1. THE CREATION OF MONEY
What we have been witnessing is, according to James Melcher: “the most massive creation of liquidity that the world has known.” Even before the recent injections, monetary infusion (M3) has been growing at 10% according to Huerta de Soto, AMS at an annual rate of .9 billion ( as of January 20, 2008), Reserve credit at 61%. This is the creation of artificial fiat money, that reduces the value of all previous monetary elements and directly leads to the ultimate fall of the dollar.
This, in Mises´s mentality is the sabotage of the monetary system. The quantity of money in actual existence, he held, is the correct quantity, and enables money to perform all the functions that a monetary system is designed to fulfill, enabling every sort of economic calculation. “What economic calculation requires is a monetary system whose functioning is not sabotaged by government interference.”
For Mises, inflation is the increase in the quantity of the circulating medium, not merely the general rise in prices, which the rest of the world calls inflation. This increase, he stated in his lectures, is the greatest social evil of all ages and the greatest wastage of capital. Its classic effects are the distortion of accounting calculation, the booms and the subsequent recessions, the wastage of capital (a plethora of mal-investments) with the accompanying bankruptcies, unemployment, and generalized impoverishment. The present crisis has made evident other effects of this relentless tsunami of liquidity: the great expansion of the financial sector with all sorts of new instruments, new terminology, the devastating increase in national debt, the introduction of new terms into our daily life like billions and even trillions, causing the financial world to flounder in toxic assets and collateralized debt obligations.
The correction of the elevated prices and costs (eg. An ordinary house that sells for a million dollars!!!) is accomplished in the “bust” that follows every boom, the bursting of the bubble. The market would accomplish this automatically and immediately. But as long as more and more liquidity is being created, the actual bubbles will never be eliminated, and more and more future bubbles will appear, even before today´s unrecognized bubbles of previous years have bulged out and been recognized. The prime cause of crises is the multiplication of the circulating medium; its cure cannot logically be more of the same.
Thus the crisis cannot end as long as we continue inflating, bailing out sick institutions and debasing the monetary unit with artificial play money. It is illogical to pretend that a massive wash of liquidity could possibly correct the problem of the overvalued mortgages. The excessive creation of money produces an economic disequilibrium in relation to the value of the asset class to which the money is drawn.”Every time direct government payments have been tried, they have failed.” To show this, “one needs the Austrian theory of the business cycle. Government spending, if it takes place through the expansion of bank credit, will, if “successful,” result in another artificially created boom. The recovery thus generated will result in the long run in even worse economic distress, once that new boom in turn collapses. Nor can a policy of further monetary expansion indefinitely postpone disaster. Eventually people’s confidence in the monetary system will crumble, and a hyperinflation will result.”
