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Six Myths About Money and Inflation

The following are six of the most prevalent economic myths that appear time and again in the mainstream media. I will give a brief description of each and a brief description of the economic reality, as seen from an Austrian perspective.

Myth 1: Increased money leads to economic prosperity.

Myth 2: Manipulating interest rates leads to economic prosperity.

Myth 3: Lowering the foreign exchange rate of the currency, to give more local currency in exchange for foreign currency, will lead to an export-driven economic recovery.

Myth 4: Money expansion will not cause higher prices.

In the meantime, however, inflation is muted by several factors.

  •  Although the Fed is increasing its balance sheet and the monetary base (i.e., currency plus bank reserves), which it directly controls, banks are being induced to hold massive quantities of excess reserves rather than lend them out because the Fed is paying interest on them.
  • Even so, banks are making loans and investments and the US monetary base is increasing rapidly, but so is the demand for money increasing as foreign governments, up until recently, continued to build up their dollar reserves. Simultaneously, citizens of foreign countries with unstable currencies hoard dollars.
  • Some of the new money is temporarily going into the asset markets creating bubble-like conditions in the stock and art markets and an incipient bubble in some parts of the reviving housing market.

Myth 5: More, better, and more vigorously enforced regulations can prevent loan and investment losses.

Myth 6: Government can prevent hyperinflation.

Source Ludwig von Mises Institute

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