[UPDATE: I tweaked the example to have Bernanke pay Jim to perform a service, rather than giving an outright gift. I don’t want us to get bogged down over whether a gift should be counted as “income” since that’s not essential to the argument.]
We have made unbelievable progress. Major Freedom hasn’t thrown in the towel, but he has given an extremely conciliatory concession and admits that he can’t follow Wenzel down the path he has forged.
At this point, I think most people see the logic of my position on cash balances and saving. In a series of posts, I want to now disarm the critics who (I think) can’t follow me yet, because they have one or two apparently decisive objections to my approach. In other words, they can agree that my approach avoids some of the thorny tangles into which Wenzel’s leads, but it looks like I avoid those problems only to march us off a cliff.
So let’s take on the one that is rhetorically the most damning:
“Murphy, if you’re right that a person can “save” by hoarding more cash, then you have to admit that Ben Bernanke can increase someone’s “savings” by printing up money and handing it to him.”
Yes, I admit it–my position forces me to say that. But if we think it through, what else can we say? Consider the following:
Bernanke prints up $100,000 and hands it over to Jim as payment for the service of Jim singing “Sweet Caroline.” Jim takes the cash and buys a bunch of pizzas, goes on cruises, takes his lady friends (he’s got a lot now) out on the town, etc. etc. After a few months go by, Jim has blown through the $100,000.
Question: Did Jim really consume $100,000 worth of goods and services during the period in question? I think he most certainly did.
Question: Absent a libertarian revolution, with a Nuremberg Trial conducted by Walter Block, did Jim’s net worth go down as a result of these actions? They certainly need not have. (Assume Jim doesn’t do a bunch of cocaine and degrade his future earning potential, etc. You get what I’m saying.)
Question: When Jim’s accountant runs the numbers at the end of the year, how can he explain Jim’s $100,000 in consumption, coupled with no obvious reduction in his other assets or increase in liabilities owed to others? The accountant will have to say that Jim’s income was $100,000 higher, because of Bernanke’s $100,000 payment for the performance.
I see no way around this: If Bernanke prints up $100,000 and you spend it on consumption, then your income and consumption are both truly $100,000 higher. This is true even though it’s not morally legitimate (from a Rothbardian viewpoint), nor economically efficient (from various perspectives). In the same way, the mafia don’s accountant can run the books, and keep track of how much income they “earn” from fencing stolen goods, extortion, etc.
Now it’s true, if we want to be “macroeconomists” and step back, we can see that there is a sense in which Jim didn’t really produce $100,000 worth of services. So other things equal, the purchasing power of money has fallen. The $100,000 Jim spends on consumption isn’t the same batch of real goods and services that a legitimate (non-inflationary) $100,000 would have been. And of course, everybody else who holds dollar-denominated assets is a little poorer because of it. So the community hasn’t necessarily seen an increase in consumption (depending on how the hit is absorbed among them), but Jim certainly has.
If we are still with me, it’s an easy tweak to now say: Suppose Jim takes the $100,000 Bernanke gave him, and uses it to buy a factory. Jim clearly invested that money. As before, he clearly had $100,000 in extra income. So how could he have invested it? Why, he first saved it. Rather than buying pizzas, cruises, and nights on the town with his lady friends, he directed that purchasing power into the acquisition of a productive factory that will yield future income to Jim.
So yep, when Ben Bernanke gives you $100,000 and you sit on it, you have saved and invested in higher cash balances. This isn’t morally legitimate or economically equivalent to non-inflationary saving, but you did save in a nominal accounting sense.