The Money Myths

"Beware of false knowledge; it is more dangerous than ignorance" George Bernard Shaw

"The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge" Stephen Hawking

"I honestly believe it is better to know nothing than to know what ain't so" Josh Billings

In 1971, President Nixon ended the international fixed exchange rate system (Bretton Woods) by ending the promise to convert the US Dollar to gold on demand. This changed everything about how national currencies operate in the real world, and yet the way we teach and talk about money is still largely based upon that now outdated system.

Sometimes with deeply held but incorrect knowledge, we have to tear down before we can rebuild. Our understanding of money has become so muddled that it is necessary to tear down some false beliefs before we can start explaining what money is and how it works today.

Money is a bit like like electricity. It is so simple and yet so complicated. We use it every day but we really don't understand how it works; and we really don't care to know - we just want it to work! But sometimes we are forced to grapple with money because sometimes things go very wrong. Money can hurt us, especially if we don't know how it works. 

How we think about money really matters. It influences much of our public discourse and heavily influences public policy. Unfortunately, it is also grossly misunderstood. The following Money Myths are provably false but are constantly repeated in the media, among political groups, and even in classrooms. Understanding how things really work can lead a nation back toward a more prosperous and equitable path.
  1. The purpose of taxes is to raise funds for government spending
  2. The government has to borrow to fund its spending that exceeds taxes collected
  3. America borrows from China to fund our national debt
  4. We are leaving a debt burden to our children
  5. Fiat money isn't backed by anything - it's all based solely on trust
  6. The Fed is printing money
  7. Social Security and Medicare are unfunded liabilities that we cannot afford
  8. Too much government "debt" will eventually cause interest rates to rise
  9. Government "borrowing" takes away from the private sector
  10. Persistent government deficits lead to high inflation
  11. We must save more to restore our economy
  12. The myth of redistribution
  13. The myth of "loanable funds"
  14. The myth of "unfunded liabilities"
Reading this for the first time can be a bit challenging as we are so used to thinking of money in terms of household or business budgets. Lest you get too upset before digesting everything, click here for some helpful clarification on what I am not saying.

And now you are ready for some initial conclusions that can be drawn from a proper understanding of money. Whether your political persuasion is more right or more left, we all have to start from the right foundation - how the system actually works.

More reading

The Deficit: Nine Myths We Can't Afford

A note of credit: This blog is based significantly upon the writings of economists Warren Mosler, Randall Wray, Bill Mitchell, Stephanie Kelton, and others. I highly recommend their books, especially: The Seven Deadly Innocent Frauds of Economic Policy, Soft Currency Economics, and Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems as a starting point for understanding the inner workings of the monetary system, and the many practical applications that follow.