On the Mises Institute’s website, Frank Shostak has an article called “Can Quantitative Easing Lift Economic Growth?“. He points out that there is no monetary pumping that can be beneficial for the economy. Instead, monetary pumping hurts the economy as it “leads to the weakening of the wealth generation process”.
Shostak is right on the money (no pun intended) in his analysis of monetary inflation. In his article, he states the following:
“Hence various studies that supposedly show that the Fed’s quantitative easing can grow the US economy are fallacious. To suggest that monetary pumping can grow an economy implies that increases in the money supply will result in increases in the pool of real wealth. This is however a fallacy since all that money does is serve as the medium of exchange. It enables the exchange of the produce of one specialist for the produce of another specialist and nothing more. If printing money could somehow generate wealth then world wide poverty would have been eliminated by now.”
This is an important point. Money, in this case the U.S. dollar, is a medium of exchange. By creating more money, we don’t get any more actual goods and services. The creation of money also doesn’t actually destroy wealth in and of itself. But as Shostak points out, it hurts the wealth generation process.
In other words, if the Fed creates another $1 trillion out of thin air tomorrow, this doesn’t actually destroy anything at that particular moment. But it does hurt future production in a big way. It redistributes wealth and it also misallocates resources. The newly created money changes how resources are used. We saw this back in the housing bubble when too many resources were diverted into the housing sector, as opposed to other consumer goods or savings and investment.
Monetary inflation distorts the economy. It sends artificial signals that are not in accordance with market demand. In the long run, it makes us poorer. Even people who directly benefit from the initial monetary inflation (for example, investors or bankers) are usually hurt in the long run. Everyone’s standard of living is affected in some way, as there is less production of goods and services that would be created absent the monetary inflation.
Many people, even free market thinkers, believe that the main problem with monetary inflation is that it causes prices to rise. While monetary inflation does cause prices to be higher than they otherwise would have been (not necessarily higher though), money creation is detrimental in many other ways. It redistributes wealth and it misallocates resources. We have a lower standard of living because of monetary inflation by the Fed. Unfortunately, it is a bad sign for our standard of living that the Fed continues to engage in massive monetary inflation.