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What Is the “Correct” Growth Rate of the Money Supply?

by | Apr 21, 2017 | ,

Most economists believe that a growing economy requires a growing money stock, on grounds that growth gives rise to a greater demand for money, which 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. Since growth in money supply is of such importance, it is not surprising that economists are continuously searching for the right, or the optimum, growth rate of the money supply. Some economists who are the followers of...

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How the Fed Operates — And Why It’s a Problem

by | Mar 15, 2017 | ,

We are often asked about the mechanisms by which the US Federal Reserve Board (the Fed) influences the level of US interest rates and whether these mechanisms also influence the level of the US money supply. It has long been regarded that the Fed no longer inflates and contracts the money supply but rather simply acts to target interest rates. The purpose of this brief paper is to clarify how the Fed works and the impact that its operations have on the money supply. The main market through which the Fed adjusts interest rates is the federal funds market. The federal funds market is, as the...

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Tightening the Money Supply will Inevitably Lead to a Bust

by | Feb 3, 2017 | ,

Fed policymakers are of the view that the correct interest rate policy could bring the economy onto a path of economic stability and low price inflation. The idea is to guide interest rates toward what is called the “natural” interest rate. The natural rate is believed to be one that is consistent with stable prices and a balanced economy. What is required then is that Fed policymakers successfully target the federal funds rate toward this natural interest rate. One of the tools that policymakers are employing in their decision making process is the Taylor rule. This rule was designed to...

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Why Fractional-Reserve Banking Would Be Limited in an Unhampered Market

by | Jan 16, 2017 | ,

The so-called multiplier arises as a result of the fact that banks are legally permitted to use money that is placed in demand deposits. Banks treat this type of money as if it was loaned to them, thus loaning it out while simultaneously allowing depositors to spend that money. RELATED: "Austrians, Fractional Reserves, and the Money Multiplier" by Robert Batemarco For example, if John places $100 in demand deposit at Bank One he doesn't relinquish his claim over the deposited $100. He has unlimited claim against his $100. However, let us also say that Bank One lends $50 to Mike. By lending...

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Keynes Would Have Loved Trump’s Economic Plan

by | Nov 22, 2016 | ,

Trump’s plan is what Keynes would have prescribed! Most economic commentators such as a Nobel Laureate Paul Krugman should be delighted with the US president-elect Donald Trump’s economic plan for it is going to be along the lines of Keynesian economics. One of Trump’s promises is a massive infrastructure spending program. According to Trump, We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we...

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There Are Two Types of Credit — One of Them Leads to Booms and Busts

by | Nov 15, 2016 | ,

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. Businessmen themselves are confused as to why. They cannot make sense of why certain business practices that were profitable yesterday are losing money today. Bad business conditions emerge when least expected — just when all...

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How Government Budget Deficits Make Us Poorer

by | Nov 11, 2016 | ,

According to some commentators the US federal budget deficit still remains a major economic problem notwithstanding that it draws less attention than in the past. The Federal Government budget had a surplus of $33.4 billion in September against a surplus of $90.9 billion in September last year. The 12-month moving average of the Federal Government budget stood at a deficit of $49 billion in September against a deficit of $44.2 billion in August and a deficit of $37 billion in September last year. Most experts are of the view that the harm from budget deficits comes from “crowding out,” the...

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Frank Shostak

Frank Shostak's consulting firm, Applied Austrian School Economics, provides in-depth assessments of financial markets and global economies.


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Last Rights: The Death of American Liberty

Last Rights: The Death of American Liberty

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Americans today have “freedom” to be fleeced, groped, injected, harassed, surveilled, vilified, disarmed, beaten, detained, and maybe shot by federal agents. From hapless homeowners hit by SWAT raids to pandemic lockdowns pointlessly paralyzing lives, government...

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