THE NECESSARY TIGHTENING OF CREDIT IN
THE RECESSION STAGE: CRITICISM OF THE
We will now consider three different types of deflation, defined as any decrease in the quantity of money “in circulation.” Deflation consists of a drop in the money supply or a rise in the demand for money, and other things being equal, it tends to cause an increase in the purchasing power of the monetary unit (i.e., a decline in the “general price level”). Nevertheless it is important to avoid confusing deflation with its most typical, pronounced effect (the fall in the general price level), given that in certain cases the prices of goods and services decrease in the absence of deflation. As we have seen, this is part of the healthy growth process of an economy whose productivity is improving due to the incorporation of new technologies and to capital accumulation which arises from the entrepreneurial spirit and from the natural increase in the voluntary saving of its agents. We studied this process in previous sections, and without any decrease in the quantity of money in circulation, it gives rise to a widespread increase in the production of consumer goods and services, which can only be sold at lower prices. Thus the process results in a real rise in wages and in the income of the other original means of production, because although the income of workers and of the other owners of original factors may remain fairly constant in nominal terms, the prices of the consumer goods and services workers acquire drop considerably. In this case the decline in the general price level is not monetary in origin, but real, and it derives from the generalized increase in the productivity of the economy. Hence this phenomenon is completely unrelated to deflation as we have defined it, and is simply a sign of the healthiest and most natural process of economic development.
Nonetheless we will now examine three distinct types of deflation (strictly defined as any decline in the supply of or increase in the demand for money) which have radically different causes and consequences. Let us analyze these types of deflation in detail:
(a) The first type consists of policies adopted by public authorities to deliberately reduce the quantity of money in circulation. Such policies have been implemented on various historical occasions and trigger aprocess by which the purchasing power of the monetary unit tends to increase. Moreover this forced decrease in the quantity of money in circulation distorts the structure of society’s productive stages. Indeed the reduction in the quantity of money initially brings about a decline in loan concession and an artificial increase in the market interest rate, which in turn leads to a flattening of the productive structure, a modification forced by strictly monetary factors (and not by the true desires of consumers). Consequently many profitable capital goods stages in the productive structure erroneously appear unprofitable (especially those furthest from consumption and most capital-intensive). As a result the most specialized companies in capital-intensive sectors sustain widespread accounting losses. Furthermore in all sectors the reduced monetary demand is unaccompanied by a parallel, equally-rapid decline in costs, and thus accounting losses arise and pessimism becomes generalized. In addition the increase in the purchasing power of the monetary unit and the decrease in the products’ selling price cause a substantial rise in the real income of the owners of the original means of production, who, to the extent their prices are rigid and do not fall at the same rate as those of consumer goods, will tend to become unemployed. Therefore a prolonged, painful adjustment period begins and lasts until the entire productive structure and all original factors have adjusted to the new monetary conditions. This whole process of deliberate deflation contributes nothing and merely subjects the economic system to unnecessary pressure. Regrettably, politicians’ lack of theoretical knowledge has led them on various historical occasions to deliberately initiate such a process.
(b) The second type of deflation, which should be clearly distinguished from the first, occurs when economic agents decide to save; that is, to refrain from consuming a significant portion of their income and to devote all or part of the monetary total saved to increasing their cash balances (i.e., to hoarding)*. In this case, the rise in the demand for money tends to push up the purchasing power of the monetary unit (in other words, it tends to push down the “general price level”). However this type of deflation differs radically from the former in the sense that it does make a contribution, since it originates from an increase in the saving of economic agents, who thus free resources in the form of unsold consumer goods and services. [...] [T]he “Ricardo Effect” appears, due to the drop in the relative prices of consumer goods, which in turn leads to an increase, other things being equal, in the real wages of workers and in the income of the other original means of production. Hence the processes which trigger a lengthening of the productive structure are set in motion. The productive structure becomes more capital-intensive, due to the new investment projects undertaken, projects entrepreneurs will be able to complete because productive resources have been freed in the stages closest to consumption. The only difference between this situation and that of an increase in voluntary saving which is immediately and directly invested in the productive structure or capital markets is as follows: when saving manifests itself as a rise in cash balances, there is a necessary decline in the price of consumer goods and services and in the price of products from the intermediate stages, as well as an inevitable reduction in the nominal income of the original means of production and in wages, all of which adapt to the increased purchasing power of the monetary unit. Nevertheless unlike the first type of deflation mentioned, this type does not entail a painful process which contributes nothing. Instead here it is based on effective saving which causes a rise in society’s productivity. The lengthening of the productive structure and the reallocation of the factors of production occur to the extent there is a change in the relative prices of the products from the intermediate stages and from the final stage, consumption. Such a change is independent of whether, in absolute, nominal terms, all prices must drop (to a varying extent) as a consequence of the increased purchasing power of the monetary unit.**
(c) The third type of deflation we will consider results from the tightening of credit which normally occurs in the crisis and recession stage that follows all credit expansion[...]: just as credit expansion increases the quantity of money in circulation, the massive repayment of loans and the loss of value on the assets side of banks’ balance sheets, both caused by the crisis, trigger an inevitable, cumulative process of credit tightening which reduces the quantity of money in circulation and thus generates deflation. This third type of deflation arises when, as the crisis is emerging, not only does credit expansion stop increasing, but there is actually a credit squeeze and thus, deflation, or a drop in the money supply, or quantity of money in circulation. Nevertheless this sort of deflation differs from that analyzed in (a) above and produces various positive effects which merit our attention. First, deflation caused by the tightening of credit does not give rise to the unnecessary maladjustments referred to in section (a); instead it facilitates and accelerates the liquidation of the investment projects launched in error during the expansionary phase. Therefore it is the natural market reaction necessary for a rapid liquidation of the investment projects undertaken in error during the expansionary stage. A second positive effect of credit deflation is that it in a sense reverses the redistribution of income which took place in the expansionary stage of the inflationary boom. In fact inflationary expansion tended to bring about a decrease in the purchasing power of money, which in turn reduced the real income of everyone on a fixed income (savers, widows, orphans, pensioners) in favor of those who first received the loans of the banking system and first experienced an increase in monetary income. Now, in the stage of credit tightening, this forced redistribution of income reverses in favor of those who in the expansionary stage were the first harmed, and thus people on a fixed income (widows, orphans, and pensioners) will gain an advantage over those who most exploited the situation in the earlier stage. Third, credit deflation generally makes business ventures appear less profitable, since historical costs are recorded in monetary units with less purchasing power, and later, accounting income is recorded in monetary units with more purchasing power. As a result entrepreneurial profits are artificially diminished in account books, prompting entrepreneurs to save more and distribute less in the form of dividends (exactly the opposite of what they did in the expansionary phase). This tendency to save is highly favorable to the commencement of economic recovery***. The decline, provoked by the tightening of credit, in the quantity of money in circulation undoubtedly tends to drive up the purchasing power of the monetary unit. An inevitable drop in the wages and income of the original means of production follows, though at first this decrease will be more rapid than the reduction in the price of consumer goods and services, if such a reduction takes place. Consequently, in relative terms, the wages and income of the original means of production will decline, leading to an increased hiring of workers over machines and a massive transfer of workers toward the stages closest to consumption. In other words the credit squeeze reinforces and accelerates the necessary “flattening” of the productive structure, a process which accompanies thebrecession. It is essential that labor markets be flexible in every aspect, in order to facilitate the massive transfers of productive resources and labor. The sooner the readjustment is completed and the effect of loans granted for erroneous investment projects is eliminated, the sooner the foundations of the subsequent recovery will be laid. The recovery will be characterized by a restoration of the relative price of the original means of production, i.e., by a decrease in the price of consumer goods and services. This reduction in the price of consumer goods and services will be greater, in relative terms, than the drop in wages, due to an increase in society’s general saving, which will again stimulate growth in the capital goods stages. This growth will be achievable, given that it will originate from a rise in voluntary saving. As Wilhelm Röpke reasonably concludes, this third type of deflation (the result of the credit squeeze that follows the crisis)
Nonetheless we will now examine three distinct types of deflation (strictly defined as any decline in the supply of or increase in the demand for money) which have radically different causes and consequences. Let us analyze these types of deflation in detail:
(a) The first type consists of policies adopted by public authorities to deliberately reduce the quantity of money in circulation. Such policies have been implemented on various historical occasions and trigger aprocess by which the purchasing power of the monetary unit tends to increase. Moreover this forced decrease in the quantity of money in circulation distorts the structure of society’s productive stages. Indeed the reduction in the quantity of money initially brings about a decline in loan concession and an artificial increase in the market interest rate, which in turn leads to a flattening of the productive structure, a modification forced by strictly monetary factors (and not by the true desires of consumers). Consequently many profitable capital goods stages in the productive structure erroneously appear unprofitable (especially those furthest from consumption and most capital-intensive). As a result the most specialized companies in capital-intensive sectors sustain widespread accounting losses. Furthermore in all sectors the reduced monetary demand is unaccompanied by a parallel, equally-rapid decline in costs, and thus accounting losses arise and pessimism becomes generalized. In addition the increase in the purchasing power of the monetary unit and the decrease in the products’ selling price cause a substantial rise in the real income of the owners of the original means of production, who, to the extent their prices are rigid and do not fall at the same rate as those of consumer goods, will tend to become unemployed. Therefore a prolonged, painful adjustment period begins and lasts until the entire productive structure and all original factors have adjusted to the new monetary conditions. This whole process of deliberate deflation contributes nothing and merely subjects the economic system to unnecessary pressure. Regrettably, politicians’ lack of theoretical knowledge has led them on various historical occasions to deliberately initiate such a process.
(b) The second type of deflation, which should be clearly distinguished from the first, occurs when economic agents decide to save; that is, to refrain from consuming a significant portion of their income and to devote all or part of the monetary total saved to increasing their cash balances (i.e., to hoarding)*. In this case, the rise in the demand for money tends to push up the purchasing power of the monetary unit (in other words, it tends to push down the “general price level”). However this type of deflation differs radically from the former in the sense that it does make a contribution, since it originates from an increase in the saving of economic agents, who thus free resources in the form of unsold consumer goods and services. [...] [T]he “Ricardo Effect” appears, due to the drop in the relative prices of consumer goods, which in turn leads to an increase, other things being equal, in the real wages of workers and in the income of the other original means of production. Hence the processes which trigger a lengthening of the productive structure are set in motion. The productive structure becomes more capital-intensive, due to the new investment projects undertaken, projects entrepreneurs will be able to complete because productive resources have been freed in the stages closest to consumption. The only difference between this situation and that of an increase in voluntary saving which is immediately and directly invested in the productive structure or capital markets is as follows: when saving manifests itself as a rise in cash balances, there is a necessary decline in the price of consumer goods and services and in the price of products from the intermediate stages, as well as an inevitable reduction in the nominal income of the original means of production and in wages, all of which adapt to the increased purchasing power of the monetary unit. Nevertheless unlike the first type of deflation mentioned, this type does not entail a painful process which contributes nothing. Instead here it is based on effective saving which causes a rise in society’s productivity. The lengthening of the productive structure and the reallocation of the factors of production occur to the extent there is a change in the relative prices of the products from the intermediate stages and from the final stage, consumption. Such a change is independent of whether, in absolute, nominal terms, all prices must drop (to a varying extent) as a consequence of the increased purchasing power of the monetary unit.**
(c) The third type of deflation we will consider results from the tightening of credit which normally occurs in the crisis and recession stage that follows all credit expansion[...]: just as credit expansion increases the quantity of money in circulation, the massive repayment of loans and the loss of value on the assets side of banks’ balance sheets, both caused by the crisis, trigger an inevitable, cumulative process of credit tightening which reduces the quantity of money in circulation and thus generates deflation. This third type of deflation arises when, as the crisis is emerging, not only does credit expansion stop increasing, but there is actually a credit squeeze and thus, deflation, or a drop in the money supply, or quantity of money in circulation. Nevertheless this sort of deflation differs from that analyzed in (a) above and produces various positive effects which merit our attention. First, deflation caused by the tightening of credit does not give rise to the unnecessary maladjustments referred to in section (a); instead it facilitates and accelerates the liquidation of the investment projects launched in error during the expansionary phase. Therefore it is the natural market reaction necessary for a rapid liquidation of the investment projects undertaken in error during the expansionary stage. A second positive effect of credit deflation is that it in a sense reverses the redistribution of income which took place in the expansionary stage of the inflationary boom. In fact inflationary expansion tended to bring about a decrease in the purchasing power of money, which in turn reduced the real income of everyone on a fixed income (savers, widows, orphans, pensioners) in favor of those who first received the loans of the banking system and first experienced an increase in monetary income. Now, in the stage of credit tightening, this forced redistribution of income reverses in favor of those who in the expansionary stage were the first harmed, and thus people on a fixed income (widows, orphans, and pensioners) will gain an advantage over those who most exploited the situation in the earlier stage. Third, credit deflation generally makes business ventures appear less profitable, since historical costs are recorded in monetary units with less purchasing power, and later, accounting income is recorded in monetary units with more purchasing power. As a result entrepreneurial profits are artificially diminished in account books, prompting entrepreneurs to save more and distribute less in the form of dividends (exactly the opposite of what they did in the expansionary phase). This tendency to save is highly favorable to the commencement of economic recovery***. The decline, provoked by the tightening of credit, in the quantity of money in circulation undoubtedly tends to drive up the purchasing power of the monetary unit. An inevitable drop in the wages and income of the original means of production follows, though at first this decrease will be more rapid than the reduction in the price of consumer goods and services, if such a reduction takes place. Consequently, in relative terms, the wages and income of the original means of production will decline, leading to an increased hiring of workers over machines and a massive transfer of workers toward the stages closest to consumption. In other words the credit squeeze reinforces and accelerates the necessary “flattening” of the productive structure, a process which accompanies thebrecession. It is essential that labor markets be flexible in every aspect, in order to facilitate the massive transfers of productive resources and labor. The sooner the readjustment is completed and the effect of loans granted for erroneous investment projects is eliminated, the sooner the foundations of the subsequent recovery will be laid. The recovery will be characterized by a restoration of the relative price of the original means of production, i.e., by a decrease in the price of consumer goods and services. This reduction in the price of consumer goods and services will be greater, in relative terms, than the drop in wages, due to an increase in society’s general saving, which will again stimulate growth in the capital goods stages. This growth will be achievable, given that it will originate from a rise in voluntary saving. As Wilhelm Röpke reasonably concludes, this third type of deflation (the result of the credit squeeze that follows the crisis)
is the unavoidable reaction to the inflation of the boom and must not be counteracted, otherwise a prolongation and aggravation of the crisis will ensue, as the experiences in the United States in 1930 have shown.
Under certain conditions, government and union intervention, along with the institutional rigidity of the markets, may prevent the necessary readjustments which precede any recovery of economic activity. If wages are inflexible, hiring conditions very rigid, union power great and governments succumb to the temptation of protectionism, then extremely high unemployment can actually be maintained indefinitely, without any adjustment to new economic conditions on the part of the original means of production. Under these circumstances a cumulative process of contraction may also be triggered. By such a process the massive growth of unemployment would give rise to a widespread decrease in demand, which in turn would provoke new doses of unemployment, etc. Some theorists have used the term secondary depression to refer to this process, which does not arise from spontaneous market forces, but from coercive government intervention in labor markets, products, and international trade. In some instances, “secondary depression” theorists have considered the mere possibility of such a situation a prima facie argument to justify government intervention, encouraging new credit expansion and public spending. However the only effective policy for avoiding a “secondary depression,” or for preventing the severity of one, is to broadly liberalize markets and resist the temptation of credit expansion policies. Any policy which tends to keep wages high and make markets rigid should be abandoned. These policies would only make the readjustment process longer and more painful, even to the point of making it politically unbearable.
What should be done if, under certain circumstances, it appears politically “impossible” to take the measures necessary to make labor markets flexible, abandon protectionism and promote the readjustment which is the prerequisite of any recovery? This is an extremely intriguing question of economic policy, and its answer must depend on a correct evaluation of the severity of each particular set of circumstances. Although theory suggests that any policy which consists of an artificial increase in consumption, in public spending and in credit expansion is counterproductive, no one denies that, in the short run, it is possible to absorb any volume of unemployment by simply raising public spending or credit expansion, albeit at the cost of interrupting the readjustment process and aggravating the eventual recession. Nonetheless Hayek himself admitted that, under certain circumstances, a situation might become so desperate that politically the only remaining option would be to intervene again, which is like giving a drink to a man with a hangover. In 1939 Hayek made the following related comments:
it has, of course, never been denied that employment can be rapidly increased, and a position of “full employment” achieved in the shortest possible time by means of monetary expansion. . . . All that has been contended is that the kind of full employment which can be created in this way is inherently unstable, and that to create employment by these means is to perpetuate fluctuations. There may be desperatevsituations in which it may indeed be necessary to increase employment at all costs, even if it be only for a short period—perhaps the situation in which Dr. Brüning found himself in Germany in 1932 was such a situation in which desperate means would have been justified. But the economist should not conceal the fact that to aim at the maximum of employment which can be achieved in the short run by means of monetary policy is essentially the policy of the desperado who has nothing to lose and everything to gain from a short breathing space. [Hayek, Profits, Interest and Investment, footnote 1 on pp. 63–64]
Now let us suppose politicians ignore the economist’s recommendations and circumstances do not permit the liberalization of the economy, and therefore unemployment becomes widespread, the readjustment is never completed and the economy enters a phase of cumulative contraction. Furthermore let us suppose it is politically impossible to take any appropriate measure and the situation even threatens to end in a revolution. What type of monetary expansion would be the least disturbing from an economic standpoint? In this case the policy with the least damaging effects, though it would still exert some very harmful ones on the economic system, would be the adoption of a program of public works which would give work to the unemployed at relatively reducedwages, so workers could later move on quickly to other more profitable and comfortable activities once circumstances improved. At any rate it would be important to refrain from the direct granting of loans to companies from the productive stages furthest from consumption. Thus a policy of government aid to the unemployed, in exchange for the actual completion of works of social value at low pay (in order to avoid providing an incentive for workers to remain chronically unemployed) would be the least debilitating under the extreme conditions described above unemployed) would be the least debilitating under the extreme conditions described above
* It is also possible, in theory and in practice, for economic agents to raise their cash balances (demand for money) without at all modifying their volume of monetary consumption. They can do this by disinvesting in productive resources and selling capital goods. This leads to a flattening of the productive structure and brings about the widespread impoverishment of society through a process which is the exact opposite of the one we analyzed with respect to a lengthening (financed by growth in voluntary saving) of the productive structure. resources have been freed in the stages closest to consumption.
**48 Whenever an individual devotes a sum of money to saving instead of spending it for consumption, the process of saving agrees perfectly with the process of capital accumulation and investment. It does not matter whether the individual saver does or does not increase his cash holding. The act of saving always has its counterpart in a supply of goods produced and not consumed, of goods available for further production activities. A man’s savings are always embodied in concrete capital goods. . . . The effect of our saver’s saving, i.e., the surplus of goods produced over goods consumed, does not disappear on account of his hoarding. The prices of capital goods do not rise to the height they would have attained in the absence of such hoarding. But the fact that more capital goods are available is not affected by the striving of a number of people to increase their cash holdings. . . . The two processes—increased cash holding of some people and increased capital accumulation—take place side by side. (Mises, Human Action, pp. 521–22)
***An analysis of the positive effects of this third type of deflation (caused by the tightening of credit in the recession stage of the cycle) can be found in Rothbard, Man, Economy, and State, pp. 863–71. See also Mises, Human Action, pp. 566–70. Furthermore Mises indicates that despite its negative effects, the deflationary squeeze is never as damaging as credit expansion, because contraction produces neither malinvestment nor overconsumption. The temporary restriction in business activities that it engenders may by and large be offset by the drop in consumption on the part of the discharged wage earners and the owners of the material factors of production the sales of which drop. No protracted scars are left. When the contraction comes to an end, the process of readjustment does not need to make good for losses caused by capital consumption. (Mises, Human Action, p. 567)
Nenhum comentário:
Postar um comentário