The economy is important. It is where production and value creation takes place. So due to the importance, there are quite some economic myths. Myths we should simply bust. It is too important
1. Deficits and inflation
Most governments in the world are running with a deficit. This comes from the fact that politicians are out of touch with reality. Political parties fail to balance a budget. They fail to protect the short-term and long-term interests of its citizens.
A deficit means that the government spends more money than it gets in. To solve this they can do a few things.
1. Sell government bonds to the public # this money is not inflammatory. This money comes from money at the banks. The money was just a banking wire.,
2. Sell government bonds to financial institutions (banks, pension funds, insurance companies) # If this happens new money is created. The treasury bonds are new banking deposits. The banks will create money via this.
Meaning that the government bonds are creating inflation. The money created is new. It is created out of thin air. Yes, this is inflation.
2. Deficits and private investments
The past decade showed exactly that this economic myth is not true. Record low-interest rates made more and more money going to government spending. The programs are not creating any wealth. The money is wasted in unproductive programs.
No matter how you look at government deficits, they all cause massive economic problems. When it is financed by the banking and insurance system we will see wealth destructing inflation. When it is financed by private investors it is just keeping the terminal ill beat alive.
3. Tax increases solve deficits
There are quite some politicians who oppose deficits. So that is a lovely beginning. Unfortunately, they offer an even worse solution. The solution is nothing more than increasing your tax bill. This simply means more money for the government. This is a bad policy and a bad idea. Since when did it work to give junk more drugs?
One of the reasons that higher tax is not working is that it is likely that all politicians and bureaucrats are simply blowing the money away. So this will not be the solution for the deficit.
You might know Parkinson law. A law which says that expenditure will meat income. If you have the goal to become financially independent you should violate this law.
Another negative side effect is that a tax increase will result in higher inflation. Yes, inflation is nothing more than a form of taxation. But inflation has a benefit when it compares to taxation. You have a choice. If you have to pay USD 200 for a burger I feel sorry for you. But at least you have the choice of buying the burger of eating something different.
4. The myth of the FED money supply changes and raising / failing interest rate
The media pays a lot of attention to the growth or decline in the money supply. Unfortunately, they miss the real data. The problem is that the money supply has nothing to do with the changes in interest rate.
When the central banks increase the money supply they do this with bank reserves. More money for the financial system.
The changes in interest rates are there due to a few reasons. The supply and demand for money are one of the reasons.
It is true that an increase in the money supply could make money cheaper. When there is more of something it is less valuable. It is easier to get. But when no one is interested in borrowing we will see bubbles in financial markets.
The bubbles of financial markets are exactly what we see happening in the past decade. It is also exactly what happens prior to hyperinflation.
5. Economists can forecast with big data, charts, computers
People think economists can’t predict the future. I’m sorry to say so. No one is capable of predicting the future 100% accurate. The real problem in this is humans. Which economist correctly forecasted the popularity of octopus as a Christmas evening meal around the world?
If economists, and other forecasters, were 100% correct then they should not complain about the fact that they are right. For so long the current trend continues.
6. The link between inflation and unemployment
One of the most used reasons we hear to keep inflation is that when we don’t have inflation we will high unemployment. High unemployment, poverty, and instability. So it seems we are trapped. Wealth destruction or unemployment.
This point is exactly where the current economists are failing to deliver on the economic promises they make. The promise was that the inflation would bring stability and more wealth.
A reason for many to believe this bad policy is due to the link between high unemployment and the wage rate. Unfortunately, this doctrine was developed at the beginning of the industrial revolution.
The higher costs of salary could result in higher unemployment. That is only the case when productivity does not increase. High salary at low productivity results in high unemployment.
7. Deflation will result in the collapse of society
When it comes to this we forget that inflation only occurred during a period of war. Due to the industrial revolution, the prices went down. After the industrial revolution, it took wars to make things more expensive.
The inflation came from the increase in money supply growth.
The free market, brave capitalists, simply could produce for lower prices. This results in more poorer people get access to new products and services.
Exactly the same as what we see right now happening. We see this happening in the world of electronics, consumer goods. They get cheaper due to innovation.
8. The best tax is a flat tax
A flat tax results in lower government and government revenue. At least that is what the supporters of this say. Don’t get me wrong. Every tax deduction is a step forward. A step towards economic freedom.
But taxes could be increased as they could also be lowered. Politicians have the job. For as long the voters tolerate them. Or step up and simply throw them out.
Bureaucrats stay. They measure their importance just by the money they manage. So they will increase every tax when they have the chance. A solution for this would be to simply say that all tax increases and new taxes should be done by a referendum.
9. Lower income tax serves everyone
A popular idea is that lower taxes are good for everyone. A popular accounting saying says that the lower you tax, the more you get. Unfortunately, this is not true.
The idea that lower tax just means that the taxpayer will pay less and the government will get more proofs to be wrong.
The theory is developed for just 1 reason. Give politicians an excuse to push for lower taxation. The theory aims to maximize tax revenue for the government. It assumes we all want to maximize tax revenue to support a big government.
I’m in support on low tax. Or, no tax to be more precise, but I’m not in support of a big government. I’m in support of a very small government. Doing almost nothing and not taking anything for it.
10. Global competition on labour results in unemployment
To bust this misunderstanding we need to start with asking some questions. Why are wages high in some countries and low in other countries? We need to ask this question for a few reasons. It is the root of global job competition. So if you like to stop this then you will need to start here.
Taxation on jobs is high, at least in the United States. So this could be a solution. Then we have the fact of productivity. Western countries have high productivity and can, therefore, afford high labor costs.
Workers compete with each other. On productivity, on the quality, stability of production. The hygiene standards in rural Africa are different than in the western world. Does this mean that rural Africa should pay the same salaries?
Another factor which results in high salaries is tariffs. So if western countries would like to end this they a take the first step. A step which they can take by doing something sensible.
Of course, they will not do something sensible. Politicians will just do what they always do. Until the people had enough and simply kicked them out.