We often talk about the rising cost of living. Prices seem to climb relentlessly, making it harder to afford the same things we could yesterday. It's easy to blame shops, suppliers, or specific events. But what if the story is deeper? What if the very nature of the money in our pockets is changing, subtly shifting the ground beneath our economic feet? Theorists sometimes call the general rise in prices "inflation," but perhaps we should look closer. Maybe the real inflation isn't the price tag itself, but the arrival of new money into the system – money created seemingly out of thin air, which then pushes those prices up. This understanding shifts our focus from just the symptom (higher prices) to a potential underlying cause.

Money Isn't Wealth, It's a Measuring Stick

For decades, central banks worldwide have been increasing the supply of money. The common justification is that this stimulates the economy and keeps unemployment low. However, this narrative might not capture the whole picture. Let's reflect on what money truly is. It's a tool for exchange, a way to measure value, but it isn't wealth in itself. Pieces of paper or digital numbers in an account don't magically become more houses, food, cars, or the skills and services that genuinely improve our lives. Real wealth lies in the actual goods and services an economy produces. A central bank could theoretically double the amount of money overnight, but the country wouldn't suddenly be twice as rich; it would still possess the same amount of tangible resources and productive capacity. As George Reisman pointed out in his work "Capitalism," the amount of wealth produced and the total monetary value assigned to it are two different things. One can increase without the other following suit.

An Uneven Trickle-Down

Creating new money doesn't create new wealth; instead, it tends to redistribute existing wealth. When new money enters the economy, it doesn't land evenly in everyone's bank account. It typically flows through specific channels – perhaps as government spending, business loans, or central bank asset purchases. Those who receive this new money first get a significant, often unearned, advantage. They can buy goods, services, or assets at the current, lower prices before the inflationary effects fully ripple through the economy. As Murray Rothbard noted, it's like a race where those nearest the source of the new money get a head start, leaving others further behind.

The Quiet Cost to Everyone Else

As this new money circulates, it gradually filters through the economy. More money chasing the same amount of goods and services inevitably puts upward pressure on prices. For everyone else – those who didn't receive the new money early on – the result is a subtle erosion of their purchasing power. Their savings buy less, and their wages stretch less far. This process acts much like a hidden tax. Unlike income or sales tax, where we see the money leaving our hands, this "inflation tax" is invisible. We just notice things getting more expensive, often without connecting it directly to the expansion of the money supply that might be driving it. This quiet transfer allows government activities to be funded beyond what citizens might agree to pay through direct, visible taxation, potentially masking the true cost of government spending.

Widening Divides

This process can also deepen societal divides and feelings of unfairness. One primary way central banks inject money is by artificially lowering interest rates. This encourages borrowing. But who is best positioned to borrow large sums cheaply? Often, it's those who already possess significant assets to use as collateral – typically, wealthier individuals and large institutions. They can use this borrowed money to acquire more assets like stocks, real estate, or businesses. As demand for these assets rises (fueled by the easy credit), their prices inflate, further increasing the paper wealth of those who own them. This creates a cycle where financial elites, heavily invested in market assets, can pull away from the majority whose fortunes are more tied to wages and the "real" economy of goods and services, potentially leading to resentment and social friction.

Distorted Signals and Fragile Foundations

Beyond redistribution, artificially low interest rates send misleading signals throughout the economy. They can encourage excessive consumption and risky business ventures that might not be viable under normal market conditions. As Henry Hazlitt might suggest, easy money can lead to distortions, funding projects that only seem profitable because credit is cheap. It's like building on shaky foundations. Think of it like a stimulant: easy money can create a temporary economic "high," a boom period where activity seems vibrant. But this boom is often built on unsustainable investments and consumption patterns encouraged by the artificially low cost of borrowing.

When the "drug" of easy money wears off – perhaps because interest rates have to rise to combat escalating prices – the underlying weaknesses are exposed. The resulting economic downturn or "crash," while painful and psychologically distressing for many, can be seen from this perspective as a necessary correction, a purging of the unsustainable activities fostered during the boom. As Robert Murphy put it, the difficult period of correction actually begins during the boom when the distortions occur; the subsequent crisis is the often painful, but ultimately cleansing, healing process required to return the economy to a more stable footing based on real savings and sound investment.

A Difficult Path Ahead

After decades of expanding the money supply, economies like the US face a challenging situation. Rising consumer prices are becoming harder to ignore, impacting household budgets and psychological well-being. Central banks may try to counter this by raising interest rates, making borrowing more expensive. However, with high levels of debt across households, businesses, and governments, significantly higher interest rates risk triggering a widespread collapse of the very economic structures built during the era of easy money. The fear of such a collapse creates significant anxiety.

The choice becomes stark: continue fighting rising prices with higher rates and risk a deep recession, or revert to lowering rates at the first sign of serious trouble, potentially risking an uncontrolled inflationary spiral. As Ludwig von Mises warned, if people fundamentally lose faith in the future value of money, believing that its creation will never stop and prices will rise indefinitely, a "flight into real values" can occur. Everyone tries to spend their money as quickly as possible on tangible goods, regardless of need or price. This scenario, often termed a "crack-up boom," leads to hyperinflation where the money essentially becomes worthless, shattering economic coordination and social trust.

This quiet process of monetary expansion, often presented as a technical tool for economic management, carries profound implications for individual prosperity, societal fairness, perceptions of justice, and the very stability of our economic lives. It reshapes fortunes and futures in ways we rarely perceive until the consequences become unavoidable, affecting not just our wallets, but our sense of security and place in the world.

References

• Rothbard, Murray N. What Has Government Done to Our Money? Ludwig von Mises Institute. This concise book clearly explains the nature of money and how government intervention, particularly through central banking and inflation (defined as increasing the money supply), distorts the economy, acts as a hidden tax, and redistributes wealth unfairly. It directly supports the article's core arguments about the source of inflation and its redistributive effects.
• Mises, Ludwig von. Human Action: A Treatise on Economics. Yale University Press (or Liberty Fund / Ludwig von Mises Institute editions). A comprehensive treatise on economic theory. Relevant sections (particularly Part Four: Catallactics or Economics of the Market Society) delve deeply into the theory of money and credit, the consequences of credit expansion (monetary inflation), the resulting business cycles (boom and bust), and the potential end-game scenario of runaway inflation (the "crack-up boom"). It provides the theoretical backbone for the article's points on economic distortions and potential collapse.
• Hazlitt, Henry. Economics in One Lesson. Three Rivers Press (or earlier editions). While broader than just monetary policy, this classic work excels at explaining the unseen consequences of economic policies. Chapters on credit, government spending, and inflation illustrate how interventions often create hidden costs and distortions (like malinvestment driven by artificially low interest rates) that are ignored when focusing only on the immediate, visible benefits. It reinforces the article's theme of looking beyond the surface justifications for monetary expansion.