Why Isn't Monetary Pumping Helping the Economy?

Tyler Durden's picture

Submitted by Frank Shostak via the Ludwig von Mises Institute,

Despite all the massive monetary pumping over the past six years and the lowering of interest rates to almost zero most commentators have expressed disappointment with the pace of economic growth. For instance, the yearly rate of growth of the European Monetary Union (EMU) real GDP fell to 0.7 percent in Q2 from 0.9 percent in the previous quarter. In Q1 2007 the yearly rate of growth stood at 3.7 percent. In Japan the yearly rate of growth of real GDP fell to 0 percent in Q2 from 2.7 percent in Q1 and 5.8 percent in Q3 2010.

In the US the yearly rate of growth of real GDP stood at 2.4 percent in Q2 against 1.9 percent in the prior quarter. Note that since Q1 2010 the rate of growth followed a sideways path of around 2.2 percent. The exception is the UK where the growth momentum of GDP shows strengthening with the yearly rate of growth closing at 3.1 percent in Q2 from 3 percent in Q1. Observe however, that the yearly rate of growth in Q3 2007 stood at 4.3 percent.

In addition to still-subdued economic activity most central bankers are concerned with the weakness of workers earnings.

Some of them are puzzled that despite injecting trillions of dollars into the financial system so little of it is showing up in workers earnings.

After all, it is held, the higher the earnings, the more consumers can spend and consequently, the stronger the economic growth is going to be.

The yearly rate of growth of US average hourly earnings stood at 2 percent in July against 3.9 percent in June 2007. In the EMU the yearly rate of growth of weekly earnings plunged to 1.3 percent in Q1 from 5.4 percent in Q2 2009. In the UK the yearly rate of growth of average weekly earnings fell to 0.7 percent in June this year from 5 percent in August 2007.

According to Vice Chairman of the US Federal Reserve Stanley Fischer, the US and global recoveries have been “disappointing” so far and may point to a permanent downshift in economic potential. Fisher has suggested that a slowing productivity could be an important factor behind all this.

That a fall in the productivity of workers could be an important factor is a good beginning in trying to establish what is really happening. It is however, just the identification of a symptom - it is not the cause of the problem.

Now, higher wages are possible if workers’ contribution to the generation of real wealth is expanding. The more a particular worker generates, as far as real wealth is concerned, the more he/she can demand in terms of wages.

An important factor that permits a worker to lift productivity is the magnitude and the quality of the infrastructure that is available to him. With better tools and machinery more output per hour can be generated and hence higher wages can be paid.

It is by allocating a larger slice out of a given pool of real wealth toward the build-up and the enhancement of the infrastructure that more capital goods per worker emerges (more tools and machinery per worker) and this sets the platform for higher worker productivity and hence to an expansion in real wealth and thus lifts prospects for higher wages. (With better infrastructure workers can now produce more goods and services.)

The key factors that undermine the expansion in the capital goods per worker are an ever expanding government and loose monetary policies of the central bank. According to the popular view, what drives the economy is the demand for goods and services.

If, for whatever reasons, insufficient demand emerges it is the role of the government and the central bank to strengthen the demand to keep the economy going, so it is held. There is, however, no independent category such as demand that drives an economy. Every demand must be funded by a previous production of wealth. By producing something useful to other individuals, an individual can exercise a demand for other useful goods.

Any policy, which artificially boosts demand, leads to consumption that is not backed up by a previous production of wealth. For instance, monetary pumping that is supposedly aimed at lifting the economy in fact generates activities that cannot support themselves. This means that their existence is only possible by diverting real wealth from wealth generators.

Printing presses set in motion an exchange of nothing for something. Note that a monetary pumping sets a platform for various non-productive or bubble activities — instead of wealth being used to fund the expansion of a wealth generating infrastructure, the monetary pumping channels wealth toward wealth squandering activities.

This means that monetary pumping leads to the squandering of real wealth. Similarly a policy of artificially lowering interest rates in order to boost demand in fact provides support for various non-productive activities that in a free market environment would never emerge.

We suggest that the longer central banks worldwide persist with their loose monetary policies the greater the risk of severely damaging the wealth-generating process is. This in turn raises the likelihood of a prolonged stagnation.

All this however, can be reversed by shrinking the size of the government and by the closure of all the loopholes of the monetary expansion. Obviously a tighter fiscal and monetary stance is going to hurt various non-productive activities.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Chupacabra-322's picture

Why? It's one huge Ponzi. That's why.

AssFire's picture

Exactly my mangy coyote, if every nation moves in the same direction (debasing and inflating)- the perspective, without a reference value (gold) remains unchanged.

Eventually, the crap on the banks' books (those removed from mark to market) will actually match the number on the books... or so they hope.

knukles's picture

Because we're in a Liquidity Trap.

Publicus's picture

Because the cash is not given directly to the people. Instead, it is given to the rich.

SoberOne's picture

Audit, then end the fed. Return the power back to the people.

wallstreetaposteriori's picture

Simple answer..  The two are completely unrelated.

AldousHuxley's picture

Because all of that money goes straight back to the banks in the form of mortgages.


unlike sector specific recession, housing bust is the most problematic because money printing goes to save overvalued assets on paper and not into production of new goods.


BUILD TWICE AS MANY HOMES and you will see middle class spend again.

sosoome's picture

Too simplistic. End the fed and congress will just take over. There is a reason the FRA, the 16th, and 17th amendments were enacted in unison.

sosoome's picture

" Fair Tax" does nothing to stop the profligate spending and insane money-go-round.

Tax the states, as the Constitution allows, and restore state representation in Congress. Fair and flat tax schemes merely reshuffle the chairs on the Titanic.

ebworthen's picture

Yup.  Pushing on a string doesn't work. 

Janet, where is my $3 Million tax free?

Pairadimes's picture

Er, could it be because currency is not money? Or maybe because we are trying to fix a solvency problem with liquidity? Or because our semantics are fucked up, and what we are really doing is pumping debt into an already insolvent economy? Or possibly because the patient is too far gone for any heroic measures? But by all means, don't let that stop you.

shovelhead's picture

I'm sure they can unwind trillions of derivatives, stop QE and raise interest rates without any problem.

It's just a matter of concentration.

Then we can focus on 6% growth.

Problem solved.

SAT 800's picture

Why should monetary pumping help the economy? The whole idea is ridiculous to begin with. It's like praying to goat bones over a campfire to make it rain. Completely false theorey; useless; junk economics. You can't "help" an economy by making more currency units; surely that's obvious.

NOTaREALmerican's picture

Well...   It worked for half a century.    How could something that worked so well, suddenly stop working?  

Creepy A. Cracker's picture

Because praying to goat bones over a campfire to make it rain has an expiration date.  Printing money has never worked over any reasonable period of time.  It, like we are seeing, only boosts some sectors for them to come crashing down when reality strikes.

gdiamond22's picture

It's not supposed to help the economy;it's supposed to help those closest to the spicket

SoberOne's picture

Spigot, but it's all good. A great trivia question!

gdiamond22's picture

Well played. It seems QE has been detrimental to my purchasing power and brain utilization.

josephpetronyc's picture

the robot are taking all the jobs , and the rich people or anyone with 1/2 a brain is holding or hilding there money

Dapper Dan's picture

 possible not a spelling error after all.


hilding [hil-ding] /?h?l d??/ SpellSyllables


noun, Archaic.
a contemptible person.
BandGap's picture

Uh, sure. "there" money.

all your robot are belong to us.

NOTaREALmerican's picture

Re: The more a particular worker generates, as far as real wealth is concerned, the more he/she can demand in terms of wages.

Funny one,  but (regardless of the above humor) why do people keep saying the economy isn't improving?   How GOOD, exactly, can the economy get?    Everybody, I know is doing better than ever.  

SoberOne's picture

The labor participation rate could be better, historically speaking.

NOTaREALmerican's picture

Yeah,  but,  really?   What are they going to that we don't already have done?    They aren't exactly starving to death.  So,  why rock the boat. 

silverer's picture

I knew this country was in for a bad ride when I heard three or four years back that for the first time in history, the U.S. worker suffered a decrease in productivity.  To get a report like this, and continue to add debt, means it is impossible to 'grow out of' the debt and the policy makers had to know this.  But Americans are those trusting, ever optimistic people that 'believe in America'.  They wave their little flags at parades and pick their kids up high so they don't miss the propaganda, and the abuse goes on...

Escrava Isaura's picture

That's right, girlfriend,

72% of this country believes in Angels.

But, decrease in productivity in the last four years?

Are you kidding us?

Otherwise, you have lots of catching up to do.

The Most Interesting Frog in the World's picture

ZH should raise it's standards. You haven't made one coherent comment since you have been on here. Please do yourself and your country a favor by placing a shotgun under your chin and pulling the trigger. Shit, you might fuck that up. I know, jump from at least a 20 story building. Even someone as stupid as you couldn't screw that up. You could be like a suicide bomber for stupid people but instead of killing yourself and other people you would just kill yourself, and still get all the glory ;)

AssFire's picture

it is a bot; nobody here responds to it... it will leave.

Escrava Isaura's picture

The Most Intere..., AssFire,

silverer wrote:

“I heard three or four years back that for the first time in history, the U.S. worker suffered a decrease in productivity.”  

US productivity and wealth, COMPARED to the rest of the world, peaked in 1945. It started declining in 1949, and not 4 years ago.


Then, she added: “Americans are those ever optimistic people wave their little flags at parades and pick their kids up high so they don't miss the propaganda, and the abuse goes on...”

In a nation that 72% believe in angels, picking their kids up high so they don’t miss the propaganda should not come as a surprise. Silverer should expect it!


The Most Interesting Frog in the World's picture

You may not be a real American, but you are a real dumbass.

world_debt_slave's picture

pumped to the 1% and vacuumed from the rest

carbonmutant's picture

Not designed to help the economy. It's designed to transfer control...

Bay of Pigs's picture

Prolonged stagnation? How about a hyperinflationary Greater Depression with WWIII thrown in for good measure?

That's where we are headed.

shovelhead's picture

At least it's a comfort to know we're heading somewhere rather than bumping around aimlessly to a slow death.

There's always a silver lining.

Dr. Engali's picture

A lot of useless words when it all comes down to the fact that those closest to the printing presses get the benefit. By the time it trickles down to us, our buying power is inflated away. It amazes me how nobody ever addresses the debt and the over capacity we have in every sector of the economy, including labor which we allow to flow freely over the border and outsourcing the rest.

Bay of Pigs's picture

+1 Doc

Central Banks are the scourge of humanity, and have been for hundreds of years.

Escrava Isaura's picture

Dr. Engali

You wrote: "A lot of useless words..."

Not, if the goal is to brainwash.


Then, you have, the ‘Well Indoctrinated’ -- brainwashed

Bay of Pigs

"Central Banks are the scourge of humanity"

Pigs, you have no clue about what you are talking about


shovelhead's picture

Cheer up Doc...

When that trickle becomes a tsunami because the world rejects holding dollars, you'll look back and think these were the good old days.

We'll be mulching those dollars to make fire logs to keep warm.

Rainman's picture

easy ... monetary pumping is greasing the squeaky rickety wheels of the debt train. Nothing moves when that train stops.

ejmoosa's picture

It's a less than zero sum game.  For every dollar injected, there's more than a dollars worth of malinvestment and ineffective production.

Bad and worthless investments are worse than no investment at all.  That's because the real businesses have to compete against the subsidized ones....and that destroys their true potential.

shovelhead's picture

Even a bad investment is good with free money if you can afford to wait.

You don't get free money?

Well then, I can see your point.

wmbz's picture

How can there be anyone left in this world who can even remotely believe that central banks/planners would ever change the course they have been on. Not going to happen period! These mother fuckers will print, lie, cheat, steal, commit fraud,etc... until the bitter end. That's what they do and have been doing for decades. Screw the serfs, it's easy and they are too damn stupid to understand just how stupid they are.  There will be no "change" until this son of a bitching system blows up.

NOTaREALmerican's picture

Re:  How can there be anyone left in this world who can even remotely believe that central banks/planners would ever change the course they have been on.

I think the trusting people who generally trust the smarter people would tend to think that most people are just trying their best.  

roadhazard's picture


Because like all "trickle down" it doesn't.

tgatliff's picture

Most people know what the problem is and know exactly how to fix it.  The problem is that the remaining people are in on the game and have no real desire to change it.  


The real issue, IMO, is that producing a real economy takes time and doesnt fit into short election cycle time frames.  Also, politicians do not get elected by doing the right thing.  They get elected by making the economy look good while they are in office.  Ronald Reagen is a good example of this.   People endlessly talk about "morning again in America" and endless other phrases and talk about how good things were during his time.  However, what his administrations policies unleashed (looking at you Greenspan) is what we are dealing with now.

Real productive economies is not easy.  It requires people that get rewarded for actually doing and building things that create real productive advantages (aka time savings and/or technological advantage).  In the short term, it is always allot easier to create an asset based economy and pass inflated money back and forth between each other and talk about how smart the most leveraged players are.

shovelhead's picture

One thing you can say about Reagan.

He was exceptionally good at picking the absolute worst people to run his administation while thinking that they were doing what he wanted them to do.

He tried to run the Presidency like the Governors office where the people you pick are on your side.

Fatal mistake. Good intentions without a sharp throat cutting knife will get you nowhere.

daveO's picture

His biggedt mistake was made before he even went into office. It was when he accepted GHWB as running mate at the threats made by the head of the CFR. He almost died thanks to it. 

daveO's picture

Greenspan went into office in 1987, six years into Reagan's tenure. Greenspan had written a defense of the gold standard in 1966, 19 years before. Greenspan immediately raised rates and cratered the market. Then, he spent the rest of his tenure doing just the opposite, juicing the market with low rates. He was smart enough to know who was paying his check. It wasn't Reagan or any other politician.