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bad-money

Money is not the root of all evil, but it is at the root of economic malaise and this economic crisis.

In the years preceding the subprime crisis, money acted a super stimulant. In many countries, bubbles began to form, and as the system inflated things felt so good. Protected by incompetent and impotent regulation, government directives further stimulated subprime lending and encouraged risky practices. Many investors, imperfect as they are, were duped by it all – the booming house prices and the strong credit ratings, and used every trick in the book to gear themselves and multiply nominal gains on the way up. But as the bubble beneath did not lead to a sound expansion of production, what came next was inevitable. As Mises noted in Human Action, “Credit boom is built on the sands of banknotes and deposits. It must collapse.”

The evil of bad money is doomed to return unless we learn the lessons of history. Directed government stimulus plans increasing the quantity of money, and excessively cheap money with interest rates held down too low for too long, both lead to the same conclusion.

When inflation backed fiscal stimulus is implemented and noticed, the inflationary results act as a stealth tax by the government as our money falls in value. When monetary growth is better hidden, it drives many into a state of economic irrationality which one day terminates abruptly.

Monetary stimulus may help in the short run, when looking to relieve the nation of economic malaises such as unemployment, and searching for political boost but over time consistently bad money will cause greater woe: mal investment, bubbles, inflation, and crisis.

A more conservative policy goes some of the way to improving the quality of our money, but actually achieving sound money is a much more difficult task.