Why Central Bank Stimulus Cannot Bring Economic Recovery

Fed engages in futile effort to stimulate economy through an expansion of fiat money credit

Today every central bank on the planet is printing money by the bucket loads in an attempt to stimulate their economies to escape velocity and a sustainable recovery.

They are following Keynesian dogma that increasing aggregate demand will spur an increase in employment and production. So far all that these central banks have managed to do is inflate their own balance sheets and saddle their governments with debt. But make no mistake, central banks are not about to cease their confidence in the concept of insufficient aggregate demand. In fact, European Central Bank (ECB) President Mario Draghi is considering imposing negative interest rates to force money out of savings accounts and into the spending stream. Such an action is fully consistent with Keynesian dogma, so other central bankers will be impelled by the failure of their previous actions to follow suit.

Violating Say’s Law

Keynes’s dogma, as stated in his magnum opus, The General Theory of Employment, Interest and Money, attempts to refute Say’s Law, also known as the Law of Markets. J.B. Say explained that money is a conduit or agent for facilitating the exchange of goods and services of real value. Thus, the farmer does not necessarily buy his car with dollars but with corn, wheat, soybeans, hogs, and beef. Likewise, the baker buys shoes with his bread. Notice that the farmer and the baker could purchase a car and shoes respectively only after producing something that others valued. The value placed on the farmer’s agricultural products and the baker’s bread is determined by the market. If the farmer’s crops failed or the baker’s bread failed to rise, they would not be able to consume because they had nothing that others valued with which to obtain money first. But Keynes tried to prove that production followed demand and not the other way around. He famously stated that governments should pay people to dig holes and then fill them back up in order to put money into the hands of the unemployed, who then would spend it and stimulate production. But notice that the hole diggers did not produce a good or service that was demanded by the market. Keynesian aggregate demand theory is nothing more than a justification for counterfeiting. It is a theory of capital consumption and ignores the irrefutable fact that production is required prior to consumption.

Central bank credit expansion is the best example of the Keynesian disregard for the inevitable consequences of violating Say’s Law. Money certificates are cheap to produce. Book entry credit is manufactured at the click of a computer mouse and is, therefore, essentially costless. So, receivers of new money get something for nothing. The consequence of this violation of Say’s Law is capital malinvestment, the opposite of the central bank’s goal of economic stimulus. Central bank economists make the crucial error of confusing GDP spending frenzy with sustainable economic activity. They are measuring capital consumption, not production.

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