Friday, August 12, 2011

QE Infinity

Ben Bernanke has announced that the Fed will hold interest rates at record lows until at least mid-2013. Predictably stock prices rose. It is clear now more than ever that the Fed sees its job number one as supporting security markets. Damn the malinvestment - Full speed ahead! The markets again put their faith in a man who has been wrong so many times before.

Perhaps be should be listening more to those who get it right: economists in the Austrian, causal-realist tradition. As Mises put it, for instance, back in 1931,

Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand.

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