[Originally published by Law and Liberty.]

[Originally published by Law and Liberty.]

The Circular Flow Diagram has dominated economic thought for over a century. 

Yet, all along we’ve known its shortcomings: over-aggregation, static capital, instantaneous production, and homogeneous factors. It places consumption before production and supports a fantasy macro world where saving is destructive, deficits don’t matter, and MMT makes sense.

It is relatively common that what should be recognized as a warning flag of major trouble is often ignored until things get so bad that it is almost impossible not to notice (unless one is mightily determined not to see them). Leonard Read channeled such thoughts about the damage public policy has caused Americans. He even went so far as to say “Thank God for the Mess We’re In,” (The Freeman, March 1975), because our mess is so great we might finally start thinking about how to undo the causes:

We live in strange times. The same people that vehemently defended massive deficit spending and money printing as the solution to the global economy now blame the turmoil of the UK bond and currency markets on a deficit-increasing budget.

I find it astonishing that no one of the so-called experts that have immediately placed the cause of the British market volatility on Liz Truss’s budget have said anything about the collapse of the yen and the need for Bank of Japan intervention, which has been ongoing for two weeks.

US dollar and main currencies

On October 7, 2022, US congressman Alex Mooney (a Republican from West Virginia) introduced a bill (the Gold Standard Restoration Act, H.R. 9157) that stipulates that the US dollar must be backed by physical gold owned by the US Treasury. The initiative clearly indicates that the increasingly inflationary US dollar is triggering efforts to get better money.