What is wrong with printing money?

Oh no! The Depression is Here Again!

During a depression, many businesses are desperate for customers.  They need people to buy their stuff, but the people have decided they do not want to buy it or they simply do not have enough money.  In the past, the government has manipulated the money supply in order encourage people to borrow and spend money in order to help the failing businesses.

This has not worked and the Austrian School of Economics has developed the economic theory that explains why. Although the development of  the argument against inflationary monetary policy is quite complex, the essentials are as follows.

Three Assumptions Regarding Interest Rates

1. Resources are limited.

2. In a market economy, actual available resources influence interest rates.

3. People, whether they know it or not, allocate resources based on interest rates.

Theoretical Conclusions

If you manipulate the money supply, you manipulate interest rates. Increase the money supply and borrowing money is cheaper. Conversely, saving money becomes more expensive. When interest rates are manipulated, people buy and do things they would not do if interest rates were determined by the resources actually available.

When  interest rates rates are separated from actual market conditions entrepreneurs make business decisions based on false data resulting in widespread malinvestment and the destruction of capital.  The limited supply of resources shrinks and the quality of life goes down, even as the quantity of paper money in your pocket increases.

Historical Observations

Now a depression is looming. Now a president wants the GDP to grow to make the economy look good. So we print the money to lower interest rates.

Now the dot com bubble bursts. So we print more money to lower interest rates.

Now housing prices shoot through the roof and then crash.  Now banks fail.  So we print more money to lower interest rates.

Now people invest in US debt and lose it all to inflation.  Now print the money? I don’t think so!

Two Future Recommendations

Human history is filled with irrational policy.  Inflationary monetary policy just one more instance.

1. Stop this nonsense now! Interest rates must be determined by the market, not by government. Depressions are a good thing because they purge the system of misallocated resources and allow the limited available resources to be put to better and or more efficient use.

2. Read Human Action by Ludwig Von Mises

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