Sorry Mystics, Central Banks cannot finance Government spending: Lessons from Yemen

John Tamny on Yemen experiences:

Before Yemen’s civil war began in 2015, its currency (the rial) was worth 1/215th of a dollar. According to a report in the Washington Post last week, the rial has plummeted to 1/800th of a dollar, thus “sending food and fuel prices soaring.”

The tragedy underway in Yemen exists as yet another reminder that the Federal Reserve’s definition of inflation is completely upside down. While economists at the Fed believe that economic growth causes inflation, unstable countries in other parts of the world continue to reject the U.S. central bank’s simple-mindedness.

Indeed, it can’t be stressed enough that the biggest driver of rising prices is paradoxically a lack of economic growth. Growth is always and everywhere an effect of investment, and a falling currency repels the very investment necessary for the increased productivity that results in falling prices. In short, true inflation burns its victims twice: through rising prices in the near-term as the cost of goods reflects a shrunken currency, and through slower growth over time as the investment necessary for progress migrates away from the country that is irresponsibly pursuing devaluation.

The tragedy taking place in Yemen also offers a useful lesson about the well-oversold capabilities of central banks. Even certain members of the Austrian School claim that their very existence enables wasteful government spending as far as the eye can see. 

……

Though various economic schools relentlessly try to revive Santa Claus through their mysticism about governments, central banks and printing presses, the reality is that wealth and economic growth are always produced in the private sector. Government spending and printing presses are a consequence of the latter, and never a driver.

Hmm… These battles will continue forever perhaps…

 

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