Inflation Breeds Even More Inflation
Mises knew that breakdowns of economic activity were the inevitable outcome of government interference in the monetary sphere. However, public opinion has not correctly diagnosed the root cause, regularly blaming instead the free market system — rather than the government — for the malaise. In times of crisis, people call for more government intervention in all sorts of markets, thereby setting into motion a spiral of intervention which, over time, erodes the liberal economic and social order.
It is therefore a rather discomforting truth that today’s governments the world over produce fiduciary media, the very kind of money Mises had warned us against.
It is an inflationary regime. The relentless rise in the money stock necessarily reduces the purchasing power of money to below the level that would prevail had the money supply not been increased. Early receivers of the new money benefit at the expense of those receiving it later.
What is more, the creation of fiduciary media artificially suppresses market interest rates and thereby distorts the intertemporal allocation of scarce resources. It leads to malinvestment, which must eventually erupt in collapsing output and employment. FULL ARTICLE
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