Understanding Money

For a long time I’ve been convinced that we mostly don’t understand how money really works.  It’s way to easy to think that the government must operate just like a household, and ensure that it doesn’t overspend – thus many of the current calls for austerity.  And obviously there are limits – we all know about 1920s Germany and Zimbabwe and many other examples of runaway inflation.  But typically there are additional circumstances driving such situations (such as reparation payments and crazy dictators)!

I found this column “Not Enough Money” from the National Review’s Ramesh Ponnuru interesting, because he believes many of the folks warning of impending hyper-inflation are probably fighting “the last war” instead of truly understanding the current situation.  Here’s a taste:

In warning about inflation, conservatives are crying “fire” in, if not Noah’s flood, at least a torrential rain. It may be that they are stuck not so much in the 1930s as in the 1970s — the time when conservatism forged much of its current outlook on economics, and a time when monetary restraint was badly needed. Conservatives also tend to think that loosening monetary policy is a kind of intervention in free markets, and therefore to be suspicious of it. But this is an error.

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