For the naïve mind there is something miraculous in the issuance of fiat money. A magic word spoken by the government creates out of nothing a thing which can be exchanged against any merchandise a man would like to get. How pale is the art of sorcerers, witches, and conjurors when compared – Ludwig von Mises
With the economy continuing to limp along, the Federal Reserve announced in the Wall Street Journal last week its intent to further “stimulate” the economy in 2013; this after announcing a third round of quantitative easing (QE) in mid-September. The forward implications of such a move include currency depreciation, price increases in commodities such as oil, and a continued flow of limited capital into the hard, commoditized assets least vulnerable to the dollar’s decline.
The naiveté of the Bernanke Fed’s reasoning would be funny if it weren’t so sad, and if it didn’t bring with it such negative implications for real people. The case for its initiatives is based on a belief that mass creation of the “ticket” that is money will somehow produce economic growth. This is how an adolescent thinks, to borrow a line from frequent reader Brent Rice, and from a column on the Fed a little ways back by the Wall Street Journal’s Robert Pollock. Parents often tell their children that “money doesn’t grow on trees,” but that’s exactly the assumption on which the Bernanke Fed is operating.
Money without capital. Credit derives from the productive activity of households and businesses when they exchange the fruits of their efforts for money-tickets. By banking those tickets, they place capital at the disposal of those who can use it to fuel the economy.
Fed thinking, inexcusably, has left the production side of these linkages out of the equation. QE creates new money-tickets out of nothing and deposits them in the banking system in return for interest-bearing assets. Its actions create no new capital, and cannot add anything to the circulation of capital through the economy. The entire increase in reserves that the banking system has obtained from the Fed’s actions since 2008 still sits, idle and identified as “excess,” on banks’ balance sheets.