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Booms & Busts: An Analysis of Easy Money

Booms & Busts: An Analysis of Easy Money

According to the popular way of thinking, various economic data can provide an analyst with the necessary information regarding the state of the economy. It is held that by inspecting various economic indicators such as the gross domestic product or industrial production, an analyst could ascertain the state of the economic business cycle. Following the experts from the National Bureau of Economic Research (NBER), business cycles are seen as broad swings in many economic indicators, which upon careful inspection permit the establishment of peaks and troughs in general economic activity....

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The Bank of England’s Governor Fears a Liquidity Trap

The Bank of England’s Governor Fears a Liquidity Trap

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 a downturn: If there were to be a deeper downturn, more than a conventional recession, then it’s not clear that monetary policy would have sufficient space. He is of the view that aggressive monetary and fiscal policies will be required to lift the...

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Money, Expectations, and Economic Growth

Money, Expectations, and Economic Growth

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 an effect on prices. This means, according to Friedman, that changes in money with respect to real economic activity tend to be neutral in the long run and non-neutral in the short run. In the short-run, which may be as much as five or ten years, monetary changes affect primarily output....

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Good Economic Theory Focuses on Explanation, Not Prediction

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. Hence, it is held that the criterion for the selection of a theory should be its predictive power. So long as the theory "works," it is regarded as a valid framework as far as the assessment of an economy is concerned. Once...

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More Money Pumping Won’t Make Us Richer

More Money Pumping Won’t Make Us Richer

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 growth. These policies set in motion the diversion of real savings from wealth generators to the holders of the newly pumped money. Real savings, rather than supporting individuals that specialize in the enhancement and expansion of the infrastructure are consumed by various...

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Myth: Gold Makes Boom-Bust Cycles Worse

According to some commentators on the gold standard, an increase in the supply of gold generates similar distortions as money out of “thin air” does. Let us start with a barter economy. John the miner produces ten ounces of gold. The reason why he mines gold is because he believes there is a market for it. Gold contributes to the well-being of individuals. He exchanges his ten ounces of gold for various goods such as potatoes and tomatoes. Now people have discovered that gold apart from being useful in making jewelry is also useful for some other applications. They now assign a much greater...

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Should the Fed Print More Money When "Demand for Money" Rises?

For most economists and commentators the main role of the Fed is to keep the supply and demand for money in equilibrium. Whenever an increase in the demand for money occurs — in order to maintain the state of equilibrium — it is held that the Fed must increase the money supply as a necessary action in order to keep the economy on a path of economic and price stability. The accommodation of the increase in the demand for money is not considered as money printing and therefore not harmful to the economy. That is,  this sort of  increase, it is held, does not set in motion the boom-bust cycle...

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The Connection Between Money-Supply Growth and Inflation

In the article “Rapid money supply growth does not cause inflation” written by Richard Vague at the Institute for New Economic Thinking, December 2, 2016, the author argues that empirical evidence shows that increases in money supply has nothing to do with inflation. According to Vague, Monetarist theory, which came to dominate economic thinking in the 1980s and the decades that followed, holds that rapid money supply growth is the cause of inflation. The theory, however, fails an actual test of the available evidence. In our review of 47 countries, generally from 1960 forward, we found that...

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