Why Central Bank Stimulus Cannot Bring Economic Recovery

Tyler Durden's picture

Submitted by Patrick Barron via The Ludwig von Mises Institute,

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.


Two Paths of Capital Destruction

The credit expansion causes capital consumption in two ways. Some of the increased credit made available to banks will be lent to businesses that could never turn a profit regardless of the level of interest rates. This is old-fashioned entrepreneurial error on the part of both bankers and borrowers. There is always a modicum of such losses, due to market uncertainty and the impossibility to foresee with precision the future condition of the market. But the bubble frenzy fools both bankers and overly optimistic entrepreneurs into believing that a new economic paradigm has arrived. They are fooled by the phony market conditions, so bold entrepreneurs and go-go bankers replace their more cautious predecessors. The longer the bubble lasts, the more of these unwise projects we get.

Another chunk of increased credit goes to businesses that could make a profit if there really were sufficient resources available for the completion of what now appears to be profitable long term projects. These are projects for which the cost of borrowing is a major factor in the entrepreneur's forecasts. Driving down the interest rate encourages even the most cautious entrepreneurs and bankers to re-evaluate these shelved projects. Many years will transpire before these projects are completed, so an accurate forecast of future costs is critical. These cost estimates assume that enough real capital is available and that sufficient resources exist to prevent costs from rising over the years. But such is not the case. Austrian business cycle theory explains that absent an increase in real savings that frees resources for their long term projects, costs will rise and reveal these projects to be unprofitable. Austrian economists explain that a declining interest rate caused by fiat money credit expansion does not reflect a change in societal time preference — that is, society's desire for current goods over future goods. Society is not saving enough to prevent a rise in the cost of resources that long term projects require. Despite central bank interest rate intervention, societal time preference will reassert itself and suck these resources back to the production of current goods, where a profit can be made, and away from the production of future goods.


No Escape from Say’s Law

No array of bank regulation can prevent the destruction of capital that becomes apparent to the public through an increase in bank loan losses, which may reach levels by which major banks become insolvent. Bank regulators believe that their empirical research into the dynamics of previous bank crises reveals lessons that can be used to avoid another banking crisis. They believe that banker stupidity or even criminal culpability were the underlying causes of previous crises. But this is a contradiction in logic. We must remember that the very purpose of central bank credit expansion is to trigger an increase in lending in order to stimulate the economy to a self-sustaining recovery. But this is impossible. At any one time there is only so much real capital available in society, and real capital cannot be produced by the click of a central bank computer mouse. As my friend Robert Blumen says, a central bank can print money but it cannot print software engineers or even cups of Starbucks coffee to keep them awake and working. Furthermore, requiring banks to hold more capital — which is the goal of the latest round of negotiations in Basel, Switzerland — is nothing more than requiring stronger locks on the barn door, while leaving the door wide open. Closing the door tightly after the horse is gone still means the loss of the horse. Why would an investor purchase new bank stock offerings just to see his money evaporate in another round of loan losses?



The governments and central banks of the world are engaged in a futile effort to stimulate economic recovery through an expansion of fiat money credit. They will fail due to their ignorance or purposeful blindness to Say’s Law that tells us that money is the agent for exchanging goods that must already exist. New fiat money cannot conjure goods out of thin air, the way central banks conjure money out of thin air. This violation of Say’s Law is reflected in loan losses, which cannot be prevented by any array of regulation or higher capital requirements. In fact rather than stimulate the economy to greater output, bank credit expansion causes capital destruction and a lower standard of living in the future than would have been the case otherwise. Governments and central bankers should concentrate on restoring economic freedom and sound money respectively. This means abandoning market interventions of all kinds, declaring unilateral free trade, cutting wasteful spending, and subjecting money to normal commercial law, which would recognize that fiat money expansion by either the central bank or commercial banks is nothing more than outright fraud. The role of government would revert to its primary, liberal purpose of protecting life, liberty, and property and little more.

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Chuck Knoblauch's picture

Why are you calling what the FED did STIMULUS?

They are causing inflation by printing money.

They are reducing the purchasing power of the currency.

They are murdering our country.

No, it's not STIMULUS.


Flakmeister's picture

You might have a point if they were actually printing....

All those Excess Reserves are in the equivalent of Debt Heaven.  Maybe Greenspan can convene a seance to get in touch with them...

MrFailSauce's picture

Say's law is stupid.  You can have a factory at 50% capacity, you can have people unemployed, you can have widgets in storage, or piling up in the supply chain.  Yet Say's Law denies that this is possible.

acetinker's picture

No, it doesn't MrFall-  You don't need money to purchase things that don't exist, do you?  Likewise, if you don't have money, it doesn't matter to you that there are things available to purchase, does it?

Channel stuffing comes to mind.  Some years ago, an Uncle-in-Law who was a ranking exec at Southern Co. told me of his travels to the Soviet Union.  Back then, they built a car called the Lada.  It was never in high demand either domestically or internationally but they continued to build them, just to keep people busy.

In order to maintain the illusion of a viable economy, the finished cars were dismantled and reduced as far as possible to raw materials-recycling if you will- and reconstituted into finished goods in a never-ending cycle.

The goods were available, but the purchasing power was not.  Would you assert that because of this, Say's law is 'stupid'?  I wouldn't.

As a side note, the Uncle-in-Law remarked "those must be the highest purity raw materials on the planet".

Atomizer's picture


Only if you sell a container load of sweaters and socks from North Korean [AKA any non BIS hot spot] and resell merchandise into core nations under a Joseph A. Bank Clothiers, Inc label

The comedy gets louder.

Hello Maxine, how are you today? Don’t feel being picked on, two other companies are targeted...The problem, you’re Negro ass who is going to have to explain to the US public.  Re labeling is a felony. I made up the country. Those ship guys talk after you pay them.

Show the receipts public servant. Again, you’re a public servant.. Show the receipts…

TeethVillage88s's picture

It is a GAME to say this is a stimulus for the whole Economy. The Fed & DC Politicians are NOT Even Trying to fix the Economy.

Like most people here, I think it is a Bald faced Lie.

If you are a big boy Bank Dealer for the FED, then you win. Everyone Else is getting raped. As you just stated so well above.

Hell, the press conferences or Public Statements are just fluff... there is no concern for the weak parts of the economy, for fixed income families, for Retirees... I guess everyone is expected to work, be a Private Executive & be a High Speed Trader.

Those in DC are just "Brown Nosers". The Long Con as they sink the Country.

OC Sure's picture

You are almost there, Chuck.

It is not just that they are reducing the purchasing power of the currency. It is that that action necessarily is theft.

Currency has lost its value. If there is a loss of value then where arrives the gain? The thieves stole it. So the answer to the articles title question is that if a patient has a broken arm why would anyone think that breaking his legs will fix the arm? And the answer to this question is that not too many people see it that way and the thief depends on deception.

Atomizer's picture

That's not what the UN/IMF/World Bank/BIS told me.



samuraitrader's picture

this is what they have stimulated. another candidate to lead the charge of the next GLOBAL financial crisis. the list is getting long.

"The business of bundling junk-rated corporate loans into top-rated securities is booming like never before following the implementation of regulation aimed at making the financial system safer."


Do you feel safer?



Winston Churchill's picture

What could go wronp, I'm sure its all rated AAA

Oh wait.

Yen Cross's picture

    It can't be those regional wars, Southern European 25%+ unemployment rates, all time low global public approval ratings for appointed technocrats, carbon b/s taxation, energy manipulation, ect... Flat Earth rationalists that have anything to do with it?

Itchy and Scratchy's picture

'I never saw it coming II.' - J Yellen

Obama_4_Dictator's picture

Alright, we get.  We all understand why EQ is bad.  Can we just get this collapse over with so we can go back to our daily lives.....

SofaPapa's picture

I like this article.  It draws the line clearly between money and goods.  When money ceases to represent tangible goods,  instead representing only promises, the downhill slope is clear.  Once a critical mass of the population wakes up to the fact that "dollars" are no longer a representation of wealth, the currency will die.  It's going to be ugly, but it's inevitable at this point.

g'kar's picture

These articles, while interesting, are meaningless when TPTB don't want any sort of economic recovery.

TeethVillage88s's picture

You are Right.

A) 10 years of High Gasoline prices
B) 10 years of Housing Slump
C) 5 Years of ZIRP, no Interest on Savings
D) More Foreign Direct Investment in the USA, than Private Domestic Investment
E) Pension Funds are underfunded, we spend over $5 Billion a year to fix pension funds, the Pension Guarantee Fund is under funded by $23 Billion
F) People no longer are buying houses as the Jobs are no longer there, move back with parents, share houses
G) 92K people don't work now since the good jobs are gone
H) Median Wages have Fallen since 2008 in huge way even offset by Sky rocket Executive pay
I) Clearly TBTJ Banks have decided US Labor Force is too expensive and won't Invest in the USA
J) Capital Flight, Brain Drain from Industry to foreign lands, Stagnant capital, Capital Stashed overseas in Person Trust Funds, Corporate Profits sit offshore waiting on tax holiday, Mal Investment in Stocks or High Risk Market Plays, a whole lot of Rent Seeking not value adding going on, Business culture is about being an Insider and Knowing a Big Player
K) Big Investment goes to War, DoD, Intelligence, Security, Drones, Spy Devices, Computers for Spying
L) Big Money in Lobbying, tax Accounting, Financial Management that doesn't add Value any place in the USA.
M) Deregulation & Privatization make Federal Budget Expansion and Inflation very persistent including our DOD Privatization of War & Spying & Giving Away US Dollars to our favorite dictators around the world in what? Over 100 countries? I mean hey at least lets have good financial ratings, good standard accounting, good standard financial instruments, and keep federal contractors to a minimum as some of them are huge expensive corporations.
N) Double Digit Federal Budget Expansion every year under Continuing Resolutions should be a "Felony", but no one polices US Congress Do they??????
O) So Lobbyist get to work to privatize and capture federal budget contracts. They want your Medicare & Social Security next....
P) Fewer Commercial Banks indicates that TBTJ Banks have an advantage over the smaller Banks.
Q) Fewer Self Employed in the USA, fewer Small Businesses in the USA... I think we have the same 15 Million Small Businesses in the USA equal to like 1935, but the Population exploded you know??

Democracy = Free Speech, Free Press, Small Businesses, Free Internet, Self Employment... and No Money in Washington DC Politics, no Citizens United, Repeal McCain-Feingold Act, bring back Glass-Steagal Act

Itchy and Scratchy's picture

Ammunition shortages ....just sayin'!

Flakmeister's picture

Because the alternatives to "growth" that might be possible are anathema to the ruling elite...

Itchy and Scratchy's picture

Ammunition shortages ....just sayin'!

Tinky's picture

Two years later...

[adopt your best, slow-paced Yellen cadence and voice]

"Going forward, Senator, I believe that we will have to be more dilligent, and consider the possibility that our policies, no matter how well-intentioned, might prove catastrophic."

Flakmeister's picture

Almost forgot, you can't print oil....

Itchy and Scratchy's picture

Just wait until Paul Krugman reads this!

ebworthen's picture

No escape from immorality covers it.

On a long enough timeline.

orangegeek's picture


Der Kaufmann's picture

Can we please stop believing in economic theories from very past centuries? Unfortunately money isn't just a vehicle anymore, since you can get it from your central bank at zero rates, and lend it (sell) it to others for higher rates. It's a philosophical question: Are interest rates the price of money (borrowed)? If you say yes, Say's law is obsolete like all economic theories which might have been true centuries ago. Sure, the baker is buying shoes with bread. But he still has to transform it into fiat money in our current system before buying shoes. And if he can't transform it, his production didn't necessarily created demand. If there is no demand for his production, his production didn't create demand for himself. Or if he can transform, but doesn't buy shoes because he's smart and knows about deflation and wants to get the shoes for a lower price in the future. So the main question is still unanswered: What's money? Say's law is an utopic proposal and a possible answer, but it's not always true. Because in economics everything can be true depending on the circumstances in your economic model. I think we're far away from creating any realistic economic model. Mankind isn't that good in maths. And as long as the majority of economists can't accept, that the economy is made by man, and that the rules of the economy derives from behaviors of mankind, no one will deliver any satisfying answer.

SunRise's picture

What is money you ask? Money is the storage of your labor. You go to work and they pay you in dollars. So now I ask, Since money is the storage of your labor, isn't every person who takes your money without your permission actually using your labor without permission and when someone uses your labor without permission doesn't that make them a slave owner and you the slave?

TeethVillage88s's picture

Ain't he admitin' that the Big bankers are hoading the Cash like in the Great Depression???!!

"...President Mario Draghi is considering imposing negative interest rates to force money out of savings accounts and into the spending stream."

The Wealthy people with cash, the bankers with ZIRP or low interest money ... have connected themselves with all the economies around the world. They want only high yield investments for doing nothing, for low risk or sometimes with high risks in a diversified portfolio or strategy.

Dem's got not reason to help you'se or me. It is Great Depression part dux.

yogibear's picture

The PhDs at the Fed know their swiping wealth from the 99% and giving it to the 1%ers. 


MrFailSauce's picture

"Say's Law"

Biggest misnomer in economics.  Not only is it not a law, it is patently false. 

OC Sure's picture



Why call it fiat money?

Money mediates an exchange of something for something. The fiat, decree, is necessary to mediate the exchange of nothing for something. There is a decree because the currency is not money; it is counterfeit.

"The tyranny of modern economics began when the term money, the concept of money, was falsely redefined as if it could become detached from the percepts from which it was conceived. Money went from being defined as a unit of measuring one's work to produce a product that meets the demands of others to being named as just a medium of exchange. The tyranny of modern economics thereby changed the course of human events quite simply by redefining a word from what that word essentially represents to what it does not. As stated in my first post, what we choose to describe something as does not define what it is; it is what it is first and then defined correctly in accord with that fact. Tyranny's obfuscation of the language then is clear. They have been naming money for so long as the medium of exchange that no one asks anymore, 'the exchange of what?"'

- OC Sure; Tyranny of Modern Economics (to be released June 8th)




Hohum's picture

Nothing can bring "economic recovery."  But we'll continue to pretend our favored ideology can for some time to come.

OC Sure's picture

You are on to it. Something cannot ever come from nothing.

GooseShtepping Moron's picture

I agree with most of that, except the part about decalring unilateral free trade.

Free trade is suicide.

Spungo's picture

Instead of dropping interest rates and causing idiots to buy PIK bonds, the fed should raise interest rates to reward savers then print new money to put PIK bonds on their balance sheet. This way they get the desired malinvestment without fucking pensioners in the ass.

CHX's picture

stimulus to increase spending my a$$. most of what remains of the middle class have more debt on their shoulders than cash or assets. many are cash-flow negative, and piling on more debt just makes this worse over time (look at the US balance sheet). the flow of cheap money by CB goes right into the hands of the top 10% and the banks, but not to main street. the newly created money is the mechansim to keep interest rates artificially low, and overall inflation keeps rising. oil and energy are in a steady uptrend, and this alone will ensure plenty of inflation in the real world. tough spot for the world economy, and getting tougher, as the base (healthy income of the middle class) is activly being eroded away. so they keep on doing what they know doing, pile debt upon debt, and steal from savers through inflation (negative real interest rates). my hope is that it will get better after some sort of re-set, crash, but I seriously doubt it.