QE: Malinvestment Is the Major Risk

Buried in Kevin Warsh’s “Finding Out Where Janet Yellen Stands” in today’s Wall Street Journal, where Warsh “highlights─and then questions─some of the prevailing wisdom at the basis of current Fed policy”, is a short statement which illustrates the growing, but seldom acknowledged, influence of the ideas of Mises and Hayek on current thinking on monetary policy.

In the section where Warsh questions the wisdom of the assertion that absence of higher inflation is license for more and continuing monetary ease, Warsh provides a succinct summary of ABCT and even uses the “m” word (malinvestment):

The most pronounced risk of QE is not an outbreak of hyperinflation. Rather, long periods of free money and subsidized credit are associated with significant capital misallocation and malinvestment—which do not augur well for long-term growth or financial stability.

Warsh also highlights another unintended consequence of Fed policy where Austrian influenced writers have been leading critics of current policy – How Fed induced liquidity spreads to the rest of the world. See Monetary Nationalism and International Economic Stability or How the Fed Causes Booms (Andreas Hoffmann and Gunther Schnabl) and Busts in South America (Nicolás Cachanosky)

Comments

  1. Yes, it is important to remember that should not become slaves to government based statistics. The currency can gain or lose purchasing power without any change in the price level. Likewise, the currency can maintain its purchasing power with changes in the price level. We must not be trapped by monetarist theory. Austrian economics of Mises and Hayek sees beyond the superficial aggregate statistics of government bureaucrats.

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