The US Federal Reserve can keep stimulating the US
economy because inflation is posing little threat, Federal Reserve Bank of
Minneapolis President Kocherlakota said. “I am expecting an inflation rate to
run below two percent for the next four years, through 2018,” he said. “That
means there is more room for monetary policy to be helpful in terms of …
boosting demand without running up against generating too much inflation.”
The yearly rate of growth of the official consumer price
index (CPI) stood at 1.7 percent in August against two percent in July.
According to our estimate, the yearly rate of growth of the CPI could close
at 1.4 percent by December. By December next year we forecast the yearly rate
of growth of 0.6 percent.
Does Demand Create More Supply?
It seems that the Minneapolis Fed President holds that by
boosting the demand for goods and services — by means of additional monetary
pumping — it is possible to strengthen economic growth. He believes that by
means of strengthening the demand for goods and services the production of
goods and services will follow suit. But why should that be so?
If by means of monetary pumping one could strengthen the
economic growth then it would imply that — by means of monetary pumping — it
is possible to create real wealth and generate an everlasting economic
prosperity.
This would also mean that world wide poverty should have
been erased a long time ago. After all, most countries today have central
banks that possess the skills to create money in large amounts. Yet world
poverty remains intact.
Despite massive monetary pumping since 2008, and the
policy interest rate of around zero, Fed policymakers seem to be unhappy with
the so-called economic recovery. Note that the Fed’s balance sheet, which
stood at $0.86 trillion in January 2007 jumped to $4.4 trillion by September
this year.
Production Comes Before Demand
We suggest that there is no such thing as an independent
category called demand. Before an individual can exercise demand for goods
and services, he/she must produce some other useful goods and services. Once
these goods and services are produced, individuals can exercise their demand
for the goods they desire. This is achieved by exchanging things that were
produced for money, which in turn can be exchanged for goods that are
desired. Note that money serves here as the medium of exchange — it produces
absolutely nothing. It permits the exchange of something for something. Any
policy that results in monetary pumping leads to an exchange of nothing for
something. This amounts to a weakening of the pool of real wealth — and hence
to reduced prospects for the expansion of this pool.
What is required to boost the economic growth — the
production of real wealth — is to remove all the factors that undermine the
wealth generation process. One of the major negative factors that undermine
the real wealth generation is loose monetary policy of the central bank,
which boosts demand without the prior production of wealth. (Once the
loopholes for the money creation out of “thin air” are closed off the diversion
of wealth from wealth generators towards non-productive bubble activities is
arrested. This leaves more real funding in the hands of wealth generators —
permitting them to strengthen the process of wealth generation (i.e.,
permitting them to grow the economy).
Artificially Boosted Demand
Destroys Wealth
Now, the artificial boosting of the demand by means of
monetary pumping leads to the depletion of the pool of real wealth. It
amounts to adding more individuals that take from the pool of real wealth
without adding anything in return — an economic impoverishment.
The longer the reckless loose policy of the Fed stays in
force the harder it gets for wealth generators to generate real wealth and
prevent the pool of real wealth from shrinking.
Finally, the fact that the yearly rate of growth of the
CPI is declining doesn’t mean that the Fed’s monetary pumping is going to be
harmless. Regardless of price inflation monetary pumping results in an
exchange of nothing for something and thus, impoverishment.
