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Frank Shostak

Frank Shostak

Articles by Frank Shostak

The Bank of England’s Governor Fears a Liquidity Trap

3 days ago

The global economy is heading towards a “liquidity trap” that could undermine central banks’ efforts to avoid a future recession according to Mark Carney, governor of the Bank of England. In a wide-ranging interview with the Financial Times (January 8, 2020), the outgoing governor warned that central banks were running out of ammunition to combat …

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More Money Creation Won’t Create More Economic Growth

7 days ago

The view that more money can revive an economy is based on the belief that money transmits its stimulatory effect through aggregate expenditure. With more money in their pockets, people will be able to spend more and the rest will follow suit. Money, in this way of thinking, is a means of payment and funding. …

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Money, Expectations, and Economic Growth

14 days ago

In various writings, Milton Friedman argued that there is a variable lag between changes in money supply and its effect on real output and prices. Friedman held that in the short run changes in money supply will be followed by changes in real output. However, in the long run changes in money will only have …

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Economic Stats Won’t Tell Us What Really Causes Recessions

20 days ago

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. A research team led by W. C. Mitchell …

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To Be Useful, Data Needs Theory

23 days ago

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. …

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Good Economic Theory Focuses on Explanation, Not Prediction

December 18, 2019

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 …

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Why Central Banks Aren’t Really Setting Interest Rates

December 11, 2019

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. In this way of thinking, the long-term rate is an …

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Easy-Money Policies Don’t Solve the Problem of Idle Resources

December 7, 2019

It is widely believed that resources that are utilized in normal times to promote economic prosperity become underutilized during recessions. Some experts hold that what is required are policies which will increase the availability of credit. On this Ludwig von Mises wrote in Human Action, Here, they say, are plants and farms whose capacity to …

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Exports: Currency Devaluation Won’t Grow the Economy

December 2, 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. In the …

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

November 26, 2019

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 …

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

November 19, 2019

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 …

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Why Friedman Is Wrong on the Business Cycle

November 13, 2019

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. Bigger recessions should lead to …

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Why Government Should not Fight Deflation

November 9, 2019

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. This weakens the overall flow of spending and in …

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More Government Spending Won’t Make the Economy Grow

October 25, 2019

A key factor that constrains people’s ability to generate goods and services is the scarcity of funding. Contrary to popular thinking, funding for consumption and production is not about money as such, but about real savings. Note that various tools and machinery or infrastructure that people have created is for one purpose. That purpose is …

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Why the Pursuit of Profit Makes Us All Better Off

October 21, 2019

In most cultures, profit is seen as the outcome of exploitation of some individuals by some other individuals. Hence, anyone who is seen as striving to make profits is regarded as bad news and the enemy of society and must be stopped in time from inflicting damage. Profit however, has nothing to do with exploitation …

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Economic Growth Does Not Cause Price Inflation

October 7, 2019

Some commentators are of the view that whenever the economy gains strength it should be the role of the Federal Reserve to step in at some stage and introduce a tighter stance in order to prevent a general increase in the prices of goods getting out of control. However why should economic growth be positively …

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Do We Need More Savings Before We Can Have More Lending?

September 26, 2019

There is an emerging view held by many commentators that it is banks and not the central banks that are key for the expansion of money. This way of thinking is promoted these days by the followers of the Post Keynesian school of economics (PK). In a research paper by the Bank of England’s Zoltan …

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How Central Banks Promote Money-Creation by Private Banks

September 21, 2019

Some commentators consider fractional reserve banking as a major vehicle for the expansion in the money supply growth rate. What is the nature of this vehicle? Fractional reserve banking arises because banks legally are permitted to use money placed with them in demand deposits. Banks treat this type of money as if it was loaned …

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More Money Pumping Won’t Make Us Richer

September 16, 2019

Whenever a central bank introduces easy monetary policy, as a rule this leads to an economic boom — or economic prosperity. At least this is what most commentators hold. If this is however the case then it means that an easy monetary policy can grow an economy. But loose monetary policies do not generate economic …

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Slowing Money Supply Growth May Trigger a Recession

September 9, 2019

A slight strengthening in the momentum of consumer expenditure has prompted many commentators to suggest that as long as the US consumer continues to spend there is no risk of a recession ahead. The yearly growth rate of consumer expenditure at current prices stood at 4.1% in July against 4% in June. Notwithstanding still buoyant …

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How GDP Measures Help Create the Illusion that Money Pumping Grows the Economy

September 2, 2019

In response to a weakening in the yearly growth rate of key economic indicators such as industrial production and real gross domestic product (GDP) some commentators have raised the alarm of the possibility of a recession emerging. Some other commentators are dismissive of this arguing that the likelihood of a recession ahead is not very …

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Does the Boom-Bust Cycle Ever Result from Commodity Money?

August 26, 2019

Following the Austrian Business Cycle Theory (ABCT), the boom-bust cycle emerges in response to a deviation in the market interest rate from the natural interest rate, or the equilibrium interest rate. As a rule it is held, the tampering with the market interest rates by the central bank sets the boom-bust cycle in motion. Would …

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Real Savings Are the Key for Economic Growth

August 22, 2019

As long as the pool of real wealth is expanding, easy monetary policy will appear to “work,” and  loose monetary policy is likely to be incorrectly held as generating economic growth. Once, however, the pool becomes stagnant or starts declining, the “music stops” and no amount of central bank monetary pumping is going to “work.” …

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GDP Growth Isn’t the Same Thing as Economic Growth

August 12, 2019

To gain insight into the state of an economy, most financial experts and commentators rely on a statistic called the 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. This statistic is constructed in accordance with …

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Price Stability Is Overrated

August 5, 2019

The idea of price stability originates from the view that volatile changes in the price level prevent individuals from clearly seeing market signals as conveyed by changes in the relative prices of goods and services. For instance, because of an increase in the demand for apples, the prices of apples increase relatively to the prices …

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The Fed Chairman and the Phillips Curve

July 30, 2019

On July 11, 2019, before the Senate Banking Committee, the Federal Reserve Board Chairman Jerome Powell said that the relationship between unemployment and inflation in the US has vanished. According to Powell, “The relationship between the slack in the economy or unemployment and inflation was a strong one 50 years ago … and has gone …

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Are Expectations the Driving Force Behind Business Cycles?

July 22, 2019

According to Ludwig von Mises’s Austrian Business Cycle Theory (ABCT), the artificial lowering of interest rates by the central bank leads to a misallocation of resources due to the fact that businesses undertake various capital projects that prior to the lowering of interest rates weren’t considered viable. This misallocation of resources is commonly described as …

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Central Banks Aren’t Really In Control of Interest Rates

June 25, 2019

For most experts the central bank determines short-term interest rates by setting the target to the benchmark policy rate such as the federal funds rate in the US. Many economists are of the view that through the manipulation of short-term interest rates, the central bank by means of expectations regarding future interest rate policy can …

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Money Velocity and Economic Growth

June 19, 2019

After rising to 2.198 in Q3 1997, the ratio of US Gross Domestic Product (GDP) to money supply M2 fell to 1.433 by Q3 2017. Since then the ratio has bounced slightly to 1.457 in Q1 2019. Economists label this ratio as the velocity of money. Some experts regard the steep decline in the ratio …

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