Fed News Friday: Guest Blogger Takes on the QE2

We live in a stimulating society. We love sex, we love coffee, and we love our Hollywood movies with beaucoup explosions. Many products on the shelves claim to stimulate one thing or another, and those conversations deemed most desirable tend to attain the favorable label of “stimulating. ”As a broad concept, stimulation receives much approval, and perhaps that’s why it’s so blindly pursued in the realm of economics.

As the greatest country in the world, we are privileged to have that wondrous epicenter of economic stimulation – that clitoris of commerce – the Federal Reserve. The Fed is able to stimulate at whim, either by making money cheap or free to borrow, or simply by printing it and handing it over to the Treasury. So we have the capability to stimulate, and probably the greatest such capability of any nation in the world. Cheers.

But here’s the concern: simply calling the printing of money or the setting of interest rates “stimulus” doesn’t necessarily make these things as desirable – or as safe – as sex or coffee. In fact, the entire notion of stimulating the economy should perhaps be examined a bit further. Sadly, most Americans are more critical of Hollywood’s explosions, and of their coffee’s temperature, than they are of Federal monetary policy – though the later is arguably more important.

Let’s group all of the Fed’s stimulative apparatuses into one term – making money easy to get, or “monetative easifying.” The Fed helps people get money they otherwise would not get. It makes sense on the surface, right? For a struggling individual, a briefcase of bills will improve his outlook. So too for a struggling company – a big wad of cash will save the day. So why not for a nation? Why not “give America a wad of cash?” Certainly, any one of us would feel stimulated after receiving a trillion dollars. And, certainly, the whole country is much more important than any one individual – so a prudent citizenry should grant its nation a wad of monetative easiness post-haste. Stimulation for all.

But what is the effect of such stimulus? What does monetative easifying bring into being, which otherwise may not have been broughten? What appears on the horizon once the syringe is injected?

Crucially, when money is easified, purchases and investments which otherwise would not have occurred are suddenly viable and attractive. Consumers can buy that thing they wanted. Companies can start that division they wanted. Banks can make those loans they wanted. We may find this a positive effect, for why shouldn’t we want people to have what they want?

Well, because perhaps those purchases are not wise. Perhaps those expenditures wouldn’t have happened without easy money because, based on real economic considerations, they are imprudent. Perhaps what was stimulated ought not have been.

For by engaging in monetative easifying, the Fed encourages companies (and individuals) to strike out on projects which –without the stimulus – may not have looked quite so viable. When money is easy, projects further along the scale of foolishness are attempted. Why? Because we all want to profit, and when it costs less to attempt to profit, we will tend towards such activity.

To lay it simply, to stimulate is to encourage foolishness at the margins. The more stimulating the policies, the more recklessness will occur, because that recklessness has become cost effective. The stimulation encourages fools to seek profits.

Now, in a free market – a market where the government doesn’t put a price control on money itself – interest rates only decrease to the extent that savings have accumulated. More resources lying around mean more capital to play with and, if the investments go bad (which so many do), the surplus of resources will dwindle and interest rates must subsequently rise, curtailing those marginally foolish investments in the future. This balance is crucial for a stable economy and is one of the great mechanisms which liberty bestows on a wise and grateful populace.

But the Fed… the Fed obliterates this mechanism, favoring centralized planning to accomplish the same goals. The Fed sets interest rates regardless of the savings – of the excess capital – available in the economy. It tends to set the rate far too low, because this is good in the short term for the politicians who smile, wave, and take credit for all the new projects and jobs.

Yet, as the budding entrepreneurs head out to start their projects, their foolishness has no cushion, because the price at which they borrowed the money didn’t reflect the savings and excess capital of the economy as a whole. There was too little capital to support their risk.

When their projects fail – and they are likely because they were the least viable in the first place – the resulting losses to lenders creates a retraction of credit to others. Other, more viable businesses are now starved of capital, layoffs must occur, divisions must be shut down. Recession happens. The politicians blame the bankers and Wall St., and a populace educated in government schools eats up every word – for the rhetoric provides a pathetic veneer of feigned legitimacy to shroud their jealousy towards the rich. Of course it’s the greedy bankers! Hollywood confirms.

The stimulus – the monetative easifying – of yesterday now becomes the morass of today. The misallocations of resources – encouraged by the stimulant – are now rightly understood to be misallocations, but the damage has already been done. Society doesn’t have the cushion – the savings – to support the losses, and the tab must be paid with austerity. To help solve the crisis created by monetative easifying, the Fed monetates and easifies further. It all makes sense. Princeton confirms.

Upon consideration, the perpetual stimulus engaged in by the Fed should not be seen as a “gas pedal,” merely accelerating things forward like coffee does to your mornings, explosions to your plot, or sex to your relationships. Rather, this stimulant hits the gas pedal and grabs the wheel. And, when you consider who is driving – currently a man (term used lightly) who could not foresee the greatest crisis since the Depression, yet is given kingly power to direct the world’s economy – it becomes quite worrisome, indeed.

But regardless of whom resides upon the throne of economic czardom, for a government to stimulate an economy effectively, it would first have to be able to manage it effectively without stimulants, would it not? Has that burden of proof been met? How many times must the junkie end up in the emergency room before he reevaluates his usage patterns?

And speaking of usage patterns, this brings us back to the tired question of the efficacy of centralized economic planning. The claim that the Fed can effectively stimulate rests upon the belief that economies, broadly speaking, can be commanded towards efficiency. Is it not one of the great pillars of America that we realized such thinking to be folly? Was not the primary reason the US emerged victorious from the Cold War that we didn’t attempt to compel our economy to greatness? Has nobody noticed that populations tend to starve in proportion to how aggressively their government assumes the responsibility of their nourishment?

And from here we arrive at the crucial question. Why, in an allegedly capitalist, free-market country, is the government in the business of managing the economy at all… let alone, injecting it with stimulants?

For just as we’d likely not trust this organization to manage the usage of our other stimulants – not our movies, not our sex, and certainly not our coffee – perhaps the stimulants of economic production should also be beyond the purview of the state.

Erik Voorhees fights the moral fight for capitalism and individual liberty (the former being the natural result of the latter). A proud member of The Free State Project, Erik is currently moving to New Hampshire to strike at the shackles of statism. His writings can be found at his blog – OnLifeAndLiberty.com