Most economic commentators are of the view that when an economy is starting to experience difficult times the central bank should provide support to the economy by means of large increases in money supply. These increases are expected to strengthen the economic growth through the strengthening of individuals’ demand for goods and services.

In this way of thinking, economic activity is presented in terms of a “circular flow” of money. Spending by one individual becomes part of the earnings of another individual, and spending by some other individual becomes part of the first individual’s earnings. If an individual spends less, this allegedly worsens the situation of some other individual, who, in turn, also reduces his spending.

Following this logic, in order to prevent a recession from getting out of hand, the central bank should step in and increase the monetary inflation, thereby filling the shortfall in the private sector spending. With more money in their pockets, individuals are likely to increase their expenditure on goods and services. Consequently, an increase in demand will strengthen supply (i.e., the production of goods and services). It is held that once the circular monetary flow is reestablished, things are likely to go back to normal and sound economic growth will be reestablished.

In the market economy, wealth generators do not produce everything for their own consumption. Part of their production is used to exchange for the production of others. This means that something is exchanged for something else. Before an exchange can take place, goods have to be produced. Production must precede consumption. An increase in the production of goods and services enables an increase in the demand for goods and services (i.e., supply “creates” demand). The more goods that an individual can produce the more goods he can demand (i.e., acquire). In other words, even when people exchange money for goods or services, people accept the money, not for itself, but because it allows them to purchase other goods and services. However, money printing, without an increase in produced goods, only artificially increases demand for the existing goods.

In such circumstances, it is often assumed that surely the government and the central bank should “do something” to prevent the economic deterioration, however, neither the central bank nor the government have the resources to grow the economy. Neither the central bank nor the government are wealth generators. They are supported by diverting resources from the wealth-generating private sector. Any actions taken by the government and/or central bank necessarily involve taking from the private economy and will only further distort the structure of production. Any measures that the government or the central bank could undertake would be at the expense of generating wealth.