Inflation's Not The Only Way Easy Money Destroys Wealth

Tyler Durden's picture

Submitted by Frank Shostak via Ludwig von Mises Institute,

The US Federal Reserve can keep stimulating the US economy because inflation is posing little threat, Federal Reserve Bank of Minneapolis President Kocherlakota said. “I am expecting an inflation rate to run below two percent for the next four years, through 2018,” he said. “That means there is more room for monetary policy to be helpful in terms of … boosting demand without running up against generating too much inflation.”

The yearly rate of growth of the official consumer price index (CPI) stood at 1.7 percent in August against two percent in July.

According to our estimate, the yearly rate of growth of the CPI could close at 1.4 percent by December. By December next year we forecast the yearly rate of growth of 0.6 percent.


Does Demand Create More Supply?

It seems that the Minneapolis Fed President holds that by boosting the demand for goods and services - by means of additional monetary pumping - it is possible to strengthen economic growth. He believes that by means of strengthening the demand for goods and services the production of goods and services will follow suit. But why should that be so?

If by means of monetary pumping one could strengthen the economic growth then it would imply that - by means of monetary pumping - it is possible to create real wealth and generate an everlasting economic prosperity.

This would also mean that world wide poverty should have been erased a long time ago. After all, most countries today have central banks that possess the skills to create money in large amounts. Yet world poverty remains intact.

Despite massive monetary pumping since 2008, and the policy interest rate of around zero, Fed policymakers seem to be unhappy with the so-called economic recovery.

Note that the Fed’s balance sheet, which stood at $0.86 trillion in January 2007 jumped to $4.4 trillion by September this year.


Production Comes Before Demand

We suggest that there is no such thing as an independent category called demand. Before an individual can exercise demand for goods and services, he/she must produce some other useful goods and services. Once these goods and services are produced, individuals can exercise their demand for the goods they desire. This is achieved by exchanging things that were produced for money, which in turn can be exchanged for goods that are desired. Note that money serves here as the medium of exchange - it produces absolutely nothing. It permits the exchange of something for something. Any policy that results in monetary pumping leads to an exchange of nothing for something. This amounts to a weakening of the pool of real wealth - and hence to reduced prospects for the expansion of this pool.

What is required to boost the economic growth - the production of real wealth - is to remove all the factors that undermine the wealth generation process. One of the major negative factors that undermine the real wealth generation is loose monetary policy of the central bank, which boosts demand without the prior production of wealth. (Once the loopholes for the money creation out of “thin air” are closed off the diversion of wealth from wealth generators towards non-productive bubble activities is arrested. This leaves more real funding in the hands of wealth generators - permitting them to strengthen the process of wealth generation (i.e., permitting them to grow the economy).

Artificially Boosted Demand Destroys Wealth

Now, the artificial boosting of the demand by means of monetary pumping leads to the depletion of the pool of real wealth. It amounts to adding more individuals that take from the pool of real wealth without adding anything in return — an economic impoverishment.

The longer the reckless loose policy of the Fed stays in force the harder it gets for wealth generators to generate real wealth and prevent the pool of real wealth from shrinking.

Finally, the fact that the yearly rate of growth of the CPI is declining doesn’t mean that the Fed’s monetary pumping is going to be harmless. Regardless of price inflation monetary pumping results in an exchange of nothing for something and thus, impoverishment.

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kchrisc's picture

All utterances by the FedRes, and their government puppets, are nothing more than lies and cover for their thefts and an excuses for more.

An American, not US subject.

GrowerJohn's picture

I would suggest reading Mark Boyle's "Moneyless Man: A Year of Freeconomic Living".




Rememberweimar's picture

I would suggest reading Mein

Dick Buttkiss's picture

"All utterances by the FedRes, and their government puppets, are nothing more than lies and cover for their thefts and an excuses for more."

In other words:

"Everything the state says is a lie, and everything it has it has stolen." — Frederich Nietzsche

kchrisc's picture

Damn Frederich Nietzsche! He copied my thought.

I'm going to sue him.


An American, not US subject.

Sad thing is, we shouldn't have to be saying it still.

max2205's picture

'Because the numbers we made up are running below what we thought we'd made them'

Have a nice day

Duc888's picture

"Boosting demand", is that more liar loans?

craus's picture

Everything is going up in cost.

When's the last time Yellen bought a gram of crack?

Bell's 2 hearted's picture



deflation on tap

paul steinert's picture

"Production comes before demand"?  Are you kidding me?

"Before an individual can exercise demand for goods and services, he/she must produce some other useful goods and services."  You mean all those deadbeats going into 8 years of debt with subprime auto loans for their new ride are the ones who are producing useful goods and services?  This articl sucks

Bell's 2 hearted's picture

channel stuffing


buy gift cards for holidays


and get 50% to 80% off afterwards

BigJim's picture

Try rereading the article, slowly, and perhaps you'll see that's not what he's saying.

Or perhaps you won't. On second thoughts - forget it. Here's a link for you:

withglee's picture

There is no "monetary pumping" if those people pay back those car loans. If they don't, there is DEFAULT. If DEFAULT is not matched by INTEREST collections (immediately), INFLATION results. The relation is: INFLATION = DEFAULT - INTEREST.

Accepting people's promises to complete trades (loaning money and collecting regular repayments) is no different than insuring their risk in exchange for premium payments. It's an actuarial issue.

OC Sure's picture

This appears to be Frank's paraphrase from any number of articles posted on my blog such as this:

"We are surrounded by this deception of not identifying money's original nature that money represents working to produce a product first and then it can be used to mediate an exchange with someone else who also worked to produce a product; the exchange money mediates is a win-win situation, full value for full value. It is because this fundamental principle of what money is has been falsified that all that depends upon it is thereby false too."


It is good to see a career intellectual learn from my identification of the difference between money and counterfeit and how this knowledge can work to undermine tyranny.

Clowns on Acid's picture

You obviously missed the point.

disabledvet's picture

I would agree IN THEORY that ENERGY PRODUCTION can come before demand. (In other words so long as energy production continues to soar because of the nature of its "peculiar demand"--look up ELASTICITY) but in a world war money is simply "conjured up" via some Jewish Wizard it's really hard to argue with Karl Marx here and simply go long production period. "If I can sustain a run rate who gives a phuck about the price?"

By definition we are capital constrained in an all fiat world...just make it a very capital intensive business and PRESTO! YOU'RE A GOVERNMENT!

Oil is a case study really. "Oil is money, everything else is debt."

Of course you gotta watch "the game in transition" (to use basketball metaphor)...we had huge energy battles before oil..and are having another one now "post oil" (natural gas.)

Since "merely trillions" are on the table who gives a phuck about the real story of course...

limacon's picture

Wealth = intelligence + knowledge

The knowledge is available in abundance via the Internet .

But the Intelligence needs a boost 

See how

The Giga Society wants YOU to join them .

Be smart if you dare .

Peter Pan's picture

Nothing boosts demand more than having real jobs producing real things.

Unfortunately financialization produces nothing but theft of real jobs and real production.

Once that balance between real and false is disturbed it becomes almost impossible to regain traction becsuse the finance function and its squid like hold over the economy will not shrink to allow real people to do real things.

By flooding the free market with debt they effectively shackle productive hands as well as the free market and this gives rise to a dependent underclass which threatens to become ugly once the bread and circuses are taken away.

humble_man's picture had me at "financialization produces nothing."

Bell's 2 hearted's picture

"Long-run monetary neutrality is an uncontroversial, simple, but nonetheless profound proposition. In particular, it implies that if the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative."


 "If the FOMC hews too closely to conventional thinking, it might be inclined to keep its target rate low. That kind of reaction would simply re-enforce the deflationary expectations and lead to many years of deflation."


any guesses to author?


Kocherlokata 2010

Bell's 2 hearted's picture

what is interesting about this speech.  The only time he voiced this opinion.


Pretty obvious he got read the riot act by bernanke.


  afterwards, he only spewed the company line

Dre4dwolf's picture

Remove debt, and you will have prosperity.

Remove taxation, and you will have prosperity.

Remove central banks and fractional banking, you will have prosperity.


Its about time banking and money industries got replaced with computers, we dont need people making money off transactions, we need people producing things worth transacting for.


besnook's picture

which is why the fed will try the direct approach for the christmas season. cash in every pocket.

djsmps's picture

Small things add up. Garlic just went up 20% where I buy it ( a little Asian market). I haven't bought sour cream in at least a year. It's up 25%

Clesthenes's picture

“Artificially Boosted Demand Destroys Wealth”

Yes, I agree, but it is much worse than that: it is the process by which a generation of tax consumers financially cannibalizes following generations of tax payers.

Money creation, by central banks, occurs by the purchase of debt instruments with new currency or new bank reserves issued by the central bank.  Such debt instruments are pre-existing, the new currency or bank reserves are newly created.  This process is known as monetization of debt.  In the case of public debt instruments (such as US Treasuries), they necessitate the imposition of taxes on following generations of taxpayers, and such monetization facilitates the process by delaying the need to impose such taxes.  Either way, such debts represent a means by which following generations of taxpayers (our children and grandchildren) are financially cannibalized by the present generation of spendthrifts and cutthroats.

What can we say about a society that allows this to happen… that it can’t survive… that it does not deserve to survive?  I respond with a positive answer to both alternatives.

But that doesn’t mean that every individual in that society should perish; only those who fail or refuse to take measures to protect and save themselves.

So, what shall we do… use that mush in our brains, some call indoctrination, to design a correction… or learn lessons of those very few men who authored three of the eras in human history that actually advanced the cause of liberty – instead of merely replacing one tyranny with another?


If we choose the first, how can we expect to defeat a nation that has been perpetrating general plunders and genocides continuously for over 4000 years?

DOGGONE's picture

Here is proof:
"The Public Be Suckered"

hardmedicine's picture

There are only just a few percentage points of the population that understands this basic principle. 

gcjohns1971's picture

When He broke the third seal, I heard the third living creature saying, “Come.” I looked, and behold, a black horse; and he who sat on it had a pair of scales in his hand. And I heard something like a voice in the center of the four living creatures saying, “A quart of wheat for a denarius, and three quarts of barley for a denarius; and do not damage the oil and the wine.”


Scales are the tool of the moneychangers.  A Denarius is a day's earnings.  Wheat is the food staple for the middle class.  Barley is the food staple for the lower class.  Wine and Olive Oil are staples for the upper class. 

Inflation delivers the wealth of the lower and middle classes who do not hold inflatable assets to the upper class who do.  The result is that food becomes expensive for the lower and middle classes, but the upper classes are not harmed.


withglee's picture

Any time you see the term "monetary pumping" you know you're going to hear from Shostak. There is no such thing as monetary pumping. That sounds like raising the water level in your swimming pool.

Rather, it is plain and simple counterfeiting. Those who "can" print themselves money (accounting entries) to pay their bills. They're called governments. It's not pumping ... its simply defaulting on purpose and with consequences only to others.

It's built into our economic system ... on average 4% per year since Fed origin in 1913.Heck, they have a formal objective to counterfeit at the rate of 2% per year.

Inflation can and should be guaranteed to be zero all the time everywhere. It is by design that it is not. Inflation is government's principal method of funding itself. Taxes are just about paying interest.

techstrategy's picture

Yep.  And soon it will be clear how the financial sector has created synthetic financial profits through option manipulation to feed itself while starving the real economy by keeping all the excess reserves at the Fed  so as to not increase the velocity of money and inflation in the real economy (and collecting risk free profits in the process)

hangemhigh77's picture


Overdrawn's picture

Here's an interesting chart on the dollar index showing that the Fed's playing symmetry:


Bottom to Peak 1980-1985=(5) 1995-2001=(6) 2011-2017=(6)
Peak to Bottom 1985-1992=(7) 2001-2008=(7) 2017-2024=(7) 
Bottom to Bottom 1980-1992=(12) 1995-2008=(13) 2011-2024=(13)
Price ranging 1992-1995=(3) 2008-2011=(3) 2024-2027=(3)

If the decade term downtrend line holds, US dollar might hit around 90.5 by late 2016 or early 2017
and then go down all the way to 63.5

homebody's picture

Economy of the lazy.  Stop the free stuff now or many will starve.  Vote for any that insist we take the bitter pill now.  If not, all that will be left - the violent gangs in the cities and the rest of us that have moved to the wilderness.  

JetsettingWelfareMom's picture

"Note that money serves here as the medium of exchange - it produces absolutely nothing."

I am routinely amazed at how few people understand that concept. I went to Isaan in the North of Thailand and quipped to one of my friends back in Ohio that I ate great organic food all week for nothing. She asked who paid for me. It didn't occur to her that the food I was referring to grew out of the ground (I helped with the rice harvest a bit) and therefore had been produced independent of valuation by a fiat currency.

I often think of Maslow's hierarchy of needs I learned in Psychology--there should be an expanded hierarchy, which goes at the lowest levels to those things without which you will die the fastest. Oxygen would then be at the bottom of the pyramid, the most valuable thing in this Earthly universe. Water then food next, shelter, which might be more or less necessary depending on weather condition, all the way up to the peak of the pyramid with spiritual enlightenment. A lot of the middle hierarchies (family ties and community) could be debated upon. What strikes me about such a pyramid of value is that nothing in it is intrinsically monetary based--we all know they'd love to charge us to breath (kinda like the movie "In Time'), water and food systems are corrupted more every year into 100% dependency on the state. Shelter has to act and look a certain way and hopefully be in an area where its "value" causes a property tax revenue boom to the overlords. Any system on this pyramid that can be corrupted with a fiat worldview, has been.

It's scary how few people know that, least of all the central bankers....

AdvancingTime's picture

Currencies are IOUs, glorified and pretty pieces of paper printed and handed out by governments. Whether because of modern printing options or in an effort to thwart counterfeiters most of us will admit countries have raised the bar concerning the appearance of their currency.

This has almost become a full blown beauty contest and taken our minds off what is really behind these pretty little tokens. A piece of paper with great power, based only on faith, they are mere promises of stored value and wealth, and the value of these promises can change in an instant. With this in mind currencies may not be the best place to store your wealth. The article below delves deeper into currencies as a great "Trojan horse" for governments to fleece the average citizen of their wealth.

Farmer Joe in Brooklyn's picture

Loaded up the truck on XLF and SPX puts yesterday...!!  Now, time to get some popcorn and watch the show...!! 

Burn, baby, burn.....