I have to say, I actually really like Ben Stein as a human being. He seems like a really great guy. The first book I ever bought about stock market investing was written by him, and I followed him for a long time on FoxNews and later on Yahoo!Finance. I still occasionally read up on his columns in the American Spectator, but needless to say, if you've read anything on this blog up to this point, you'll know how very much I now disagree with the man. What Ben Stein is suggesting is mass monetary inflation. He justifies the expansion of the money supply on the grounds that the CPI is down, therefore inflationary pressures are low and an increase of the money supply will not result in appreciable price increases. This is the same justification Alan Greenspan used as he inflated the money supply through the 90's and early 2000's, without significant price increases AT THAT TIME. Now look what we have! These two men (and, frankly, most economists) fail to understand that stable prices are actually inflationary. Prices should fall as a result of increases in efficiency and productivity over time, not remain stable. Ben Stein is one of those guys who has the best education that money can buy. He has learned exactly what is taught in school and is widely viewed by mainstream folks as an expert in economics. A perfectly mainstream education for a perfectly mainstream guy. The problem is that what is taught in school is mainstream Keynesianism and it is wrong. The reader simply must understand a few things about monetary expansion:
Obviously, this is also a time for extreme monetary growth. As we economists would say, the velocity of money — that is, how often it changes hands — is falling rapidly. This means the Federal Reserve can pump up the quantity of money greatly to offset that fall without fear of inflation. There are the usual "pushing on a string" limits to how well this will work but it must be attempted.
The real issue choking the economy now is lack of lending and fear by the banks and other lenders. This must be met by explicit solvency guarantees from the central banks. There should be no pussyfooting around this. It's a matter of extreme urgency.
- Monetary expansion is inflationary regardless of its effect on price levels.
- Monetary expansion is redistributive in its effects. It is stealing by another name. It does not matter whether prices remain stable or not. Real purchasing power is transferred from holders of the old money to the recipients of the new money. The consequence is this is obvious, as I discussed earlier. (Anyone remember those strangely low savings rates these past years? Who in their right mind saves? Interest rates are too low, and if you don't spend your money, the government spends if for you!)
- Monetary expansion warps the price structure of the economy. This results in irrational investment, bubble activity, and a warped production structure that does not satisfy real needs in an optimal fashion.
- Monetary expansion erodes the most critical function of money: its ability to serve as an accounting system. Money's most important role is to allow resources to flow in an optimal fashion based on pricing structures. It is a "lubricant" of the economy, allowing rational resource exchange and flow to occur. It is NOT A MEASURE OF WEALTH! True wealth is contained in the goods and services produced in an economy. Money allows their exchange in a rational fashion to meet the needs of people. Hence, it acts as an accounting system to keep track of how things are best exchanged and make rational economic calculations for future plans. Monkeying with the money supply is disruptive to this process, screws up the accounting, and leads to irrational and destructive activities.