Although money should be just an intermediary tool for trade and negotiation, an artificial asset that is neutral, in the short run this intrinsically valueless paper can distort the markets, even if it has predictable value, but only if it is manipulated into being a store of value that has a better risk adjusted return than private market stores of value.
Paper money has no intrinsic value in itself. If the fed keeps it predictably devaluing fast enough, always moving it towards its intrinsic value, it acts as a very useful enabler of trade by creating a unit of measurement for value and medium of exchange.
But unfortunately, for fiat to enable trade, it also has to artificially be made into a store of value. If this paper is made into a store of value that retains value better than private stores of value (such as stocks, bonds, or just stockpiles of stuff), it jams the markets for private stores of value. It turns savers into accumulators of pieces of paper or numbers in accounts instead of being holders of things that are backed by economic activity and wealth creation. It becomes a subsidy from investors, entrepreneur, job creators and workers to holders of pieces of paper. It is the worst kind of subsidy because it blocks wealth and welfare creation.
The only way for central banks to allow private markets to function properly, is to get money out of the way by making sure it always devalues fast enough that it doesn't overly displace private stores of value that are backed by real economic activity.
At microeconomics malinvestiment happens all the time, and you do want it to fail. Otherwise we'd be still sending typewriter created letters though horsemail.
Now, you are proposing that at the macro-level it does not exist? How is it so? Is malinvestiment one of those things that cancel-out at the macro level? If so, that would be huge, it would be the first real (not nominal) value ever to cancel-out at the macro-level. So, I'll have to ask for your references.
At the aggregate level, the alternative to investment is just economic inactivity. At this level, turning investment into fiat means stopping economic value creation and preventing economy value retention.
Unless you really believe that the unemployed would be destroying more than 100% of the value of the investment they need to work, it's an incorrect assumption.
I think the erroneous assumption that Austrians make is that they think investments are not worth it in the private markets if they have negative returns.
That is incorrect, stores of value can be useful as long as they retain part of their value, that is unless their returns are above -100%. You don't throw out a bag of apple because one of them may rot early. Idle fiat has a return of -100% to the aggregate economy over the time that it is made idle. On the aggregate, it's just paper it doesn't actually carry value forward. It is a claim on value created by others who have not promised to create anything. If you had instead invested the money into stock or a bond, something that enables production, even if you would only have generated -50% returns, you would have added much more value to the aggregate than if the savings would have been kept as idle fiat reserves.
It is crucial that fiat does not price good short term investments out of the market every time the risk adjusted market rates go below -2%. -2% can be an artificially high rate that puts the private market in a gridlock.
Negative returns may well be the natural state for stores of value. Before financial systems existed, almost all investments, had negative returns if you didn’t put work and energy into them. The only way you had to store value was to accumulate stuff, buildings or land. All options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.
Even in societies with good financial systems, getting risk free, hassle free, positive real returns has been difficult for most of history. This probably reflects the laws of thermodynamics that tell us that things tend to decay without work and energy put into them.
The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free returns were easy to find. This however, may not continue forever, particularly amidst a aging and retiring population.
Money should not be made an artificial government backstop for stores of value as this destroys the total amount of real wealth in the economy and replaces it with pieces of paper or numbers in accounts. The saving vehicle of last resort should be for people to stockpile stuff they will need in the future (which incidentally creates job because this stuff needs to be produced) not accumulation of fiat.
Anyway, that rant makes no sense. You can't just informally move from real and nominal values at will, as you can't claim that in a population, if everybody lose any amount less than 100% of their wealth, everybody would get richer. Or better, well, you can claim it, you just can not make it real.
I am the one being meticulous about the implications of real vs nominal. In particular I am saying that people's saving should be tied to something real by making sure they end up in something backed by real economic activity like stocks, bonds, actual stuff or credible promises of production of actual stuff.
You on the other hand don't seem to see the different implications between fiat stores of value and real value tied to production and production capacity. You have no problem if people's savings end up as purely nominal idle fiat without any real intrinsic value tied to them, if people's savings accumulate as pure government created claims on production from other people who have not promised to fulfill those claims.
Say you had an isolated farming village where people wanted to save to be able to eat in the winter. It is important that farmers invest their profits into additional production to have something to eat in the winter, even if, because of perdition, the stored crops are only worth 90% of the initial investment required to produce them.
Otherwise, if they instead mandate their government to create a currency that keeps 98% if its real value when other forms of savings available don't, most farmers are going to work, trade part of the crop they don't want to eat to diversify their diet and keep their cash profits to be able to buy something to eat in the winter. They will not produce a crop to store for the winter since it would only return -10% and their central banks promised to keep money at -2% real value.
However, now comes winter and all farmers have cash but few have anything to sell because they didn't reinvest their cash in the production of a stored crop for the winter!
It's going to be difficult for the government to control inflation in such conditions because there will be too few goods for the amount of money people will want to spend. If the government manages to control inflation it will be by depressing the nominal value of the crops of the few farmers who did invest and save a crop for the winter. The central bank might do this by giving high enough interests payment on cash to prevent people from wanting to spend it immediately. In any case, people won't eat much during the winter.
This could all have been prevented if the central bank had kept money devaluating sufficiently and farmers would not have kept their savings as cash but would have reinvested them into an extra crop for the winter and have continued to trade during the winter.
What you call allowing "malinvestment", I call allowing sufficient production or production capacity to fill the needs of the future even if the returns are quite negative on this production.
Note that there are parallels with farmers saving for the winter and a baby boom saving in preparation for retiring and stopping to work.
http://www.independent.co.uk/news/business/news/three-charts...
A quick search shows an unemployment rate that just crossed below 10% in April. From 2000-2008, the unemployment rate ranged 4-5% (with very high unemployment in the 80s and 90s). http://www.tradingeconomics.com/embed/?s=ieuert&v=2015080617...
Also, government debt to GDP rose steadily and is near historic highs, although has recently begun to fall: http://www.tradingeconomics.com/embed/?s=irldebt2gdp&v=20150...
By which measure is Ireland in a better position than 2008?
The economy is a disaster, especially for young people, home repossessions are just getting started by the banks (who were the actual ones bailed out, wrecking the economy by driving government debt through the roof.) The actual situation on the ground is grim, despite what the official figures might tell you.
Source: Irish person who emigrated.
The 2009 "bailouts" of GM and Chrysler involved each company entering bankruptcy, and having the desirable assets of those firms purchased in bankruptcy by new entities in which the US and Canadian governments were (together) major (in GM's case) or minor (in Chrysler's case) investors. So, any sentence that starts with "if we allowed a large automaker to go bankrupt..." that concludes with describing a result that didn't actually occur is demonstrably incorrect.
That's what people thought about textiles and apparel. Neither turned out to be true. Textile mills are coming back to the East Coast (http://www.nytimes.com/2015/08/03/business/chinese-textile-m...) and the number of apparel manufacturing jobs in the Los Angeles County has stabilized in the past several years.
And you'd free a loot of resources (people, money, etc) to create something that people really want, instead of forcing them to work on stuff the government has to pay people to buy.
Anyway, what is sending companies out of the US is your government fiscal policies. Start paying the stuff you take from there (instead of buying on loans), and those companies will be back.
Not to mention the fact that continuously proceeding with such bailouts is simply unsustainable. The problem lies in our modern inability to stomach losses and handle austerity. It's something no one rightfully wants, but when market failures or financial crises occur, it's for a reason. You're witnessing a natural repricing mechanism at work and no one is disagreeing a lot of destruction can be a by product. But I don't buy your narrative that unless we saved those industries in the US they would have permanently moved elsewhere.
The economy is like an organism, not a washing-machine. The most optimal repairing mechanism is itself.
organism have finite life, they die. Washing machine can be maintained/repaired indefinitely. Of course cyborg is the best way.
Extending the organism metaphor, forest fires can be a naturally occurring healthy event that promotes renewal. Sometimes, a fire will burn with enough intensity that the forest itself is destroyed. Should we try to prevent all forest fires, the most destructive fires, or let nature take its course?
So the problem is not necessarily one of free markets but alternatively, one of corruption.
Respect the wisdom of markets. Allow corrections to take place and don't bury malinvestment under the rug only for it rear it's ugly head worse later on by acting as if you have a better intuition on what the price of money should be.
Most people accept the virtue of free markets. Yet many don't see that the actions the Fed has been taking destroys the concept of a market by artificially supplementing supply or demand in an unbounded way based on a perceived sense of greater understanding.
The problem is it's really hard for most of these policy makers to build a platform based on "Let's do nothing and let the markets correct themselves". In such complex domains like an economy the action bias is very real, problematic, and the best thing to eliminate if you want to renormalize markets.