Saturday, January 3, 2015

Super Mario Draghi Smoking Some Seriously Dope Keynesian Weed

From Patrick Barron from Mises Canada: (emphasis by me)

From today’s Open Europe news summary:
Draghi: ECB ready to initiate QE to counter low inflation
In an interview with Handelsblatt, ECB President Mario Draghi warned that persistently low inflation in the Eurozone meant that “the risk that we do not fulfill our mandate of price stability is higher than six months ago”. Draghi reiterated that the ECB was ready to step in with a programme of Quantitative Easing, noting that “We are in technical preparations to adjust the scope, speed and composition of our measures for early 2015.”
ECB President Mario Draghi’s latest statement is full of Keynesian fallacies, to wit:
1. That price stability is a worthy goal. No, monetary stability is essential, so that prices may reflect the true preferences and productive limitations of the market in order to allocate scarce resources to their most important purposes as dictated by the market.
2. That low inflation or even deflation is harmful. No, in a economy with increasing productivity prices will fall, benefiting all of society. Preventing prices from falling or, as ECB President Draghi desires, encouraging price inflation, causes the Cantillon Effect, whereby early receivers of the new money benefit at the expense of later receivers. Continuing monetary expansion will cause the Austrian Business Cycle.
3. That GDP is a good measure of an economy’s success. if this were the case, then Zimbabwe would be a huge success story. GDP simply adds up the monetary prices of goods sold, so higher prices on the same or even slightly lower volume of sales necessarily will be interpreted by Keynesian economists as success.
4. That monetary expansion can spur an economy to greater prosperity. If this were the case, then counterfeiters would be doing all of us a big favor. Monetary expansion distorts the structure of production, sending more resources to the expansion of enterprises further removed from final consumption. This malinvestment eventually will be revealed by losses in these industries. The current collapse of commodity prices and anticipated bankruptcies in commodity production industries are a good illustration of this process and are attributable to massive monetary expansion by central banks since the 2008 great recession.

Mario Draghi must be smoking some crazy shit. Definitely gotta be something he bummed off from the Japanese. Must be the good stuff that Abe and Kuroda keep for themselves during important decisions about sinking their economy.

I'm focusing on the first 2 points, because I think they are much more important than the last 2 points. The first 2 points are actual goals broadcasted by the ECB, while the last 2 points are more of the by-products of striving towards those goals.

Price stability is a bad goal. If you understand Econs 101, you know that price is a derivative of supply and demand. Controlling prices destroys price discovery. Imagine if we had a price stability mandate for VCD PLAYERS or PAGERS. Exactly. This is a stupid ass goal. Why tell people how much things should cost? If that's the price people are willing to pay, that's the price it should be sold for.

Inflation is another nonsense goal. Deflation is not multiple magnitudes worse than inflation - unless of course, if you are a net borrower. (most of them are, which is why deflation CANNOT happen) Shit, if we don't like high inflation, why isn't deflation good? Targeting an arbitrary number as an inflation target is crazy. So along the spectrum of high deflation, low deflation, low inflation and high inflation, only low inflation is a good outcome? Ask yourself, why? The answer? Countries living on borrowed time and borrowed money.

I have really seriously honestly tried to understand all this Keynesian voodoo magical economics, but IT JUST DOESN'T MAKE ANY SENSE AT ALL.

You know what? Maybe I should head over to Frankfurt and have a puff of whatever Draghi is doing. Without my logic impaired, it's impossible for me to believe any of this crap.

Puff, puff, puff away my friend.

No comments:

Post a Comment

Observe the house rules.