The Liquidity Obsession
13 de abril de 2020

There is no word that has been repeated more during this COVID-19 crisis than “liquidity”. All economic policies are focused on guaranteeing it. On the monetary side, central banks have decided to implement heavily expansionary plans: the ECB, with a plan worth 750 billion euros, and the Fed, with 700 billion (along with mentioning the possibility of allowing for unlimited monetary injections). On the fiscal side, all countries have designed recovery programs in which, to a large extent, the state functions either as a guarantor or as a lender through public credit companies.

An economist of the Austrian school will always be skeptical of any kind of public intervention, whatever mood he or she is in. We know from F.A. Hayek’s theory of scattered knowledge that the state at all times faces a problem of dispersed and subjective information, preventing it from planning the economy in all of its facets.

This argument is also based, for example, in the Austrian business cycle theory (ABCT). It posits that the authority that intervenes in the money and credit markets is not capable of knowing the time preferences of the agents who are involved (which by extension are a manifestation of this same subjective and dispersed knowledge). Because of this, by setting an interest rate, the result will be the creation of economic distortions and lack of coordination. These distortions then give way to the cycle of economic expansion and recession. The central argument of the theory of the impossibility of economic calculation is applicable to any situation in which the state intervenes.

The massive injection of liquidity (an expression used to say that money is being created from nothing) does not escape this argument. We know that money as a store of value is the most liquid form of exchanging production that has been invented through spontaneous order. We must not forget, therefore, that money is always in reference to production. Thus, we must ask ourselves this: Can we create money without aid in the form of an increase in production? The answer, in light of the economic slowdown, is evident.

Production is falling, and is expected to fall suddenly, and to historically unprecedented levels. There is currently no increase in the demand for money. If this is the case, why are we creating more? Would this not produce inflationary effects? Everything will depend on the channels through which the new money enters, and how it ends up becoming available. However, what we do know is that significant distortions will be generated. The main objective of the fiscal and monetary authorities is to avoid a drop in GDP in the short term, or in other words, they do not want the consumption of present goods to fall. They therefore want agents to possess liquid cash to continue executing their operations.

In a conjuncture like this, business losses translate into lower consumption of capital goods (AKA the reduction of the productive capacity of future goods in the economy). In order to recover this ability, it is essential to save (not consume) present goods and transform them into capital goods that allow the generation of more consumer goods further down the line. The key, therefore, is in the accumulation of capital.

Even so, both fiscal and monetary policy seem to seek the opposite. The first is aimed at increasing consumption, which ultimately hinders this process of the accumulation of present goods and their later transformation into capital goods. The second, which can focus on the accumulation of capital goods, arbitrarily transforms (in a way not supported by agents’ time preferences) present goods into capital goods. This will surely not generate a sufficient level of profitability in the future (i.e. they do not produce desired, valued, consumer goods that are useful to the economy). This is similar to the produced effect of the consumption of present goods, as it causes a reduction in the quantity of capital goods that ultimately impedes future prospects for economic growth. If there is all in all less production, and monetary/fiscal policies are exacerbating this effect, what is the purpose of printing more money? The answer is clear: It serves no use at all. It’s just about paper, and nothing more. On top of that, the introduction of new money through credit channels creates market distortions that, as a result, makes it necessary to invest in capital that will not be useful later (that is, capital that generates value).

All in all, both fiscal and monetary policies imply the creation of discoordination that leads to contraction in economic growth. Printing paper money is not the solution to this problem. The solution can be found in increasing production. To make this a reality, we must have the following things: more savings before more consumption and that the investment and creation of capital goods is done as appropriately as possible. This can only be done not through centrally planning the economy, but by letting this information flow through the markets in a decentralized manner. Payment mechanisms must be built according to the economy’s necessities and demands with no excesses. In the best words I can possibly explain this concept: The injection of liquidity into the economy will be counterproductive.

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