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the

Daily:

lenbeck)

After

Mises

Hol

Taper:

the Daily: lenbeck) After Mises Hol Taper: The Fed s 21, 2013 by Non-Plan Hol Is

The

Fed s

21,

2013 by

Non-Plan

Hol

Is

lenbeck

(ht

Unchanged

21, 2013 by Non-Plan Hol Is lenbeck (ht Unchanged Saturday, December Frank
21, 2013 by Non-Plan Hol Is lenbeck (ht Unchanged Saturday, December Frank
21, 2013 by Non-Plan Hol Is lenbeck (ht Unchanged Saturday, December Frank

Saturday,

December

Frank

tp://mises.org/daily/author/1763/Frank-

5 5 5 p e o p l e r e c o m m
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555 T w e
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58
20
36
   

Asaneconomis

 

t,

 

it

 

isgetti

ng

   

the

   

logicunderlying

 

currentmonetarypolicy

 

(ht

tp:

/

/www.youtube

             

.com/watch?v=QgFCf9caiw8)

             

twomain

 

channels

by

which

economist

 

pol

icy

can

 

influence

growt

h

       

to

loweri

nteres

t

rates

to

spurinvestmen

   

tand

consumption

spending.

The

secondistoi

       

real

wagesdrop,

spurring

out

put

 

andemployment.

wagesdrop, spurring out put   andemployment. ofthe added andhas havefew s les a is moredifficulttounders
wagesdrop, spurring out put   andemployment. ofthe added andhas havefew s les a is moredifficulttounders
wagesdrop, spurring out put   andemployment. ofthe added andhas havefew s les a is moredifficulttounders

ofthe

added

andhas

havefew

put   andemployment. ofthe added andhas havefew s les a is moredifficulttounders tand are is so
s
s

les

a

is
is

moredifficulttounders

tand

are is
are
is
so
so

intheU.S.There

sthinkmonetary

andemployment.Thefirst

is so intheU.S.There sthinkmonetary andemployment.Thefirst nduceinflation       the

nduceinflation

     

the

centralbankhasreducedinterestrates

               
to

to

 

withli

   

ttle

 

to

showforit

.Youc

anbring

a

water

   

inatrough,pond,or

lake,

b

utyoucannot

make

 

has

found

 

itswayintoexcessreserves.Banks

   
are not

are

not

 

orthycus

   

tomersw

howantto

borrow.Thehousehold

 

tite

for

more

   

debt,andthebusi

ness

 

sectoriscareful

     

abou

t

cia

l

and

 

economic

en

vironmentonunstablefoo

     

ting.Busine

     
     

stmentsnevercleanedupafterthelastbubbleand

     

ofthe

policy.

 

Whywouldbusinessesstickthei

   

rnecksoutif

     

the

 

corner?

 

Since2008,

almostzero

makingfuture

ssesarekeenly

ta

horseto

himdrink.Most

liquidity

lendingbecause

they

aware

ta horseto himdrink.Most liquidity lendingbecause they aware of painful creditw sectoriss til ldeleveraging inves appe

of

painful

creditw

sectoriss

til

ldeleveraging

inves

appe

appe

finan

tmentsin

ofth

e

current

malinve

pricedistortions

monetary

theysuspec

adjustment

around

Since the firs t channelhasfailed,onlythe secondchannelremains.Economists are generallyin
Since
the
firs
t
channelhasfailed,onlythe
secondchannelremains.Economists
are
generallyin
agreement,however,thatthere
isnolong-runtrade-offbe
tweeninflationand
unemployment.The
Keynesiansandmonetar
ist
s
believeth
at
t
here
maybeasho
rt-runtrade-off.Ifpeoplehave
adaptive
expectations,(basedontherecentpast)
then
monetarypolicythatcreatesinflationwil
l
reduce
unemploymentbylowering
aworker s
real
wages.Ofcourse,onceaworkerre
alizes
hehas
been
fooled,he
willd
emand
aninc
reaseinnominal
wagestobringhisrealwagesbackup
toprevious
levels.
Thegaininemployment
is
onlytemporary.If,instead,peoplebasethei
rexpec
tations
rational
lyandarenot
fooled,
the
neo
-clas
sical
position
,thereis
noshort-orlong-run
trade-of
fs
betweeninflationand
unemployment.
In a capita li steconomy, relativepri ces playacrucial roleinsendinginfo rmationto producers about what soc
In
a capita
li
steconomy, relativepri
ces
playacrucial
roleinsendinginfo
rmationto
producers
about
what
soc
iet y
want
s .When
one
pricegoes
upand anothergoe
sdown,the
se are
signals
thattell
prod
ucer
s to
make more
ofthe
firstgood and
les
softheseco
nd.
Itis
a complex
systemof
si
gnals
with
price
change
s reflec
ti ngtheurgency
oftheneeds
within
therealityofthelaw ofscarcity.
The
most
important
aspec
t ofa
pric
esys
temisthe
informationit
conveys
to guideproduction.
Inflationcauses
an information
e
xtraction
problem.
When
al
lpricesare
goingupbydifferent
degrees,
itis
v
erydifficult
foranentrepreneur
to
di
s
tingui
sh
betweena
relativeanda
nabsolute
pr
ice
change.
Isarisingpricea
r
eflecti
onof
greater
demand
orinflat
ionary
pres
sure?Thatis,
does
it
reflectasociety s
changingneedsor
simplyreflectsa
changedmeasuringstick(i.e.,
thevalue
of
money)?Thesameinfo
rmationextractionproblem
holds
true
with
the
pricesofresources
and
labor.
We
havedifferentlabormarkets
withawage
grad
ient
establishedalongtheproductionproces
s.
The
printingofmoneyinterfereswith
thiswage
gradient
andthe
information
i
tconveysabout
the
right
proportionofc
apitalandconsumptiongoodsto
produce.
Overallemployment
mayinitially
improve
but
thegainis
not
wor
ththecos
tfrom
the
adj
us
tment
that
mus
t
oc
cur
once
theprintingstops.
(ht
tp:/
/www.h
us
sma
n.n
et/wmc
/wmc131104.htm)
Lookingat
his
toricalevidence
,inflation
leads
to
h igher,
not
lower,unemployment.
This
should
not
be
surprising.
Inflation is
like
a wrench
thrown
into
the
workings
ofa
capitalistsys tem.
   

Ifeconomistsagree

       

that

 

thereisno

     

long-term

     

trade-offbetweeninflation

       

and

 

unemployment,

and

t

he

current

Feds

 

trategy

 

tolowerintere

st

 

rates

     

hasfailed

   

miserably

 

to

boos

t

 

growth,

 

thenwe

t
t

mus

slikely

betteriftheFed s

ask,

whyis

theFed,

evenafterthis

   

week s

taper,in

effec

t

printing$75

 

billi

   

onamonth?I

t

t

he

goalis

toi

nduce

   

inflationforashort-term

   

gaininemployment.

   

Things

are

no

strategyis

toraiseas

     

set

     

pricestoinducean

 

imaginarywea

lth

 

effect.

Yet

multiple

         

bubblesmaypop

 

beforeany

wealtheffect

     

takesplace.TheFed

should

should

 

not

be

 

playingthe

economy

 

as

a

stakeina

poker

game.

 

Throughmultipleb

         

ubbles,Alan

Greenspan s

           

monetarypolicyw

   

asrespon

sible

   

for

mas

 

sivehuman

sufferingworldwid

 

e.Yet

Greenspanislivi

     

ng

h

igh

on

t

hehogwi

th

a

   

comfygovernment

   

pension,

spendinghisspare

 

time

penni

 

ngop-edarticlesanddis

     

pensinghi

sexpertadv

 

iceon

 

the

lecture

 

circuit.He

informs

   

usthat

he

   

wasonlyhuman

and

   

tha

t

noone

s

aw

 

the

bubblecoming.

 

Thisis

 
less no t
less
no
t

him

thaningenuous.Ifyouplay

     

withfire,

and

you

burndowntheforest,

   

itiscr

 

iminaltosay Idid

       

realizethat

 

playingwith

     

matcheswasdangerous. The

   

sadsituation

     

isthat

we

 

recentlyreplaced

witheven

b
b

iggerarsonists!

       
b iggerarsonists!         isshort How ,like wil in top ha leni nc erman

isshort

How

,like

wil

in

top

ha

leni

nc

erman

term

1981

t

certaint

s

interest

s

to

rates

be

,iti

?Yel

theG

going

s

l

theU.S.

government

no

reac

Volker;

bank

(ht

tp:

ndependentGerma

to

s
s

entral

government

torefinanc

willshebeab

letot

e

tofth

eU.S.

the

was

rcent

lat

or

Onecanbe

debt

debt.

more

Thei

powerles

willshootuponceinflation

at

picksup.Sincemos

inf

verydifficulttoinflate

pricestoreduce

therealvalueof

-German-Hyper

1921-23.

tifithas

//mises

from

interestratesof12pe

ion)

ametheinflationbeastasVolckerdid?

.org/daily/6588/90-Years-Ago-The-End-of

.org/daily/6588/90-Years-Ago-The-End-of using the printing pres ses during and Hitler, both

using

the

printing

pres

ses

during

and Hitler, both responsi ble for millions of death s,rodetopow eron a wave of dis
and
Hitler,
both
responsi
ble
for
millions
of
death
s,rodetopow
eron
a
wave
of
dis
cont
ent
(ht
tp://mi
ses
.org/dai
ly/6584/) .
that
fol
lowed
periodsofexcessive
monetary
print
ing
Why
are
we
taking
such
risks?
:
Theviews
expressed
in
Dai
ly
Ar
ticles
on
Mises.org
are
not
necessari
ly
those
of
the
Mises
Institute.
Comment
on
this
article.
When
commenting,
please
pos
t
a
concise,
civil,
and
informative
comment.
FrankHollenbeckteachesfinance
ande
conom
icsat
the
International
University
ofGeneva.He
has
previouslyheld
positionsasaSeniorEcono
mist
att
heS
tate
Department,Chief
Economis
t
at
Caterp
il
larOverseas,
andasanAs
sociateD
irectorofaSwiss
private
bank.See
Frank
Hollenbeck's
(ht
tp://mises
.org/dai
ly/author/1763/
Frank-Hollenbeck)
article
archives
.
You
ca
nsubs
cribetofutureartic
lesby
Frank
Hollenbeckvia
this
RS
S
feed
(ht
tp://mises
.org/Feeds/artic
les
.ashx?AuthorId=1763)
.
(ht
tp://creat
ivecommons
.org
/licenses/by/3.0
/)