Evans-Pritchard Says Austrians Are Wrong

Just posted this over at the Ludwig von Mises Institute of Canada:

Despite his not-half-bad diagnoses of the political problems facing Europe, the Telegraph’s Ambrose Evans-Pritchard has really done himself in with his article today entitled “You Are All Wrong, Money Printing Can Halt Europe’s Crisis.”  In regards to the title, Evans-Pritchard misinterprets the protest behind further central bank intervention.   Those who refuse to believe that free lunches come from the printing press don’t claim that money printing itself won’t stop a crisis from unfolding initially.  It has been argued by the likes of Mises, Hayek, and Rothbard that monetary easing, fancy talk for printing, does in fact “halt” the crisis but only at the expense of the future.  It is the equivalent of plugging a hole in a dam wall with chewing gum.  As Mises pointed out in Human Action:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

But why worry about the long run where we are all “dead” right?  For another poorly conceived assumption, Evans-Pritchard asserts there are only two solutions to fixing the Eurozone:

A near universal view has emerged that Europe’s crisis can only be solved by governments and fiscal policy, with varying views over the proper dosage of pain.

I beg to differ. This is a monetary crisis, caused by a jejune central bank that aborted a fragile recovery by raising rates earlier this year, allowed the money supply to collapse at vertiginous rates in southern Europe, and caused a completely unnecessary recession — and a deep one judging by the collapse in the PMI new manufacturing orders in November.

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This crisis can be stopped very easily by monetary policy, working through the old-fashion Fisher-Hawtrey-Friedman method of open-market operations to expand the quantity of money, ideally to keep nominal GDP growth on an even keel.

This does not solve the 30pc intra-EMU currency misalignment between North and South, of course, but it quite literally “solves” the solvency crisis for Italy and Spain. They would not be insolvent if the ECB had not driven them into depression by letting their money supply implode.

What Evans-Pritchard doesn’t mention is the third option known as capitalism.  While cuts in government spending and the bloated welfare states for countries like Greece, Italy, Portugal, and Spain would go a long way in removing a heavy burden on the productive private sector, losses will have to be faced elsewhere. I am of course referring to the big Eurozone banks that purchased government bonds and must now face haircuts as the prospect of being repaid fully seems more farfetched than ever.  Major losses have to occur but no one said market corrections to unsustainable booms are ever pretty.

In a true free market, actions have consequences as losses are just as important as gains.

What sticks out like a sore thumb about this short passage, which Evan-Pritchard probably doesn’t realize, is the fragile nature of an economy reliant on constant artificially low interest rates and cheap money.  The Eurozone began plunging faster just a few months ago after a slight increase in ECB benchmark interest rates.  One can only imagine the consequences of letting interest rates be determined solely by the market.

Though Evans-Pritchard may be correct that money printing stalls crises for the time being; monetary easing is never a long term solution but only a short sighted band aid that will inevitably create bigger problems down the road.  At least the Austrian econ community is finally getting its due however as demonstrated by this sentence:

This will enrage many readers — especially the “Austrian” internet vigilantes — but I have to say it.

Chalk up another “enraged” Austrian internet vigilante.  In other words, chalk up another victory for common sense.