Submitted by Xiaolin Zhong via Mises Canada,
Dear Chairwoman Yellen,
This is an open letter urging you to stop money printing immediately. It has created worse economic inequality and tremendously hindered the economic recovery from the longest recession in history.
You have said that you are extremely concerned about economic inequality. Yet, through money printing, you are the greatest contributor to it. Such inequality can easily be seen in the two consequences of money printing: skyrocketing prices of most important necessity items, such as gas and food on the one hand, and that of commodities and assets on the other. The skyrocketing prices of food and gas have ripped off a great chunk of income of main street people, and that of commodity and assets have brought a dramatic fortune to assets holders and financial speculators, the Wall Street “fat cats” being the greatest beneficiaries. Consequently, the former get much poorer and the latter get much richer. Unlike the fair and beneficial economic inequality due to different efforts resulting in individualized maximum utility, the net of the utility of income and the disutility of cost of income (i.e., the sacrifice of leisure time), this inequality has nothing to do with efforts. The Wall Street “fat cats” have been making tons of money effortlessly, while the Main Street people have been struggling just to make end meets and this is something beyond their reach, no matter how hard they work. This sort of inequality is a recipe for social turbulence and therefore the worst kind. I have tremendous sympathy on those who have been protesting their employers, demanding pay raise. They are not seeking higher income. They are just trying to keep their income from falling. Such protest and demand, however, has been made to the wrong persons. The right person is you.
It seems very difficult for you to appreciate the pain the skyrocketing prices of gas and food have caused to working people. With your wealth, you hardly feel a thing from increased spending on those items. In spite of this, however, you should be able to imagine what such increases mean for those who had had to spend half or more of their income on daily necessities even before it occurred. If your imagination is still not good enough, then you should probably consider trying to make a living just like Main Street people.
Why don´t business employers just increase employees’ wages, you may wonder. Well, they cannot. You know very well that they will if they can. Happier workers are more productive. Employers cannot do that because the increase in commodity prices has been seriously hurting costs. It is already exceedingly tough for them to keep appropriate profits, let along raising wages. Even elite economists such as you understand that there could be no business without profits. If wages increase, business employers will have only two choices: either boosting automation or simply going out of business. Needless to point out that neither case helps improve employment.
Why don´t businesses increase prices to maintain profits, you may wonder. Well, the answer is the same: They cannot. Most consumer goods and services are price-sensitive. Most price increases therefore hinder demand, which has been already extraordinarily low due to reduced income of working people. The frequent deep holiday discounts have demonstrated this clearly. Prices of gas and food can be increased because these items are somehow price-insensitive. Even this insensibility, however, is not unlimited. The prices of commodity and assets can be increased for money seeks safe harbour.
This hits the answer to your next question: why does the expansion of liquidity not cause prices to rise. The answer is that only higher demand results in higher prices. And there can be no demand without income. What is income? By definition, it comes from production. This is not from me. This is what all economics text books have been saying. While disagreeing with most of what economics text books teach, I accept this definition. Even if you do not believe in me, you should believe your elite economist colleagues.
What drives production? The pursuit of profits by businesses and the spending power by individuals (I do not think I need to explain the reason for such pursuits). Average cost declines as production increases, enabling businesses to drop prices in exchange for higher sales volume, resulting in higher profits. The supply-price-demand-supply circle operates like this: the increase in supply of certain goods, say, A, B and C, brings about the drop of their own prices and the increase in demand for them. It simultaneously increases the demand for other goods, say, D, E and F, and drives their prices up. This in turn stimulates the increase in supply of D, E and F, and causes their prices to drop. What will happen to A, B and C? The demand for them will increase and their prices will climb, encouraging more production. So on and so forth. As a result, total supply increases while prices either remain stable or drop gradually, provided the amount of money in circulation remains unchanged. There is no need to expand liquidity for money circulation speeds up as economic activities heat up (I suppose you are familiar with the famous equation: price x output = money in circulation x circulation velocity). Such a healthy operation naturally produces optimal interest rates and there is no such thing as lack of liquidity. Money printing can have no positive impact on the economy, for expanded liquidity has nothing to do with production, hence demand. You know very well that expanded liquidity has never been translated into business or consumer loans. Businesses will not borrow without demand. Consumers will not borrow without income. The only borrowers are financial speculators and those who have no intention to repay.
Money printing does generate tremendous income for Wall Street “fat cats”. Such income, however, is more than off-set by the loss of working people. Money printing is thus the most vicious redistribution of wealth. It has been always the instrument for financial tycoons and corrupted politicians to accumulate wealth. History has repeatedly shown this. You do not need to look back very far to discover this truth. As recently as in 1940, the huge scale of money printing in China generated mountains of wealth for financial tycoons and corrupted politicians.
For real world people, it is a simple common sense that wealth does not fall from the sky. It has to be produced. It is beyond me that such an obvious truth is so difficult for elite economists to comprehend. This is largely because they just sit in the ivy tower, imagining the magic golden touch such as monetary and fiscal policies, mocking practitioners. They are so ignorant and arrogant.
The problem goes even beyond ignorance and arrogance. Elite economists understand clearly that demand relies solely on income. And income means production. Given this premise, the only logical conclusion regarding the cause – effect relationship between supply and demand is that it is the former that drives the latter, and there can be no other way around. Yet they have still been obsessed with the idea that demand can be created to haul supply without supply being produced in the first place. They are not only arrogant and ignorant, but also incapable of logical thinking. Unfortunately, they have long dominated both economics study and economic policy making, cultivating fools like themselves and causing disasters after disasters.
I understand that what I said above need a theoretical explanation. But such an explanation cannot be properly provided in such a short letter. I will be more than happy to elaborate for you in some other places, if you so desire. Despite this drawback, however, what I have said is entirely supported by facts and therefore not invalid, to say the least. As indicated earlier, the worst sort of economic inequality has been created. Not only that. An assets bubble is forming, if not already formed. Inflation will eventually occur, as the prices of commodity reach the point at which businesses cannot survive without raising prices. You do not want to see such inflation. Businesses cannot survive without increasing prices. By increasing prices, however, they will be committing suicide. That will cause horrible inflation and vast unemployment. This is why Churchill said inflation was worse than Stalin. Does such perspective concern you a bit? It is incomprehensible for me that there are such economists and policy makers who could be so foolish as to rely on money printing to pull the economy out of recession.
It is incomprehensible for me as well that elite economists and policy makers such as you never look at policy effects. You just blindly believe in mainstream economic theories. The famous Philips Curve perhaps best exemplifies this blindness. The Curve suggests that there is a trade-off between inflation and employment. This suggestion has been long proven phony by the stagflation during the 70’. But obviously you are still faithful of it. It is already bad that you lack the capacity to question and challenge main stream economic theories. That is still understandable, given your education background and narrow mind. But how could you ignore policy effects? Is it a basic scientific thinking that a theory is proven untrue if its prediction fails just once? Any medicine has side effects. No medicine shall be used without its benefits surpassing its side effects. A physician will stop the medicine he prescribed for his patient if it fails to deliver expected results. You are clearly aware of the side effects of money printing. Yet you have been continuously applying it without seeing any desired results. Can you call yourself a responsible physician?
It appears that none of real world experiences, logic and facts can have impact on your mind with respect of money printing, given that you have no intention to stop it. The only thing left for me to appeal to you is your conscience. I am actually a beneficiary of money printing. The price of my house has been more than doubled in just a few years. That, however, cannot make me happy, not at all. This is because I feel for Main Street people. I feel for them for I myself use to be one of them. For a long period of time, I earned just above minimum wage. Such low income, however, sustained not only my living, but also my education. This kind of life is tough. However, I have neither complaints nor regrets. I am proud of myself for having maintained dignity. I do not blame my employers either. They tried hard to pay me as much as they could. The point here is that such achievement is impossible without low and stable prices of necessities. Now, so many Main Street people are struggling, not for a better life, but for a life not worsening, thanks to money printing. You cannot deny this effect of money printing. As such, if you still have conscience and you are genuinely concerned about low-income people as you said you are, you must stop money printing immediately, not only the purchase of the treasure bonds, but also all lending, especially the ones with near zero interest rates. Anything short of that will disclose your true color: a dog running amongst Wall Street “fat cats”.
Sincerely Yours,
Xiaolin Zhong
via Zero Hedge http://ift.tt/1DVAkWz Tyler Durden