I have read several articles on PolicyMic and other websites which shared the basic theme: we can’t have inflation until we reach full employment, regardless of what we do to the money supply.
I contend that full employment is a myth, no such state exists or can exist in a market economy. There will always be slack in the labor market. In addition to individuals in the process of changing jobs and those simply enjoying leisure rather than working full-time, there are many individuals who are doing one type of work now but could easily move to a much more productive line of work if one became available. Most people also do not work as much as they could, they enjoy leisure rather than work 80 hours a week, even though they could make more money by working more.
The limiting factor in economic production is capital, not labor. Unskilled labor especially is superabundant, every doctor and lawyer could pick up a shovel or wash dishes if there was sufficient demand for such work that it drove wages up to a level that made it worth their time. What determines the productivity of labor is the capital stock that it has to work with. The particular structure of the capital stock determines what type of labor is most productive and what types of jobs pay the best wages.
Government distortion of the money markets, especially the printing of vast sums of money that pushes interest rates to unrealistically low levels, distorts this capital structure toward projects that require large initial investments and are designed to pay off in the long run when all those who are apparently deferring consumption now are ready to consume.
Instead of a productive economy based on manufacturing consumer goods for current use, we get a “service” economy designed to manage long-term projects and investments. The problem arises when these projects begin to mature and there is no real demand for its products. The low interest rates which allowed for capital to flow into these projects were a result of government manipulation rather than actual saving and no one has the money to buy. A perfect example of this process is the recent housing boom when far too many houses were built because people felt that prices would always rise, there would always be someone ready to buy another house. Obviously this could not go on forever, and it didn’t.
These negative consequences of money printing and low interest rates occur regardless of the amount of slack in the labor market. High unemployment is a result of the inability of wages to adjust to market conditions, the high value many place on leisure, especially if they continue to receive an income while not working, and structural mismatches between available labor and capital, not a lack of money in the economy. The Keynesian idea that you can pay a man to dig holes and then fill them in again and somehow get economic growth is simply false.