You Can't Print Production and Prosperity

Mises Daily by Doug French | Posted on 7/23/2009 12:00:00 AM

It's hard to imagine that the monetary policy talk can get any nuttier, but we've likely only just begun. After all, despite the Federal Reserve growing its balance sheet by 140 percent and dropping rates essentially to zero, the bankruptcies just keep on coming. Ex-Fed governor Wayne Angell told Larry Kudlow's CNBC audience, "monetary policy always works!" Although Angell does stipulate that it takes time before the tromping on the monetary gas pedal will spin the economic tires and spray the prosperity gravel.

But good grief, the Fed started cutting rates in September 2007, dropping the federal-funds rate from 5.25 percent to 4.75 percent, and it was cut, cut, cut until daddy set the target rate at 0 to .25 percent in December of last year. In the meantime, one trillion dollars has been added to the M-2 money supply.

Despite all this money creation, Circuit City, Sharper Image, Goody's, Gottschalk's, Comp USA, Levitz Furniture, Chrysler, General Motors, General Properties, and — most recently — Eddie Bauer have filed for bankruptcy protection. And personal bankruptcy filings are up in every state and soaring in Nevada, Georgia, Alabama, Tennessee, Indiana, and Michigan.

The talking heads and policy wonks are trying to tell us that we're not borrowing enough, and that's why we're in a depression and why the Japanese economy has been depressed for more than a decade.

However, the real reason we're in a depression is because businesses and individuals borrowed too much and invested it poorly. Economist Murray Rothbard explained that a depression is the recovery stage: "The liquidation of unsound businesses, the 'idle capacity' of the malinvested plant, and the 'frictional' unemployment of original factors that must suddenly and en masse shift to lower stages of production — these are the chief hallmarks of the depression stage."

That's why monetary policy isn't working and won't work. People must save and pay off their debts. The malinvestments of the boom must be liquidated. New liquidity and zero-percent interest rates will only create new malinvestments, not a sound economy. FULL STORY