Quote of the Day: Spending Illusion

The gist of the argument of these luminaries of modern macroeconomics is that an increase in the inflation rate, say to 3 to 4 percent, will stimulate the economy in two ways. First, higher inflation will “help the process of deleveraging” by eroding the real value of debt, thereby reducing the burden of debt payments and encouraging spending. And second, an increase in the inflation rate will arouse expectations of future depreciation of the dollar and thus panic businesses and households into spending their hoarded cash. This argument is rooted in what might be called the “spending illusion,” the simplistic and deeply fallacious doctrine that the spending of money drives the economy. This doctrine originated in the writings of John Law, the notorious early eightenth century gambler, financial schemer–and central banker. Law’s doctrine inspired the monetary cranks of the nineteenth century as well as the founders of modern macroeconomics in the twentieth century, Irving Fisher and John Maynard Keynes. It remains deeply entrenched in the macroeconomic thought of the twenty-first century.

That’s from Professor Joseph Salerno at the Mises Institute.

The spending illusion represents the de facto ideology embraced by the mainstream.

The reason for this is that the fallacious spending-drives-the-economy doctrine implicitly promotes the interests of the ‘crony’ banking system through debt based spending and central bank interventions mostly through inflation, where the latter has been engineered to backstop the banking system.

Yet policies which emanates from this doctrine also includes other forms of spending based government interventions or ‘boondoggles’ (think public works, welfare state, warfare state, pork barrel or earmarks, bureaucracy) which incidentally has been financed, not only by taxes, but through government debt papers intermediated through the banking system, and indirectly, the central bank.

The spending illusion is really about upholding political interests of a few, which has been disguised as ideology, and advocated by experts whose personal interests have been aligned with, or captured by, the interests of the establishment.