Since George Bush jumped into the Keynesian fray with his stimulus 1, bank bailout fiasco, I have been writing and posting on why massive deficit spending cannot “grow the economy” (as if our economic lives were the equivalent of vegetable garden and deficit spending were manure). Today, over at Mises Daily, there is a very good article by Doug French explaining why the expansionary monetary policy, which has been aggressively pursued since 2007, hasn’t and won’t do the trick either. He points out that after pursuing a policy of keeping the Federal Funds Rate at around zero with no success at preventing huge numbers of bankruptcies and increasing unemployment rates, the Fed is now thinking the solution is probably a Fed funds rate of as low as a negative 4 percent. French goes on to point out that:
…the real reason we’re in a depression is because businesses
and individuals borrowed too much and invested it poorly. Economist
Murray Rothbard explained that a depression is the recovery stage: “The
liquidation of unsound businesses, the ‘idle capacity’ of the
malinvested plant, and the ‘frictional’ unemployment of original
factors that must suddenly and en masse shift to lower stages of production ? these are the chief hallmarks of the depression stage.”
That’s why monetary policy isn’t working and won’t work. People must
save and pay off their debts. The malinvestments of the boom must be
liquidated. New liquidity and zero-percent interest rates will only
create new malinvestments, not a sound economy.
Unfortunately the Fed will not accept this reality because then it would have to look in the mirror to discover the real culprit in causing this mess.
