"When money is printed--i.e., created "out of thin air"--it sets in motion an exchange of nothing for money and then money for something, i.e., an exchange of nothing for something. An exchange of nothing for something amounts to consumption that is not supported by production. Since every activity has to be funded, it follows that an increase in consumption that is not supported by production must divert funding from wealth-generating activities. In short, consumption that is not preceded by production amounts to unearned consumption; i.e., it takes from the pool of funding without making any contribution to this pool.
Consequently, when a central bank expands the money stock, it does not enlarge the pool of funding, but, on the contrary, dilutes the pool, thereby weakening the rate of economic growth. Thus when money "out of thin air" gives rise to consumption that is not supported by prior production, it diverts the funding that supports production of goods and services of the first wealth producer.
This in turn undermines his production of goods and thereby weakens his effective demand for the goods of another wealth producer. The other producer in turn is forced to curtail his production of goods, thereby weakening his effective demand for goods of a third wealth producer. In this way, money "out of thin air," which destroys savings, sets in motion the dynamics of the consequent decline of the growth of real wealth production."
mises.com |
