Ben Bernanke, head of the Federal Reserve, seems dead set on his $600 billion “stimulus.”  Refreshingly, Americans seem willing to ask whether this is a good idea rather than just rolling over for the wisdom of the central bankers.  Is it a good idea?  Well, that depends on what BB wishes to accomplish and whether the goals are short or long term.

An injection of cash by the Fed into the economy is proposed to be just the medicine for our ailing economy.  Think of it as monetary liquor.  Pump some in, loosen people up some, and whoopee! there is your recovery.  Arguments for the system are basically Keynesian–people are not spending enough money, so the government needs to spend some.  Or rather, they need to give us the money to spend.

Aside from the obvious inflationary effects of more money, economic thinking like this forgets some fundamentals of wealth creation.  All wealth comes from business.  Printing more money or less money has little to do with the real underlying causes of prosperity.  Unless it is used to employ people to make things other people want, more money is useless.

And herein lies the problem.  Bernanke and company can inject all the cash they want into the economy.  Businesses are not going to do diddly-squat until they are relatively sure they can make long-range plans.  Given the uncertainty over health care, financial reform, and taxes, they are unlikely to do anything but hunker down and wait for some semblance of sanity from Washington.

Even if a cash injection were to work to prompt business to invest and hire, the long-term effects would be damaging.  Not only would the sheer increase in the money supply be inflationary; it would also cause us to put off the inevitable question of how unfunded liabilities such as Social Security and Medicare be paid over the next few decades.

At some point, and no one knows precisely when it will come, printing money will backfire as people recognize the dollar as worthless.  The best solution for a hangover is not to stay drunk or switch to another liquor, but to quit drinking altogether.  The day we give up fiat money is our first day clean and sober.

About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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