control the capital and decide who gets the money?

And why have so many different styles…and so many different brands and unnecessary choices? Shoes are just shoes, after all. Think of all the money that could be saved if we made just two or three styles…and only one brand. No need to advertise!

Besides, it was the cobblers who added value (the labour theory of value), not the man who invested in the shoe factory. The ‘capitalist’ was just a parasite. Or so Marx thought.

Capitalist triumph

He saw the problem. And he had a plan to fix it.

It was not enough to let the traditional, customary rules of a free society do their stuff, he thought. No more voluntary ‘give and take’. No more ‘win-win’ deals between consenting adults. No more capital in private hands.

Instead, an economy needed bright, book-smart people like himself — experts — to organise things in a better way.

Marx was a rock star, posthumously, especially in Russia and China. There, they reorganised their whole societies to conform — at least, on paper — to the Marxian insights.

Then, after decades of government-led poverty, brutality, and mind-numbing stupidity, both countries rejected the creed. In theory, it still made sense. But it didn’t work.

The Soviet Union dissolved itself and pulled down statues of Marx in 1991. China took the capitalist road in 1979…but left its Communist Party in charge.

Americans celebrated the victory. Communism had lost. Capitalism was triumphant.

When capitalism fails

Alas, the path to perdition is rarely empty for long. Soon, upon its slippery stones trod the Gucci-shod feet of erstwhile capitalists themselves.

The trust-funded grandchildren of innovators and tycoons were embarrassed by their own wealth. They learned in college that it was shameful to be so rich when others were so poor…and almost all of the world’s problems — inequality, racism, global warming, and Donald Trump — could be traced to the ‘patriarchy’.

Experts argued that classical theories of money and economics were all wrong.

The new Modern Monetary Theory (MMT) taught that the government was the source of all money…and that it should spend its money creating a better world for everyone.

They insisted, too, that the government — with its armies of PhD economists — should decide how high stock prices should be…how much it should cost to borrow money…what the rate of ‘inflation’ should be…how many people should be unemployed…and what the ‘capacity’ of an economy ought to be.

Above all, they learned that when capitalism fails, the experts need to get to work. They need to give the people money. A bailout. A giveaway.

Capital disappears

Immediately, we see where the US Economic Politburo goes wrong.

All their stimulus is focused on the demand side. Consumption, not production. It’s all getting…and no giving. Spend, spend, spend…even their counterfeit money — fake savings — can be used to draw out real savings (capital!) so that it can be spent on big-screen TVs and stock buybacks.

Real capital — the real source of wealth — disappears as fake capital takes its place.

But wait, there’s more.

Not only do the giveaways turn valuable capital into a consumable…they also reduce the economy’s ability to produce. Everyone — except the insiders — gets poorer.

Stay tuned as we explore Bonner’s Law further next week…


Dan Denning Signature

Bill Bonner,
For The Rum Rebellion

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

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