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How money creation threatens hyperinflation
How money creation threatens hyperinflation
In order to understand the relationship between money creation and the price level, we first need to get some definitions straight.
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Japan Is Writing History As A Prime Boom And Bust Case | Gold Silver Worlds
Japan Is Writing History As A Prime Boom And Bust Case | Gold Silver Worlds.
Recently, we wrote a paper about the dynamics behind the boom and bust cycles, based on the view of the Austrian School (the Austrian Business Cycle Theory, or ABCT). The key takeaway was that central banks don’t help in smoothing the amplitude of the cycles, but rather are the cause of cycles.
Business cycles are a direct result of excessive credit flow into the market, facilitated by an intentionally low interest rate set by the government.
The problem with ongoing monetary policies is that the excessive money supply sends the wrong signals to the market, which ultimately leads to misallocation of investments or ‘malinvestments’.
On the one hand, entrepreneurs invest more and increase the depth of the production process. On the other hand, consumers spend more as saving becomes unattractive. When the excess products created through the cheap money-induced investments reach the market, consumers are unable to buy them due to the lack of prior savings. At this point the bust occurs.
It is key to understand that by manipulating interest rates (particularly by lowering them), central banks create bubbles that end in busts.
Japan is an excellent case study depicting the scenario discussed by the Austrian Business Cycle Theory (ABCT). In this article, we will examine the course of the economic and monetary situation in Japan from the ABCT’s point of view.
The Banking System Can’t Lend Out Reserves, But a Bank Can – Ludwig von Mises Institute Canada
The Banking System Can’t Lend Out Reserves, But a Bank Can – Ludwig von Mises Institute Canada.
This post will seem simple to some, but I want to correct a slight confusion I’ve seen over the last several years in the economics blogosphere. (I was motivated to write because of an exchange with Nick Freiling, who loves the Austrian School but thought I had made a basic mistake in a recent piece I wrote about the Federal Reserve’s policies.) Specifically, Freiling and many others have challenged the standard claim that commercial banks lend out reserves when they make loans to customers. The critics argue that since the public will generally end up depositing their checks with their own respective banks, the granting of loans will merely rearrange which banks hold certain levels of reserves, but the banking system as a whole can’t “lend them out” because there would be nowhere for them to go. Hence, the critics allege, the talk of the Fed (say) raising the interest rate that it pays on reserves in order to discourage lending is nonsense; in Freiling’s words, there is (allegedly) no tradeoff between loans and reserves.
This argument from the critics is wrong. It rests on a confusion between micro-incentives and system-wide outcomes. In particular, the interest rate that the Fed pays on reserves can most definitely affect the willingness of commercial banks to make loans on the margin.
Before jumping directly into the issue, let me start with an analogy with actual currency held in people’s wallets or purses. (I see Nick Rowe thought of the same analogy last summer.) Forget about banks. Suppose there are $100 billion in actual currency in the economy, held by a population of 100 million people, and that this is the only money that these people use. That means on average each person holds $1,000 in currency.
The Austrian Case Against Economic Intervention – Ludwig von Mises Institute Canada
The Austrian Case Against Economic Intervention – Ludwig von Mises Institute Canada.
The basic unit of all economic activity is the un-coerced, free exchange of one economic good for another based upon the ordinally ranked subjective preferences of each party to the exchange. To achieve maximum satisfaction from the exchange each party must have full ownership and control of the good that he wishes to exchange and may dispose of his property without interference from a third party, such as government. The exchange will take place when each party values the good to be received higher than the good that he gives up. The expected, but by no means guaranteed, result is a total higher satisfaction for both parties. Any subsequent satisfaction or dissatisfaction with the exchange must accrue completely to the parties involved. The expected higher satisfaction that one or each expects may not be dependent upon harming a third party in the process.
Several observations can be deduced from the above explanation. It is not possible for a third party to direct this exchange in order to create a more satisfactory outcome. No third party has ownership of the goods to be exchanged; therefore, no third party can hold a legitimate subjective preference upon which to base an evaluation as to the higher satisfaction to be gained. Furthermore, the higher satisfaction of any exchange cannot be quantified in any cardinal way, for each party’s subjective preference is ordinal only. This rules out all utilitarian measurements of satisfaction upon which interventions may be based. Each exchange is an economic world unto itself. Compiling statistics of the number and dollar amounts of many exchanges is meaningless for other than historical purposes, both because the dollars involved are not representative of the preferences and satisfactions of others not involved in the exchange and because the volume and dollar amounts of future exchanges are independent of past exchanges.
