Modern Monetary Myths: Debunking the Fallacies That Lead to Economic Failure

The recent failure of Silicon Valley Bank (SVB) should serve as a warning about the dangers of ignoring sound money principles. Their reliance on the Federal Reserve’s assurances of low-interest rates led them to invest in no longer desirable assets when interest rates rose faster than expected. As a result, they were forced to liquidate at substantial discounts, which eroded customer confidence and led to a run on the bank. This article aims to debunk some of the economic fallacies that have gained traction in recent years and propose ways for Congress and regulators to prevent similar failures.

The Fallacy of Deficits Not Mattering

One of the most popular and bipartisan myths is that deficits do not matter. The proponents of this idea argue that the government can continue to spend beyond its means without consequence, as it can print money to make up the difference. However, this claim is untrue. When Congress spends more, the Federal Reserve increases the money supply by purchasing Treasury bonds from the open market. This leads to a simultaneous increase in the money supply and a decrease in the supply of federal bonds, making the government issue new treasuries to finance deficit spending, ultimately leading to inflation.

This myth was perpetuated during the COVID-19 pandemic, when the federal government spent more money than any lender would lend, causing the Fed to expand its balance sheet by nearly $5 trillion. Unfortunately, instead of helping the economy, this led to record-breaking inflation, affecting many households’ purchasing power and economic stability.

The Fallacy of Expert Government Officials

Another accepted idea is that “expert” government officials can effectively manipulate interest rates and economic policies to control the economy. However, overreliance on Congress’s fiscal policies and the Federal Reserve’s ability to set rates create economic signals and imbalances that can lead to economic bubbles and crashes.

For example, despite clear evidence, President Biden, Treasury Secretary Janet Yellen, and Federal Reserve Chairman Jerome Powell claimed that inflation was transitory. Similarly, Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Chuck Schumer (D-N.Y.) falsely claimed that additional government spending, such as the Inflation Reduction Act, would bring inflation under control. This thinking can lead to economic instability and further failure of banks like SVB.

Related facts

– The rapid rise in interest rates in the early 1980s led to the failure of many savings and loan institutions, which cost taxpayers $150 billion in bailout money.

– The recent inflation surge has affected household spending and has been linked to decreased consumer confidence.

Key Takeaway

It’s time to debunk popular misconceptions about current monetary policy and acknowledge the effects of government spending and monetary policy on inflation and the economy. Without proper oversight, reliance on deficit spending could lead to severe economic consequences. Congress and regulators must take responsibility to prevent such dangerous failures and consider their policies’ long-term effects on the economy.

Conclusion

The collapse of Silicon Valley Bank serves as a reminder that ignoring sound money principles and over-relying on the government’s fiscal and monetary policies can have dire consequences. As such, it’s crucial to debunk the popular myths that have long been perpetuated and start taking concrete measures to prevent such failures from happening in the future.