Sunday, December 27, 2020

Can Printing Money Out of Thin Air Ever Be a Good Idea?

In my continuing back and forth with Dominick Armentano, he comments at the post, If You Didn't Get $12,000 From the Government This Year, Consider Yourself Among the Scammed:

I am not making any case for Fed pumping obviously! Goodness, I am on record for abolishing the Fed! And, yes, I agree that no amount of "inflation" is acceptable and it's entirely correct that wage and price controls were imposed (Nixon) when inflation rates were quite low and this is always a danger given political insanity. With the massive monetization currently, the risks of accelerating inflation are certainly substantial.

However, I was making a more modest set of arguments which I don't think you effectively rebutted. My gym closed for 3 months. No output and no income but substantial overhead costs. Savings and Working capital depleted and bank loans impossible. Lockdowns over BUT only a few customers dribble in. Working capital required now to cover overhead, hire back instructors, and start new marketing efforts to restore customer base.

Now assume that "money out of thin air" goes to gym owner (loan or gift). He pays his rent (partially suspended for months), hires back some instructors, and spends new money advertising and promoting "new" products and services. Maybe he even pays (some) of the money back...just like a bank loan that he could never swing. BTW, would a bank loan have crowded out anyone? And precisely where does the new money crowd-out anyone?

In fact the new money fills in lost rent to landlord. New money fills in lost wages to laid-off instructors. New money allows the production of new services that were "lost" during the shutdown. So the new money DOES in fact lead to new output, RW, contrary to your argument. Supply is crowded IN rather than crowded out, and that goes for savings, too. And that's why, of course, interest rates have gone down, not up, as they would have (over these last 2 decades) if there had been an actual crowding out effect.

Could all of this be over-done? Absolutely, and Kelton admits as much. When all gym instructors are employed, if my gym wants to expand output, they must bid instructors away from other gyms. If all gym equipment is employed, to expand output requires my gym to bid those resources away from other employments (used equipment prices rise). Rents will rise as my gym bids additional space (for new output) from competing employments. Crowding out and the price inflation associated with it. But until all of this happens, crowding out is either nil or minimal, and Kelton's major thesis (unfortunately) still has not been vanquished.
RW response:

I am really having trouble with the idea one can be in favor of abolishing the Fed and at the same time calling for "modest" money pumping. 

I also believe that there is confusion here over past debt owed and new or on-going operations. Past debt, unfortunately, because of the lockdowns will hurt someone. In the case of the rent not paid, it will hurt the landlord or if the gym owner pays the rent it will hurt him because he didn't have revenue coming in for part of the time.

All printing money out of thin air does "to fill the gap" is shift the pain to the rest of the population who have nothing to do with the gym or the building where it is operated. This quite simply is central planning and the redistribution of losses determined by the state.

The same goes for lost wages.

As for this: "New money allows the production of new services that were 'lost' during the shutdown." This is simply a Keynesian argument that downturns are aggregate demand problems. They are never aggregate demand problems, markets clear. Says Law works. 

Interest rates have gone down because the Fed pumped in $4 trillion dollars. At its peak in early July, the Fed was pumping money at an annualized rate of 62.7%. 

And as for this: "crowding out is either nil or minimal," whenever you have new bidders introduced on the scene, via money printing, you have crowding out by definition. It is never nil. And when you have $4 trillion introduced, it is nowhere near minimal. And, by the way, Kelton wants even more money printing. Her crowding out position is far, far from nil or minimal.


  1. Everyone wants 'a piece of the action', but noone wants to blow the system up. Like there's a way to pull back from the edge of a Volcano, after realizing you got too close and the fumes emanating aren't good air. The timeline from getting too close to the edge, and falling into lava is very short, with no restart button if murphy shows up.

  2. Would a similar argument for the minimum wage go like this

    If the minimum wage was low (e.g. $3/hr) it wouldn’t create noticeable unemployment because the demand for labor causes employers to pay at least $10/hr. But there is a baby sitter who was only getting $2, who is now getting $3 because the parents could afford it. So, yay minimum wage.

    1. Well, the parents would have done something else with that additional dollar/hour had the state not forced them to pay more. So for the other use, "not yay" minimum wage.

  3. It's the Bastiat issue: Everyone sees the "benefit" from the newly printed money, but no one sees the costs imposed on those who have lost purchasing power or had resources bid away from them as a result of this new money.

  4. I'm NOT calling for new money printing. I am making a classroom argument (not advocating a policy) that the new money to the gym owner increased SUPPLY (not demand as you assert) and arrived without any "crowding out" since neither prices nor interest rates rise. So there is nothing necessarily Keynesian about it. Further, you assert that the "pain" (what pain?) has been shifted. To whom, exactly?

    Of course, markets always clear and they can clear at lower and lower prices and output levels. Have you ever stopped to think where output and employment would be NOW if the Fed had not printed one single dollar (or monetized one dollar of Treasury debt) since, say, 1990? Or even since 2008? Take an honest guess (about output, employment, and interest rates) and tell me that such a policy (in theory) makes political or even economic sense.

    1. This policy makes a lot of political sense, but no economic sense. Empirically observing that some low-information price index hasn't risen doesn't tell you much about the economic destructiveness of the policy. The price index is not representative of anyone's mode of living, and the index might have fallen but for the money printing, and thus all of those who might have seen their purchasing power increase would have lost out. It's undeniable that the new money dilutes the purchasing power of the existing money (ceteris paribus), and so those who receive the new money first get an artificial advantage over others.

    2. I agree with the NAPster (particularly with the previous comment about Bastiat). Can't tell if Prof. Armentano is acting as a devil's advocate or is seriously confused. However, the notion that not printing money to fund Treasury debt would not make political or economic policy sense, suggests a very central planner frame of reference. Suggesting that Treasury debt with inflation is better than Treasury debt without inflation. I don't need to guess, I know that neither scenario makes sense.

  5. There is no "confusion" here just a thought experiment that we all should follow through to the end. With Austrians cheering wildly (and I'm an Austrian), the Treasury and Fed announce tomorrow that they will no longer fund deficits or monetize debt. Now, you want to make a prediction about output and employment and especially interest rates? Will the "markets clear?" You BET they will at prices and levels of output and employment that we most likely have never seen or could even imagine. Rents would have to adjust; wages would have to adjust; pension payouts would have to adjust; indeed, there is not one economic indicator that would not require a massive (downward) adjustment. Say's law with a vengeance. And you talk to me about "economic destruction" associated with supplying "new" money to gym owners (PPP) such that they can resume production?! No comparison. The magnitudes of differences are simply off the chart for anyone who thinks honestly about these issues. So as in politics (where the choices are always the lesser of two or more evils), the burden of proof is to show and compare the "harm" that the new money(to gym owners, for example) produces (allegedly) to the harm associated with no deficits and no monetization. Good luck with that.

  6. "...a thought experiment..." OK. But I reject the claim that the "burden of proof" is to compare the "harm" of inflation and federal government deficits versus no inflation and federal government deficits. Theft is always the harm and that is what inflation and government deficits are.

    The results of this miraculous elimination of inflation and federal government deficits might be a rapid increase in existing taxes and an attempt to create new taxes and government fees. In addition, an intense political struggle would erupt as political power would flow out of D.C. to the states. Some of the states would also attempt to raise taxes and issue new debt to fund their deficits. Some might issue their own currency. But a new rivalrous competition between states would likely develop as some tried to become more market friendly. Fear mongering would rise to a new and feverish pitch (worse than the covid-19 rants) as the MIC and various federal bureaucracies struggled to avoid budget cuts. Prices would make dramatic adjustments not favorable to politicians and crony businesses and they would respond fiercely with wage and price controls and new regulations and more fear mongering. A prediction of outputs, employment and interest rates is impossible. There will be severe disruption for government, bureaucracies, and crony businesses and opportunity for many others. But the struggle would go on endlessly even resulting in violence.

    A scenario not unlike our current situation. Magically eliminating inflation and federal deficits will only shift the battle lines between central planners and free market advocates. It won't necessarily move us closer to free markets unless a significant number of people reject the creed of might makes right.