Tuesday, December 29, 2020

What Does Money Printing Do To An Economy?


My debate with Dominick Armentano continues.

He has left new comments at the post, Can Printing Money Out of Thin Air Ever Be a Good Idea?, which I will now discuss.

Dominick writes:

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

RW response:

I am confused here. If there is no money printing, where is the new money coming from, even if this just is a "classroom argument"? What is the purpose of this "classroom argument" if not to understand policy options? How can we understand options if a key factor, that new money has to come from somewhere, is not considered?

As for "crowding out," if new money bids goods away from others, which is what would occur, those who are outbid are being crowded out.

Further, when we are talking about new money spending, we are talking about the demand side. It may be demand for capital goods or consumer goods but it is money being spent. Supply is the product side (and money received for the supply).

Action in prices and interest rates tells us nothing about this scenario. If new money is introduced, it will result in upward pressure on prices. Prices may have fallen without the new money being introduced, so we can't just look at price change, we must look at the increased funds spent.

Dominick writes:

So there is nothing necessarily Keynesian about it. Further, you assert that the "pain" (what pain?) has been shifted. To whom, exactly?

RW response:

It sure sounds Keynesian to me, or maybe a slight variation of the manner in which it is generally put, in that it is a call for additional money to be put into the system to get business going as if more new money is the magical solution when it is just a distortion of the economy.

As for pain, if the new money is printed out of thin air, the pain is faced by those who have been outbid by the new money. If it is taxed, it is the taxpayer who suffers in addition to those outbid.

Dominick writes

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.

RW response:

I am really shocked by this comment. Prices would fall for goods and services and that is all. It would be great for consumers. There was absolutely no reason for Fed monetization in 1990 or 2008.

Supporting Fed monetization at any time is far from an Austrian school position.

I really can't do better than what the Austrian school giant Murray Rothbard said on the point:

Price deflation on the free market has been a particular victim of deflation-phobia, blamed for depression, contraction in business activity, and unemployment. There are three possible causes for such deflation. In the first place, increased productivity and supply of goods will tend to lower prices on the free market. And this indeed is the general record of the Industrial Revolution in the West since the mid eighteenth century. But rather than a problem to be dreaded and combatted, falling prices through increased production is a wonderful long-run tendency of untrammelled capitalism.

The trend of the Industrial Revolution in the West was falling prices, which spread an increased standard of living to every person; falling costs, which maintained general profitability of business; and stable monetary wage rates—which reflected steadily increasing real wages in terms of purchasing power. This is a process to be hailed and welcomed rather than to be stamped out. Unfortunately, the inflationary fiat money world since World War II has made us forget this home truth, and inured us toa dangerously inflationary economic horizon.

A second cause of price deflation in a free economy is response to a general desire to "hoard" money, that is, to see people's stock of cash balances have higher real value in terms of purchasing power. Even economists who accept the legitimacy of the first type of deflation react with horror to the second, and call for government to print money rapidly to prevent it.

But what's wrong with people desiring higher real cash balances, and why should this desire of consumers on the free market be thwarted while others are satisfied? The market, with its perceptive entrepreneurs and free price system, is precisely geared to allow rapid adjustments to any changes in consumer valuations. Any "unemployment" of resources results from a failure of people to adjust to the new conditions, by insisting on excessively high real prices or wage rates. Such failures will be quickly corrected if the market is allowed freedom to adapt—that is, if government and unions do not intervene to delay and cripple the adjustment process.

A third form of market-driven price deflation stems from a contraction of bank credit during recessions or bank runs. Even economists who accept the first and second types of deflation balk at this one, indicting the process as being monetary and external to the market. But they overlook a key point: that contraction of bank credit is always a healthy reaction to previous inflationary bank credit intervention in the market. Contractionary calls upon the banks to redeem their swollen liabilities in cash is precisely the way in which the market and consumers can reassert control over the banking system and force it to become sound and noninflationary. A market-driven credit contraction speeds up the recovery process and helps to wash out unsound loans and unsound banks.

 Dominick writes:

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.

 RW response:

Well, first see Rothbard above. But if the Fed stopped monetizing the debt, it wouldn't necessarily mean a general collapse in prices.  The supply of money would stay the same. There would be an adjustment in the capital goods sector as the economy adjusts away from earlier Fed monetization created distortions (See: Austrian School Business Cycle Theory ). A general price contraction would only occur because of a greater desire to hold cash balances. What is wrong with this? Again see Rothbard above. There is no "economic destruction," the general price level might change.

What would happen though is that if the Fed did stop monetizing Treasury debt, it would cause a collapse in Treasury security prices, which would make it much more difficult for the Treasury to borrow, which would mean smaller government and more money in the private sector for production and comsumption. This is not a bad thing.

In short, "new money" introduced by a government via central bank money printing or by some other magical means, always causes pain to those outbid and is a distortion of a free market economy.


  1. A lot of people have started cheering for checks from the government. I think the government should compensate businesses the they forced to shut down. The source of the funds should be from the general fund and not financed by new money creation. That would mean the government would have to make a choice of where to make the cuts to pay for it.

    I think you can add retirees to Rothbards list of "government and unions" who are insisting on excessively high wages and real prices. They have their life savings in their houses and the stock market, any asset price deflation in those two areas would be too painful for most.

  2. I agree with RW's analysis. It is theoretically sound. I have a difficult time discussing economics in such an abstract manner. As if large segments of the population simply agree contrary to their own short-term interests. AJO has a point. Asset values would decline if inflation and deficits were stopped including the stock market and real estate. Of course prices in general would decline making the cost of living lower but the relative price adjustments could make asset holders less well off in the short run. Economically the adjustment could happen quickly but there will be pain. Six to twelve months of chaotic adjustment and then real economic growth. But the reality of getting to the point where inflation and federal deficits could be abolished requires a sea-change in public psychology.


  3. RW,

    First, my so-called "classroom argument" (which I believe you misconstrue) is simply to ASSUME that there IS "new money" and then to assume that it goes directly to lock-down damaged suppliers (like gym owners) in the form of a PPP, loan or gift. I argued that this would increase supply (not demand directly) and that there would be no crowding out since idle resources (laid off labor mostly) would not be "bid away" from anyone. The people in "pain" are the laid off workers and landlords not paid, not any disappointed would-be bidders; they (labor) get re-employed with the new money and start producing output. So there are direct, first-order "supply effects" from the new money and your crowding out and "pain" argument is not persuasive at this point.

    Second, you then went on to assert that the bulk of my argument is really "Keynesian" which means, I guess, that the PPP loans or gifts to lock-down damaged suppliers eventually reach the consumer or capital goods market (second-order effects). Well sure, basic circular flow and all that, but so doesn't all $ obtained from private borrowing (for building and buying homes, etc.), and any change in cash balances by economic actors. So that aspect of the "bid away" argument (that it causes "pain" to those "outbid" with any new money) simply proves far too much in my view. (I was out-bid by you for that house yesterday--you got a fractional reserve--new money? loan--or you sold stock or tapped your savings--and I've been "crowded out" and now I'm in pain. This approach to crowding out and economic pain is sheer nonsense in my view. In antitrust, it is employed to condemn the competitive process for weeding out (crowding out?) inefficient suppliers, causing them pain, and entitling them to compensation. Absurd.)

    Third, listen up. I am not advocating new money printing. Where have I done that? One could always argue, after all, (given enough space!) that such programs (like PPP) always give rise to a host of economic distortions that far outweigh any "benefits" derived from PPP loans or gifts. Indeed, you bring up several of these in your remarks and I'm fine with that. Nonetheless, I still hold that my basic classroom argument explained above (a very weak version of the Kelton thesis) has not been effectively addressed. Perhaps you clinch the argument in your book which, alas, I have not yet read.

    Finally, as to the economic consequences of zero government debt and zero monetization, that full discussion will simply have to be left to another day. All I will say here is that I believe that Austrians (myself included) and libertarians generally have severely under-estimated the matrix of economic adjustments required to bring about any new "equilibrium" and under-estimated the level at which that equilibrium would be achieved in terms of output, employment and interest rates. And Hayek, but perhaps not Rothbard in his writings, would agree. Actually Murray and I (and others) had some lively debates over those very issues.


    1. Professor Armentano: I am working my way through your book, Antiturst and Monopoly. Thank you for providing that education.

      In terms of this present debate with RW, I am confused by some of your positions.

      First, you say the following: “I am not making any case for Fed pumping obviously! Goodness, I am on record for abolishing the Fed!”

      But then you say this: “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.”

      On one hand, it sounds like you want to get rid of the Fed; but, on the other hand, it seems as if you praise the Fed as a savior, if not a SAVIOR.

      I am not well-versed in Economic matters, so maybe I am missing something. But, to me, you do not appear to be consistent.

      I am also confused about “crowding out.” In your example of the gym owner suffering from the government imposed lockdown, you state the following: “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. . .” (Emphasis in the original.)

      But, can’t this same argument be made for every single government program? In a garden-variety economic downturn, if/when the government steps in, a landlord will get lost rent; lost wages will be found; and those laid-off will return to work.

      Why does the government-imposed lockdown sanctify the government intrusions? As I believe NAPster commented: This seems like Bastiat’s Broken Window fallacy. I agree with NAPster, except that in this case, the government broke the window.

      My final point of confusion is about “pain.” You indicate that the pain is felt by the people who are out of work. Ok, I get that.

      But, in the Hazlitt classic, Economics In One Lesson, I learned that it is easy to spot things that are obvious. The role of the Economist is to spot those things that are unseen.

      Again, the pain of those who are laid-off is seen and felt. But, the fact that government entered into the picture and removed the pain of those individuals also means that pain was caused to someone else.

      Your scenario reminded me of a friend of mine named Hans. From 2000 to 2008, Hans and his wife saved money. They lived in a small condo, looking forward to the day when he could buy a house.

      When the bubble burst in 2008, the government “encouraged” banks to give breaks to some homeowners. Of course, the banks were complicit in this boondoggle. I mention the situation to say that government intervention may have eased the pain of a homeowner behind on his/her mortgage. That same government intervention, however, extended the pain of my buddy, Hans.

  4. What few genuinely do is to look at the real system in place. Applying unsound economic principles to an unconventional monetary situation is a recipe for error.

    Even RW doesnt get it right all the time.