GLEN TENNEY At the Margin Advertisement

Last month I pointed out the major cause of the recession we are now experiencing was the creation of money out of thin air by the government central bank in the early years of this decade.

In this article I will point out the irony associated with the fact that the primary means the federal government is currently using to fight these massive money-creation blunders is -- you guessed it -- more money creation.

The idea that the injection of more money into the economy will solve the problems created by the injection of too much money into the economy is one of the most foolish ideas pervading politics since the creation of the Federal Reserve in 1913.

There has long been a sort of mystique about money. Money can be exchanged for things people value, and so most people think (rightly for the most part) that if they had more money, all else being equal, they would be better off.

The problem with this way of thinking, however, is it does not apply if everyone else in society has more money as well. If everyone in the world were instantly (and magically) given 20 percent more money, there is no good reason to think they would be any better off than they were yesterday.

The creation of money does not solve the problem of scarcity in the world. Nor does money solve the problem of poverty. If the creation of money could somehow solve the problem of poverty, such a phenomenon as poverty would have been eliminated from society long ago. But even a rudimentary understanding of the role of money in society suggests that real wealth cannot be created by simply printing money.

One would think even politicians and central bankers would be able to grasp that reality. But alas, they don't seem to understand that principle.

An important and pervasive principle of economics suggests the greater the supply of anything, the lower the marginal value of that thing. Knowing this principle of diminishing marginal value applies to money helps us to understand the value of money, which is often called its purchasing power, will decrease when there is more money in society. This fall in the purchasing power of money is typically known as inflation. In short, because of the huge amounts of liquidity (money) that has been created recently, inflation in the future is practically guaranteed.

The money created by government in recent months can be thought of as fraudulent money in a sense. It is created "out of thin air" and is not supported by any wealth-creating activities or savings. Such money-creation activity in fact destroys real wealth by falsifying interest rates, causing a serious misallocation of resources throughout the economy.

Thus an important question remains. If creating money out of thin air causes recessions, if it does not cure poverty, and if it does not make people better off generally, why do the people in Washington do it? An easy answer is that these bureaucrats have a different understanding of economics than I have. But such an answer is incomplete because it does not get at the root of the problem.

In striving to find the root of the problem, we should be aware that those in Washington are paid rather substantial salaries to "manage" the economy. While many academic economists do not think the economy needs to be "managed" by anyone, our views and arguments are not often persuasive enough in the political arena. If the central bankers were not allowed to manage the economy by falsifying interest rates and creating money, how would they justify their salaries? It seems managing the economy requires monetary manipulation, and monetary manipulation causes both recessions and inflation. We are already dealing with the former, and now we need to prepare for the latter.

(Glen Tenney teaches economics and finance at Great Basin College in Pahrump. He can be reached at glent@gwmail.gbcnv.edu.