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The QE2 – What would Keynes, Friedman, Mises do?

October 29, 2010

At Mostly Economics (blog of some economist from India), I read that Keynes would agree with the policy of the Fed and with the “quantitative easing 2”, and that Friedman would also agree (at least with the QE2). So is there anybody who opposed inflation? This is the question asked by Robert Wenzel from Economic Policy Journal. He mentioned two economists – Murray N. Rothbard and Ludwig von Mises, and then continues with this statement: “First, Mises, unlike Friedman and current Fed chairman Ben Bernanke, understood that the printing of money distorts the structure of the economy.”

This distortion of the structure of the economy may lead to consequences unforseen by those who support the QE2. The new money may be used for such investments which will later turn to be unproductive, and thus the phase of “growth”, caused by the QE2, will be followed by phase of decline of production and increase of unemployement.

Mr. Wenzel then quotes Mises:

“Out of the collapse of the boom there is only one way back to a state of affairs in which progressive accumulation of capital safeguards a steady improvement of material well-being: new saving must accumulate the capital goods needed for a harmonious equipment of all branches of production with the capital required. One must provide the capital goods lacking in those branches which were unduly neglected in the boom. Wage rates must drop; people must restrict their consumption temporarily until the capital wasted by malinvestment is restored. Those who dislike these hardships of the readjustment period must abstain in time from credit expansion.

There is no use in interfering by means of a new credit expansion with the process of readjustment. This would at best only interrupt, disturb, and prolong the curative process of the depression, if not bring about a new boom with all its inevitable consequences.”

Mises’s answer is that the only way out of recession is increase in real savings. He would be against the QE2.



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