Monetary Stimulus Creates Only Pseudo Wealth

by James A. Dorn,  Cato Institute

The European Central Bank’s decision to follow the Federal Reserve’s footsteps and embark on a massive program of quantitative easing to lower interest rates, encourage risk and inflate asset prices seems to be working for the moment.

New wealth appears to be created even though simple economic logic tells us that monetary stimulus cannot permanently increase a nation’s productive capacity or real income. Central bankers are engaged in pseudo, not true, wealth creation.

With ultra-low rates, savers have little incentive to postpone current consumption. There will be less saving, less capital accumulation and slower growth of real income.

The wealth effect of central bank “stimulus” will be short-lived. When rates return to normal, as they must, asset bubbles will burst, major losses will be incurred and the distortions in capital markets will become evident.  Read the entire story.

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