A Flawed Analysis Of What Ails The Economy

A Popular Meme, that Remains as Wrong as When it Was First Conceived

A recent article in the Guardian mocks JC Juncker’s latest scheme to produce some €300 billion in “investment” with a magical money multiplication scheme. Naturally, we agree that Juncker’s plan is deeply flawed, to put it as politely as possible. We have pointed this out already, even before he made the financing details known, which make very little sense.

The article also correctly notes that “QE” has not achieved anything worth noting. However, it is otherwise based on an utterly flawed analysis. The author pleads for “QE bombing” the citizenry itself, i.e., he wants central banks to print money and simply hand it out to everybody. A similar proposal has been made by several economists recently, in Germany and elsewhere. It follows on the heels of the just as absurd idea that central banks should simply “cancel” the government debt they have bought.

Apparently the purveyors of these hoary inflationist schemes – which arguably are economically an order of magnitude more crazy than what modern-day central bankers have already perpetrated – have forgotten about John Law and post-revolution France. The assumption that the British pound would have retained anything close to its current purchasing power if 24,000 pounds had been mailed to every family in the UK is absurd. But this is by far not the only or even the most important problem. The main problem is that all these supporters of unbridled inflationism are making the cardinal mistake of confusing money with wealth.

We want to pick out just one quote from the article and briefly explain what is wrong with it:

Ever since the credit crunch the continent has been suffering what Keynes called a classic liquidity trap. There is too little money around and thus a chronic shortage of demand. People have too little to spend, which means shops close, supplies dry up and no one invests.

This analysis is makes no sense whatsoever. There is no such thing as a “liquidity trap” or a “demand deficiency”. Those are Keynesian figments of the imagination. We personally know people in Europe who want to buy a big yacht, their own jet plane and their own island. They are evidently anything but “demand deficient”.