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Inflation: The Perils of Government Intervention and the Expansion of the Money Supply


Inflation, the steady rise in the general level of prices, has long been a concern for business owners, the middle class, economists, and policymakers. While there are many potential causes of inflation, well-known economists frequently emphasize the negative impact of government intervention, particularly through the expansion of the money supply. I'll attempt to share the validated arguments put forth by influential thinkers, highlighting the potential consequences of government intervention on inflation.

Government Intervention and the Money Supply: One of the fundamental principles highlighted by economist Thomas Sowell is that government intervention distorts the natural mechanisms of supply and demand in the economy, leading to unintended consequences such as inflation. Sowell argued that when governments engage in deficit spending or monetize their debt, they effectively increase the money supply, thereby eroding the value of each monetary unit. This excess money chases a relatively fixed quantity of goods, driving prices upward and resulting in inflationary pressures.

Similarly, Milton Friedman, the Nobel laureate economist, stressed the connection between the money supply and inflation. Friedman famously stated that "inflation is always and everywhere a monetary phenomenon." According to Friedman, when governments increase the money supply faster than the growth in real output, it leads to an imbalance between money and goods, leading to rising prices. Friedman's influential research on the quantity theory of money provides a compelling argument for the link between government intervention and inflation. If you are lucky enough to own the book PRICE THEORY, he explains it in understandable detail.

Ludwig von Mises, a prominent figure in the Austrian School of Economics, echoed these sentiments regarding government intervention and inflation. Mises contended that inflation was an inevitable consequence of governments expanding the money supply through central banking systems. He argued that the injection of new money into the economy disrupts price signals, distorts market coordination, and ultimately erodes the purchasing power of individuals. Mises warned that these interventions lead to economic instability and hinder long-term growth prospects.

Friedrich Hayek, another esteemed economist, explored the role of government intervention in monetary affairs. Hayek believed that central banks, in their attempts to manipulate the money supply, inevitably contributed to inflation. He argued that the discretionary control of money allows policymakers to create artificial booms and subsequent busts, exacerbating inflationary pressures. Hayek advocated for a free-market approach to money, where the supply would be determined by the voluntary transactions of individuals rather than centralised authorities. His opinions mirroring those of David Hume some 150 years earlier.

Consequences of Inflation: The expansion of the money supply through government intervention can have severe consequences for an economy. Inflation erodes the value of savings and fixed-income assets, making it harder for individuals and businesses to plan for the future. Uncertainty about future price levels discourages investment and hampers economic growth. Moreover, inflation disproportionately harms the most vulnerable members of society, as it diminishes the purchasing power of low-income individuals who are less able to adapt to rising prices.

There are several arguments above that outline the perils of government intervention in monetary affairs. Their analysis suggests that expanding the money supply through deficit spending, debt monetization, or discretionary monetary policies ultimately leads to inflationary pressures. Understanding the potential consequences of such intervention is crucial for policymakers and individuals alike. By recognizing the importance of sound monetary policies and limiting government intervention, societies can strive for stable prices, economic growth, and the preservation of individual purchasing power. It truly has never been a case of what happens if the government does nothing, as the free market can and does adapt to that and has done so for millennia, avoiding starvation, long-term poverty, and death through adapting to foreseeable events. However, when the government, or more accurately, the bureaucratic arm of governance, intervenes, it makes massive changes and ignorant changes in a short period of time, it unnaturally subsidises industries and individuals that need to fail or adapt, disrupting innovation, and natural evolution. The argument often made is that we must be willing to protect those now at the cost of the most vulnerable, those not even born yet. History has provided ample evidence time and time again that resentment towards undeserved burdens leads to violence and aggression in communities.

It is the ultimate form of discrimination, reducing the value and opportunities of the vulnerable for the sake of the lazy and complacent alive today. It isn't a case of whether governments should intervene, it's a failure for those in these positions to answer some basic Questions. What are the incentives at play? The significance of incentives in shaping individual behaviour and market outcomes. Before intervening, it is crucial to assess how the proposed intervention would alter the existing set of incentives. Will it encourage productive behaviour and efficiency, or will it inadvertently create perverse incentives that hinder economic growth? ie what will it COST?

What is the track record of similar interventions? Examining the historical outcomes of similar interventions is essential to evaluate their effectiveness and unintended consequences. Policymakers should look beyond intentions and consider the actual results of past interventions to determine whether they achieved their desired objectives or caused more harm than good.

What is the scope and duration of the intervention? The importance of considering the scope and duration of the proposed intervention. Interventions that are narrowly focused and limited in time are more likely to have a targeted impact and minimize unintended consequences. Conversely, broad and prolonged interventions can have far-reaching effects, disrupt market mechanisms, and lead to unintended outcomes.

Are there viable alternatives to intervention? Policymakers need to explore alternative solutions before resorting to intervention. The power of market forces and voluntary exchange to address economic challenges requires consideration. Considering market-based alternatives, such as deregulation or creating incentives for private sector innovation, can often be more effective and less intrusive than direct government intervention.

What is the potential for unintended consequences? Governments should stop ignoring the potential unintended consequences of intervention. Even well-intentioned policies can have unintended negative effects on other sectors of the economy or create new problems. Evaluating the potential risks and unintended consequences allows policymakers to weigh the benefits against the costs and make more informed decisions. If these questions can be answered clearly, concisely, and without effective rebuttal, then the intervention may be justified, if not, it's better to do nothing, than to cause even greater harm to others who may have nothing to do with the original issue in the first place. From the author.



The opinions and statements are those of Sam Wilks and do not necessarily represent whom Sam Consults or contracts to. Sam Wilks is a skilled and experienced Security Consultant with almost 3 decades of expertise in the fields of Real estate, Security, and the hospitality/gaming industry. His knowledge and practical experience have made him a valuable asset to many organizations looking to enhance their security measures and provide a safe and secure environment for their clients and staff.

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