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Central Banks’ Obsession with Price Stability Leads to Economic Instability

Central Banks’ Obsession with Price Stability Leads to Economic Instability

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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. Consequently, it is held, this leads to the efficient use of the economy’s scarce resources and hence results in better economic fundamentals.

The Rationale for Price-Stabilization Policies

For instance, let us say that demand increases for potatoes versus tomatoes. This relative strengthening, it is held, is going to be depicted by a greater increase in the price of potatoes than for tomatoes.

Now in an unhampered market, businesses pay attention to consumer wishes as manifested by changes in the relative prices of goods and services. Failing to abide by consumer wishes will lead to the wrong production mix of goods and services and will lead to losses.

Hence in our example, by paying attention to relative changes in prices, businesses are likely to increase the production of potatoes versus tomatoes.

According to this way of thinking, if the price level is not stable, then the visibility of the relative price changes becomes blurred and consequently, businesses cannot ascertain the relative changes in the demand for goods and services and make correct production decisions.

Thus, it is feared that unstable prices will lead to a misallocation of resources and to the weakening of economic fundamentals. Unstable changes in the price level obscure changes in the relative prices of goods and services. Consequently, businesses will find it difficult to recognize a change in relative prices when the price level is unstable.

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Corruption and economic instability in the news

Corruption and economic instability in the news

I’m including “money” related issues because energyskeptic is my attempt to write a “wiki” of important posts about the fall of western civilization as we know it from an enormous number of factors.  Although a lack of oil to keep heavy-duty vehicles running will be the real reason civilization crashes, most will think it’s due to a financial crash. That’s a good thing since people are likely to behave better if they think it’s yet another bust in a boom-bust economic system.  Awareness that its a lack of energy could lead to panic, since  a lack of fossil fuels is permanent, enabled an extra 6 billion people to be born, and has no remedy.  

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Practical PreppingKunstlerCast 253KunstlerCast278Peak Prosperity , XX2 report ]

Fraud, corruption, and economic instability

Economic Instability – signs of a crash ahead?

2016-10-24. As Europe and Asia Hoard Cash, Economists See Echoes of Crisis.

2016-9-27. Global Container Volume on Track for Worst Year Since 2009.  Flat growth in the beleaguered shipping industry could set off further bankruptcies and possible acquisitions. Wall Street Journal.

Another financial crash worse than 2009

2016-04-03 Stanley Druckenmiller: “This Is The Most Unsustainable Situation I Have Seen In My Career”. Simple Math Shows America Is Headed for an Economic Disaster

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