Frank Shostak

Frank Shostak

Frank Shostak is an Associated Scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. He received his bachelor's degree from Hebrew University, master's degree from Witwatersrand University and PhD from Rands Afrikaanse University, and has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University.

Articles by Frank Shostak

We Cannot Interpret Economic Data Unless We Know Economic Theory

Most economic commentators believe that historical data is the key in assessing the state of the economy. Thus, if a statistic such as real gross domestic product or industrial production displays a visible increase, then the economy is stronger. Conversely, a decline in the growth rate says the economy is weakening.

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Inflation in the USA: Where Do We Stand Today?

A decline in the yearly growth rate of the Consumer Price Index (CPI) to 8.5 percent in July from 9.1 percent in June has prompted many commentators to suggest that inflation has likely peaked. If this assessment is valid then it is held Fed policy makers are unlikely to push for an aggressive interest rate tightening in the months ahead.

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Is a Recession Simply a Decline in GDP? What Does That Mean?

According to the National Bureau of Economic Research (NBER), the institution that dates the peaks and troughs of the business cycles: A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP [gross domestic product], real income, employment, industrial production, and wholesale-retail sales.

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Will the US Dollar Weaken against Other Currencies?

In the July 26 Financial Times article entitled “Is the Dollar about to Take a Turn?,” Barry Eichengreen writes that the US dollar has had a spectacular run, having risen more than 10 percent against other major currencies since the start of the year. According to Eichengreen, the key reason behind the spectacular strengthening in the US Dollar is that the Federal Reserve has been raising interest rates faster than other big central banks, drawing capital flows toward the US.

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Is Economic Growth Synonymous with Ecological Destruction? The NYT Gets It Wrong (Again)

According to the New York Times (NYT) article July 17, 2022, “The pioneering economist says our obsession with growth must end,” a major threat to our living standard is the obsession with economic growth. Herman Daly—an economist that has been exploring for more than fifty years the relationship between economic growth and individuals’ living standards—is of the view that the pursuit of economic growth causing ecological harm.

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GDP Provides a False Reading of the State of the Economy

The GDP (gross domestic product) statistic portrays a view that the key driving factor of economic growth is not the production of wealth but rather its consumption. Instead, it is a calculation of the value of final goods and services produced during a particular time interval, usually a quarter or a year.

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Inflation IS Money Supply Growth, Not Prices Denominated in Money

In the recent Wall Street Journal article “Inflation Surge Earns Monetarism Another Look,” Greg Ip writes that a recent surge in inflation is not likely to bring authorities to reembrace monetarism. According to Ip, money supply had a poor record of predicting US inflation because of conceptual and definitional problems that haven’t gone away.

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Contra Ben Bernanke, the Gold Standard Promotes Economic Stability

Currently the world is on a fiat money standard—a government-issued currency that is not backed by a commodity such as gold. The fiat standard is the primary cause behind the present economic instability, and is tempted to suggest that a gold standard would reduce instability. The majority of experts however, oppose this idea on the ground that the gold standard is in fact a factor of instability.

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What Is Stagflation and What Causes It?

The occurrence of stagflation is associated with a situation of general strengthening in the momentum of prices while at the same time the pace of economic activity is declining. A famous stagflation episode occurred during the 1974û75 period, as year-on-year industrial production fell by nearly 13 percent in March 1975 while the yearly growth rate of the Consumer Price Index (CPI) jumped to around 12 percent.

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Contrary to What Some Economists Claim, the Fed Can’t Give the Economy a “Neutral” Rate of Interest

On April 19, 2022, at the Economic Club in New York, the Chicago Federal Reserve Bank president Charles Evans said the Fed is likely to lift by year end its federal funds rate target range close to the neutral range of between 2.25 to 2.50 percent. Furthermore, on April 21, 2022, Fed chairman Jerome Powell corroborated this by stating that the Fed wants to raise its benchmark rate to the neutral level.

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What Determines Interest Rates? Comparing Mainstream Economics to the Austrian School

The conventional view among mainstream economists, as presented by Milton Friedman, is that three factors determine market interest rates: liquidity, economic activity, and inflationary expectations. In this viewpoint, whenever the central bank raises the growth rate in the money supply by buying financial assets such as Treasurys, this pushes the prices of Treasurys higher and their yields lower.

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Central Banks Have Broken the True Savings-Lending Relationship

Most people believe lending is associated with money. But there is more to lending. A lender lends savings to a borrower as opposed to "just money." Let us explain. Take a farmer, Joe, who has produced two kilograms of potatoes. For his own consumption, he requires one kilogram, and the rest he agrees to lend for one year to another farmer, Bob. The unconsumed kilogram of potatoes that he agrees to lend is his savings. 

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Economic Knowledge Is Qualitative, Not Quantitative

According to the popular way of thinking, our knowledge of the economy is elusive. Consequently, the best that we can do is to attempt to ascertain some facts of economic reality by applying various statistical methods to the so-called macro data.

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Money and Savings Are Not the Same Thing

In the National Income and Product Accounts (NIPA), savings are established as the difference between disposable money income and monetary outlays. Disposable income is defined as the summation of all personal money income less tax payments to the government. Personal income includes wages and salaries, transfer payments, income from interest and dividends, and rental income.
The NIPA framework is based on the Keynesian view that spending by one individual becomes part of the income of another individual. The spending of the purchaser is the income of the seller. From this, it follows that spending equals income.
So if people maintain their spending, this keeps overall income coming in. Now, an increase in the supply of money affects the total amount of money spent. Consequently, the

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Stop Pretending Price Inflation Is a Result of “Too Much” Profit

Some commentators attribute the latest sharp increase in the Consumer Price Index to businesses pushing prices of goods higher in order to secure higher profits. (See the New York Times article “Democrats Blast Corporate Profits as Inflation Surges,” January 3, 2022). Note that the yearly growth rate of the Consumer Price Index jumped to 6.8 percent in November 2021 from 1.2 percent the year before.

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How GDP Stats Create the Illusion of Fed-Fueled Economic Growth

Most experts tend to assess the strength of an economy in terms of real gross domestic product (GDP). The GDP framework looks at the value of final goods and services produced during a particular time interval, usually a quarter or a year. The GDP is formed as the summation of consumer outlays on goods and services; outlays by businesses on plants, machinery, and inventories; outlays by government; and exports less imports.

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Who Will Inflate Faster? Europe or the Fed?

The price of the euro in terms of the US dollar closed at 1.135 in November, against 1.156 in October and 1.193 in November last year. The yearly growth rate of the price of the euro in US dollar terms fell to –4.8 percent in November from –0.7 percent in October. Some commentators are of the view that the US dollar is likely to weaken against the euro (i.e., the price of the euro in US dollar terms is likely to increase).

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Money Supply Growth Is Slowing—That Points to a Slowing Economy

According to the popular narrative, the role of the central bank is to navigate the economy along the so-called path of economic stability. By this way of thinking if various shocks cause the economy to deviate from this path, then it is the role of central bank policy makers to offset these shocks.

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“Going Cashless” Isn’t as Easy as It Seems

Many economic commentators are in favor of phasing out cash. They are of the view that cash provides support to the shadow economy and permits tax evasion. It is also held that in times of economic shocks that push the economy into a recession the rising demand for cash exacerbates the downturn—it becomes a factor of instability.

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The Problem with “Stakeholder Capitalism”

Writing in the Investment Monitor on March 18, 2021, Klaus Schwab, the founder of the World Economic Forum, was urging the replacement of the present economic system. According to Schwab, the present system is deficient, since it only benefits a small minority of the population while leaving all the others at a visible disadvantage.

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What “Inflation” Really Means

Most commentators label increases in the prices of goods and services over a period of time as inflation. Ludwig von Mises however, held that the popular definition of inflation is erroneous.

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“Idle Resources” Are Problems Caused by the Central Bank

Audio Mises Wire

It is not possible to replace productive credit by means of the easy monetary policies of the central bank. If this could have been done, then the world would have already ended poverty.

Original Article: "’Idle Resources’ Are Problems Caused by the Central Bank"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.

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Why Does Money Have Value? Not Because the Government Says It Does.

Why do individuals desire to have money, which cannot be consumed and produces nothing? To provide an answer to this one must go back in time to establish how money emerged.

Original Article: "Why Does Money Have Value? Not Because the Government Says It Does."
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.

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Warum Geld seinen Wert nicht vom Staat erhält

Warum hat der Geldschein in unserer Tasche einen Wert? Einigen Kommentatoren zufolge hat Geld einen Wert, weil die Regierung, die an der Macht ist, dies sagt. Für andere ist der Wert des Geldes auf die gesellschaftliche Konvention zurückzuführen. Dies bedeutet, dass Geld einen Wert hat, weil es akzeptiert wird, und warum wird es akzeptiert?

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Why Does Money Have Value? Not Because the Government Says It Does.

Why does the dollar bill in our pockets have value? According to some commentators, money has value because the government in power says so. For other commentators the value of money is on account of social convention. What this implies is that money has value because it is accepted, and why is it accepted?

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Savings Are the Foundation of Economic Growth

Most commentators’ regard savings as harmful to economic growth on the ground that savings are associated with fewer outlays. These commentators portray economic activity as a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.

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The Phillips Curve Myth

According to a popular way of thinking, the central bank can influence the rate of economic expansion by means of monetary policy. It is also held that this influence carries a price, which manifests itself in terms of inflation.

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Inflation Is a Form of Embezzlement

Monetary inflation is just a type of embezzlement. Historically, inflation originated when a country’s ruler such as king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process of minting new coins, the king would lower the amount of gold contained in each coin and return lighter gold coins to citizens.

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The Fed’s Power over Inflation and Interest Rates Has Been Greatly Exaggerated

It is widely held that the central bank is a key factor in the determination of interest rates. By popular thinking, the Fed influences the short-term interest rates by influencing monetary liquidity in the markets. Through the injection of liquidity, the Fed pushes short-term interest rates lower. Conversely, by withdrawing liquidity, the Fed exerts an upward pressure on the short-term interest rates.

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Why Monetary “Stimulus” Won’t Prevent an Economic Bust

U.S. CPI YoY, 2000 - 2021

The increase in the growth rate of the Consumer Price Index (CPI) has fueled concerns that if the rising trend were to continue the Fed is likely to tighten its interest rate stance. Observe that the yearly growth rate in the CPI climbed to 4.2 percent in April from 2.6 percent in March and 0.3 percent in April 2020.

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There Is No “Optimum” Growth Rate for the Money Supply

Most economists hold that a growing economy requires a growing money stock on the grounds that growth gives rise to a greater demand for money that must be accommodated. Failing to do so, it is maintained, will lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession or, even worse, depression.

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Fiscal Stimulus vs. Economic Growth

US Real GDP to Potential Real GDP Ratio, 2000-2022

[unable to retrieve full-text content]For most experts a key factor that policymakers should be watching is the ratio between actual real output and potential real output. The potential output is the maximum output that the economy could attain if all resources are used efficiently. In Q3 2020, the US real GDP–to–potential US real GDP ratio stood at 0.965 against 1.01 in Q3 2019.

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A Drop in the Money Supply Was Not the Cause of the Great Depression

In his writings, Milton Friedman blamed central bank policies for causing the Great Depression. According to Friedman, the Federal Reserve failed to pump enough reserves into the banking system to prevent a collapse in the money stock.1 The adjusted money supply (AMS), which stood at $26.6 billion in March 1930, had fallen to $20.5 billion by April 1933—a decline of 22.9 percent.

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Why There’s So Much Confusion over What “Inflation” Means

Understood properly,  inflation is not a general increase in prices but is an increase in the money supply "out of thin air" which brings about the impoverishment of wealth generators. When inflation is seen as a general increase in prices, then anything that contributes to price increases is called inflationary.

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If We Want to Increase Demand in the Market, We Must First Increase Production

Following the ideas of John Maynard Keynes and Milton Friedman, many commentators associate economic growth with increases in the demand for goods and services. Both Keynes and Friedman held that the Great Depression of the 1930s was due to an insufficiency of aggregate demand and that thus the way to fix the problem was to boost aggregate demand.

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Why Economics Cannot Be Understood through Experimentation

In the natural sciences, a laboratory experiment can isolate various elements and their movements. There is no equivalent in the discipline of economics. The employment of econometrics and econometric model building is an attempt to create a laboratory where controlled experiments can be conducted.

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Why Keynes Was Wrong about Consumer Spending

As a result of the coronavirus pandemic, most experts are of the view that it is the role of the government and central bank to minimize the damage inflicted by the virus—and the policy response to it—on the economy.

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A Rising Demand for Money Won’t Save Us from Inflation

According to popular thinking, not every increase in the supply of money will have an effect on the production of goods. For instance, if an increase in the supply is matched by a corresponding increase in the demand for money, then there will be no effect on the economy.

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How Central Banks Destroy Money’s Purchasing Power

Most economists hold that a growing economy requires a growing money stock on grounds that growth gives rise to a greater demand for money that must be accommodated. Failing to do so, it is maintained, will lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession, or even worse, depression.

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Why Central Banks Are a Threat to Our Savings

US Personal Savings Rate vs YoY % CHNG US AMS

The US personal savings rate jumped to 33 percent in April from 12.7 percent in March and 8 percent in April last year. An increase in savings is regarded by popular economics as less expenditure on consumption. Since consumption expenditure is considered as the main driving force of the economy, obviously a rebound in savings, which implies less consumption, cannot be good for economic activity, so it is held. Saving and wealth—what is the relation?

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The Importance of Economic Theory in Understanding Historical Data

It is a common belief that sound economics must be based on facts and not on theoretical reasoning as such. Some commentators are dismissive of economic analysis that is not derived from the true data, since it is not describing the facts of reality as depicted by historical data. The use of the free market economy framework, without the central bank and government intervention and with businesses as a foundation to derive valid conclusions, is dismissed as nonsensical.

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Defining “Inflation” Correctly

Inflation is typically defined as a general increase in the prices of goods and services—described by changes in the Consumer Price Index (CPI) or other price indexes. If inflation is a general rise in measured prices, then why is it regarded as bad news? What kind of damage can it inflict? Mainstream economists maintain that inflation causes speculative buying, which generates waste.

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Let’s Hope Deflation Is Headed Our Way

The yearly growth rate of the US consumer price index (CPI) fell to 0.4 percent in April from 2 percent in April last year while the annual growth of the producer price index (PPI) plunged to –1.2 percent last month against 2.4 percent in April 2019.

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How Central Banks and Lockdowns Are Making the Crisis Worse

What typifies the phenomenon of the boom-bust cycle is that it is recurrent. What is the reason for this? Loose monetary policies set the platform for various activities that would not emerge without the easy monetary stance. What loose monetary policy does here is to engineer the transfer of real savings from wealth generating activities to artificially stimulated activities, which we can label as bubble activities.

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Government Regulation against “Monopolies” Only Lowers Our Standard of Living

According to a popular way of thinking, monopolies undermine the efficient functioning of the market economy by being able to influence the prices and the quantity of products. Consequently, this undermines the well-being of individuals in the economy. By this way of thinking, the inefficiency emerges because of the deviation from the ideal state of the market as depicted by the “perfect competition” framework.

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Creating More Money Won’t Revive the Economy

In response to the coronavirus, central banks worldwide are currently pumping massive amounts of money. This pumping, it is held, is going to arrest the negative economic side effects that the virus-related panic inflicts on economies. As appealing as it sounds we suggest that this view is erroneous.

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The Bureaucrats Can’t Fix This

In the midst of the emerging economic chaos triggered by the COVID-19 coronavirus, individuals are seeking answers from governments as to how to prevent the emerging economic disaster.
Most economic experts are sympathetic to this and are urging the authorities to push massive injections of money. Thus in the US the central bank has embarked on a $2 trillion stimulus.

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Diversification versus Risk

It is widely held that financial asset prices fully reflect all available and relevant information, and that adjustments to new information is virtually instantaneous. This way of thinking which is known as the Efficient Market Hypothesis (EMH) is closely linked with the modern portfolio theory (MPT), which postulates that market participants are at least as good at price forecasting as any model that a financial market scholar can come up with, given the available information.

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No, Technology Shocks Aren’t Behind Recurring Business Cycles

Economic fluctuations, also known as business cycles, are seen as being driven by mysterious forces that are difficult to identify. Finn Kydland and Edward C. Prescott (KP), the 2004 Nobel laureates in economics, decided to attempt to find out what these forces were.1 They hypothesized that technology shocks are a major factor behind economic fluctuations and demonstrated that a technology-induced shock can explain 70 percent of the fluctuations in the postwar US data.

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Why Sweden’s Negative Interest Rate Experiment Is a Failure

According to the Financial Times’s February 20 article “Why Sweden Ditched Its Negative Rate Experiment,” economists are pondering whether Sweden’s central bank experiment with negative interest rate was a success. Sweden’s Riksbank, the world’s oldest central bank, introduced negative interest rates in early 2015.

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Some Problems with Worker Productivity Stats

According to the US Labor Department, worker productivity in the non-farm sector increased at an annual rate of 1.4 percent in the fourth quarter of 2019 after declining by 0.2 percent in the previous quarter. For the year, productivity increased 1.7 percent, up from 1.3 percent in both 2017 and 2018. It was the best annual showing since the 3.4 percent increase in 2010.

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Government “Fixes” for the Trade Balance Are Far Worse Than Any Trade Deficit

US Trade Balance, 2000-2019

In December 2019, the US trade account balance stood at a deficit of $48.9 billion, against a deficit of $43.7 billion in November and $60.8 billion in December 2018.
Most commentators consider the trade account balance the single most important piece of information about the health of the economy. According to the widely accepted view, a surplus on the trade account is considered a positive development while a deficit is perceived negatively. What is the reason for this?

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How Keynesian Ideas Weaken Economic Fundamentals

Whenever there are signs that the economy is likely to fall into an economic slump most experts advise that the central bank and the government should embark on loose monetary and fiscal policies to counter the possible economic recession. In this sense, most experts are following the ideas of the English economist John Maynard Keynes.

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Economic Stats Won’t Tell Us What Really Causes Recessions

Most economists are of the view that by means of economic indicators it is possible to identify early signs of an upcoming recession or prosperity. What is the rationale behind this opinion? The National Bureau of Economic Research (NBER) introduced the economic indicators approach in the 1930s.

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To Be Useful, Data Needs Theory

For most so-called practical economists, information regarding the state of an economy is derived from data. Thus, if an economic statistic such as real gross domestic product or industrial production shows a visible increase, it is considered indicative of a strengthening of the economy. Conversely, a decline in the growth rate is regarded as weakening. It seems that by looking at the data one can ascertain economic conditions. Is this the case, though? The so-called data that analysts are looking at is a display of historical information.

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Good Economic Theory Focuses on Explanation, Not Prediction

In order to establish the state of the economy, economists employ various theories. Yet what are the criteria for how they decide whether the theory employed is helpful in ascertaining the facts of reality?
According to the popular way of thinking, our knowledge of the world of economics is elusive — it is not possible to ascertain how the world of economics really works.

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Why Central Banks Aren’t Really Setting Interest Rates

Mainstream thinking considers the central bank a key factor in the determination of interest rates. By setting short-term interest rates, the central bank, it is argued, can influence the entire interest rate structure by creating expectations about the future course of its interest rate policy.

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Exports: Currency Devaluation Won’t Grow the Economy

Industrial Production, 2000-2019

A visible weakness in economic activity in major world economies raises concern among various commentators that world economies have difficulties recovering despite very aggressive loose monetary policies. The yearly growth rate of US industrial production stood at minus 1.1 % in October, against minus 0.1% in September, and 4.1% in October last year.

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Capital Accumulation, Not Government, Is the Key To Technological Innovation

According to Mariana Mazzucato, the RM Phillips Professor in the Economics of Innovation at the University of Sussex, government is an important factor in the promotion of innovation and thus economic growth. In particular, she challenges the popular view that innovation happens in the private sector, with governments playing a limited role. Many commentators regard her as a revolutionary thinker that challenges the accepted dogma regarding the role of government in promoting innovations and economic growth.

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Don’t Want a Liquidity Trap? More Saving Is the Answer

With interest rates in many countries close to zero or even negative, some commentators are of the view that monetary policy of the central banks are likely to become less effective in navigating the economy. In fact it is held that we have most likely reached a situation that the economy is approaching a liquidity trap. But what does this mean?

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Why Friedman Is Wrong on the Business Cycle

According to an article in Bloomberg on November 5, 2019, Milton Friedman’s business cycle theory seems to be vindicated. According to Milton Friedman, strong recoveries are just natural after particularly deep recessions. Like a guitar string, the harder the string is plucked down, the faster it should come back up.

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Why Government Should not Fight Deflation

For most experts, deflation is considered bad news since it generates expectations of a decline in prices. As a result, they believe, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future.

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The Money Velocity Myth

For most financial commentators an important factor that either reinforces or weakens the effect of changes in the money supply on economic activity and prices is the “velocity of money”.

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Rising Oil Prices Don’t Cause Inflation

Gusher

A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see first chart below).

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Central Banks’ Obsession with Price Stability Leads to Economic Instability

Card house cartoon

For most economists the key factor that sets the foundation for healthy economic fundamentals is a stable price level as depicted by the consumer price index. According to this way of thinking, a stable price level doesn’t obscure the visibility of the relative changes in the prices of goods and services, and enables businesses to see clearly market signals that are conveyed by the relative changes in the prices of goods and services.

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Money Creation and the Boom-Bust Cycle

Murray Rothbard

A Difference of Opinions, In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle.

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Two Types of Credit — One Leads to Booms and Busts

Factory Shop

In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs.

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Is there a Savings Glut?

Bakers and Work

In his speech at the New York Federal Reserve of New York on October 5, 2016, the Federal Reserve Vice Chairman Stanley Fischer has suggested that a visible decline in the natural interest rate in the US could be on account of the world glut of saving. According to Fischer, both increased saving and reduced investments have potentially significantly lowered the natural rate of interest.

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Does the UK Need Even More Stimulus?

“We are all Keynesians now, so let’s get fiscal.” This is one view according to Ambrose Evans-Pritchard from The Telegraph who believes the time is right for the UK government to loosen its fiscal stance. He suggests that the “Bank of England has done everything possible under the constraints of monetary orthodoxy to cushion the Brexit shock. It is now up to the British government to save the economy, and the sooner the better,” — argues the economics editor of The Telegraph.

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Deflation Is Always Good for the Economy

“Experts” Assert that Inflation is an Agent of Economic Growth. For most experts, deflation, which they define as a general decline in prices of goods and services, is bad news since it generates expectations for a further decline in prices.

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Why a “Dollar” Should Only Be a Name for a Unit of Gold

Once Upon a Time… Prior to 1933, the name “dollar” was used to refer to a unit of gold that had a weight of 23.22 grains. Since there are 480 grains in one ounce, this means that the name dollar also stood for 0.048 ounce of gold. This in turn, means that one ounce of gold referred to $20.67.

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If the UK Economy Tanks, Don’t Blame Brexit

If the process of wealth generation is currently in good shape then Britain’s exit from the EU shouldn’t have any negative effect on real economic growth. This, however, might not be the case.
It is likely that the reckless monetary policy of central banks in the UK and the eurozone has inflicted a severe damage to the process of real wealth formation.

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With Fiat Money, Everything Is Relative

  What Determines a Currency’s Value? At the end of March the price of the euro in terms of US dollars closed at 1.1378. This was an increase of 4.7 percent from February when it increased by 0.3 percent. The yearly growth rate of the price of the eu…

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