Monetary intervention in credit markets is often easy to initiate but extremely challenging to reverse. Once begun, it becomes a near-impossibility to halt. Just ask Ben Bernanke, the former chairman of the Federal Reserve.
He pledged to expand the Fed’s balance sheet by over $1 trillion annually until job numbers improve. Given the money multiplier effect and the “magic” of fractional reserve banking, each $1 trillion injected into the Fed’s balance sheet could eventually become $5 trillion—or even more—circulating in the economy.
Unless you relish the idea of paying $10 for a cup of coffee, we can only hope this influx of money doesn’t gain any real traction. So, why is Bernanke creating so much potential money?
Let us consider, in a Socratic manner, a rhetorical question: What would occur if Bernanke chose not to inflate the money supply?
Once the financial system has become reliant on inexpensive credit, withdrawing that support would lead to an economic breakdown. Additionally, increasing amounts of credit are required to maintain the facade of economic stability. This cycle perpetuates itself until, inevitably, the entire monetary system collapses in a more severe economic implosion.
“There is no means of avoiding the final collapse of a boom brought about by credit expansion,” Austrian economist Ludwig von Mises explained in Human Action. “The alternative is merely a question of timing: will the crisis arrive sooner due to the voluntary cessation of further credit expansion, or later, as a total catastrophe of the currency system?”
Bernanke, Obama, Congress, and the 49 percent of American households receiving government assistance are aiming for the latter scenario. There is no wish to voluntarily abandon the expansion of credit; instead, the United States, like many Western nations, appears firmly on the path to total financial catastrophe.
The Politics of Doing the Right Thing
There may be some well-meaning individuals who believe that with the right policy actions, everything will turn out fine. However, they are likely to face a rude awakening. With each policy movement, they get closer to total catastrophe.
Ironically, for politicians and central bankers, pursuing disaster can be the most convenient option. Everyone seems inclined to postpone the inevitable. Accepting the crisis sooner, thereby voluntarily changing course, is not on the agenda for current leaders, as they understand that this approach would likely cost them their positions.
Take, for example, Leszek Balcerowicz, the former central banker of Poland. From 2001 to 2007, Balcerowicz resisted the easy money policies that most of Europe was promoting. While other central bankers carelessly issued cheap credit, Balcerowicz maintained a tight monetary policy.
In essence, when others were encouraging reckless behavior, he deterred it. Consequently, Poland successfully avoided the boom-bust cycles that plagued many other nations during the early 2000s. Notably, Poland was the only country in the European Union to escape recession in 2009 and has since outpaced all other EU economies in growth.
Yet, rather than receiving gratitude or accolades from his fellow countrymen, Balcerowicz was shown the door at the end of his term in 2007. Nevertheless, he remained unbothered; he prioritized doing what was right over chasing political popularity.
“We Know Better!”
“People tend to personalize reforms,” Balcerowicz recently remarked to the Wall Street Journal. “I don’t mind. I take responsibility for the reforms I launched.” He also noted that he “understands politicians who give in [to reform], but does not accept it.”
Having witnessed the fallout of poor economic policies while growing up in state-controlled Poland, Balcerowicz even had a brief tenure at the communist Party’s Institute of Marxism-Leninism before the Soviet collapse. He is critical of the current policies espoused by both the Federal Reserve and the European Central Bank.
“They think they know better,” Balcerowicz states, commenting on the latest trends in central banking. He suggests that risk premiums (interest rates) are deemed excessively high “according to them!” He recalls a similar sentiment from socialism: “We know better!”
Balcerowicz also argues that both the United States and Europe are pursuing misguided fiscal policies. “If you reform to reduce current spending—which is already too high—you’re far more likely to succeed in fiscal consolidation than by raising taxes, which are already burdensome.” He believes that many mistakenly perceive tax hikes as warranted while spending cuts are unjust.
Does that sound familiar?
Sincerely,
MN Gordon
for Economic Prism