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Top 5 Economic Fallacies and Delusions

Though this post was published over a year ago, it still is worth repeating – as nothing has changed!

Since most people are somewhat uneducated on economic and monetary matters, there exists certain economic fallacies and delusions that continue to be repeated and believed. And as students in advertising 101 will tell you; “Repeat something enough times and it becomes a fact…”  added to the idea that, “Small truths are easily twisted into big truths…” and you have the following;

1. The Euro Crisis was Solved a Few Years Ago.

the euro crisisIn reality, nothing was truly solved in regards to the Euro several years ago, though several plans were agreed to and implemented. However, often the “plans” meant simply lending more money to certain countries while requiring (asking) them to change or change many of their countries tax, budgetary or economic policies. Today, Greece actually has more debt than they did during the first crisis several years ago.

Though several Euro countries are doing somewhat better economically than a few years ago (Ireland, Germany, the Nordic countries), generally, most Euro countries have simply plodded along with no real change in economic output or employment growth. The great hope of the ECB (European Central Bank) was that economic growth, along with a healthy dose of inflation, would solve most of the problems with time. Unfortunately, many of the problems that existed during the first crisis remain today. 

2. U.S. National Debt is Under Control.

United States national debt now sits at about $18.1 trillion dollars ($18,100,000,000,000) or  $56,000 for every man, woman and child in America. (Editor: As of 9/01/2016, the national debt is almost $20 trillion, which, unfortunately, proves the point.) The national debt continues to grow every year. While it is true that the budget deficit has decreased over the last several years, the debt has continued to increase. The budget deficit is the amount the U.S. budget is “short” each year – which is then added to the national debt. An example of this is a household that spends more than it brings in by the use of credit cards. Though the household continues to act and may even look healthy and prosperous, the debt continues to increase.

Unfortunately, all indications are that the national debt will continue to rise in future years. Though not widely discussed, the U.S. does pay interest on its debt. Though these rates have been very low and Treasury bills and bonds have been issued with low rates for 1, 5 and 10 years, ALL bonds have a maturity date. And at maturity date, they must either be paid or new debt replaced with old.

3. Falling Prices are Good!

Though most consumers and average folk welcome lower prices on the things they buy, governments and economists do not. Falling prices mean weak demand, which in turn, mean low economic output, slow growth or even recessions/depressions. Governments typically like a “little” inflation as it tends to increase tax revenues (with increasing wages, consumer and sales taxes) while decreasing the value of the government’s own debt.

For example, if a government issues a $100 bond (debt) on January 1st, but has 50% inflation during the year, the inflation adjusted value of that bond at December 31st will be just $50. And the interest it has to pay on that bond will only be worth 1/2 of what it was when it was issued at the beginning of the year. However, the opposite is generally true in a deflationary (falling price) economy. Debt and debt service become much more of a burden for a government while tax revenues are falling – not a good combination!

4. Economics is a Science, so Most Economists Always Agree.Economic fallacies and errors

Science is generally thought of as discovery and fact-finding. Once a general scientific theory is created, it is tested and holds true, i.e. the Earth was discovered to be round, water is made from two Hydrogen atoms and one Oxygen atom, etc.

While there are some general economic theories in economics; when demand for something goes up, supplies generally go down, there are no “always” true economic theories. So economics is often more art than science, more guessing than facts and more disagreement than agreement.

5. A Rising American Dollar Makes America Proud and Strong!

As Americans, it just sounds good to have a strong and rising dollar. So it must be good! No, not in many cases.  A rising dollar makes American made products more expensive for others using another currency – and imports cheaper in America. This harms American manufacturers and American companies that base their products and services primarily in American dollars. It also increases the gap between imports and exports – lowering the Gross Domestic Product.

A rising dollar also makes it more expensive for people from other countries to visit America (though cheaper for Americans to visit other countries.)

Though the American Federal Reserve is considering raising interest rates, most of the rest of the developed world is doing the reverse by lowering rates (or holding at low current rates.) This action is causing the American dollar (its debt) to become more valuable in comparison to their own currency. Countries will also intentionally lower the value of their currency to the dollar to make their exports cheaper to Americans – thus increasing their own manufacturing. Japan is now desperately attempting this economic maneuver.

Though a strong American dollar may make Americans feel good, for American-made goods, services and exports, it’s not such a good thing.

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