Author Archives: Frank Shostak




Popular Imagery of Money on the Move

For most financial commentators an important factor that either reinforces or weakens the effect of changes in the money supply on economic activity and prices is the “velocity of money”.


An image from an article on the intertubes that “explains” the velocity of money (one of the articles we came across started out as follows: “The economy runs smoothly only when there is enough money in circulation. How much is enough?”  The effect reading this has on us is not unlike that produced by the sound of fingernails scraping a chalkboard). We have found that many people find it extremely difficult to wrap their mind around the fact that the velocity concept actually doesn’t make sense, and that the matter has to be viewed from a different perspective. As an aside, we have noticed in discussions that even those who do eventually accept that a different conceptual approach is required, often insist on continuing to use the term because it “doesn’t matter what we call it”, or “to keep things simple” and similar excuses. It makes one feel like a priest trying to exorcise a particularly stubborn demon. [PT]

Illustration via


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Correlation vs. Causation

A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see first chart below).


Gushing forth… a Union Oil Co. oil well sometime early in the 20th century


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Fixation on the Consumer Price Index

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.


Central planners at work. It looks stable, doesn’t it?


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A Difference of Opinions

In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:


I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud from any source a 100 percent gold standard. This is the only system compatible with the fullest preservation of the rights of property. It is the only system that assures the end of inflation and, with it, of the business cycle. (1)


Murray Rothbard was convinced that we should return to a sound monetary system based on the market-chosen money commodity gold. Note that the use of gold as money as such cannot keep banks from issuing fiduciary media (a.k.a. uncovered money substitutes). The important thing is therefore that the monetary and banking system are free. A free banking system will develop along sound lines of its own accord, not least because banks have to continually clear transactions between each other and will tend to shun overextended lenders. A free market monetary/ banking system would likely be different from today’s system in numerous aspects, but it would be just as sophisticated and efficient. Most importantly, it would be economically sound and the likelihood that severe business cycles emerge would be vastly lower.

Photo via


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Stumped by the Bust

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.


closedWhat has caused the bust? The modern-day economic orthodoxy continues to be unable to provide a tenable and sound explanation for the business cycle phenomenon. Such an explanation does exist though.

Photo credit: Carl de Souza / AFP / Getty images


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Can Saving Possibly “Undermine Economic Growth”?

In his speech at the New York Federal Reserve of New York on October 5, 2016, the Federal Reserve Vice Chairman Stanley Fischer has suggested  that a visible decline in the natural interest rate in the US could be on account of the world glut of saving.


fisherStanley Fischer points out where the imaginary savings glut he believes to have spotted is hiding.

Photo credit: Jim Watson / APA / AFP


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AEP Speaks for Himself

We are all Keynesians now, so let’s get fiscal.” This is one view according to Ambrose Evans-Pritchard from The Telegraph who believes the time is right for the UK government to loosen its fiscal stance.


KeynesAmbrose Evans-Pritchard is channeling JM Keynes these days (depicted above). Alternative media long regarded AEP as a rare exception in the mainstream press, willing to take on economic orthodoxy. We are happy to report that we had his number early on. First he outed himself as a monetarist and advocated money printing, and now he has apparently moved over to Keynesianism. Readers may want to review some earlier articles in this context: Parade of the Inflationists, Tapering Paranoia, and Anglo-Saxon Central Banking Socialism = Free Lunch.

Photo credit: Keystone/DPA


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Alarmed Experts

A fall in the US velocity of money M2 to 1.44 in June from 1.51 in June last year and 2.2 in May 1997 has alarmed many experts. Note that the June figure is the lowest since January 1959.


slow,slow,slowMoney velocity is widely considered “too slow”. But what does the formula really tell us?


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“Experts” Assert that Inflation is an Agent of Economic Growth

For most experts, deflation, which they define as a general decline in prices of goods and services, is bad news since it generates expectations for a further decline in prices.


PigUmbrellaIllustration via


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Once Upon a Time…

Prior to 1933, the name “dollar” was used to refer to a unit of gold that had a weight of 23.22 grains. Since there are 480 grains in one ounce, this means that the name dollar also stood for 0.048 ounce of gold. This in turn, means that one ounce of gold referred to $20.67.


US_Gold_CertificateA 1922 20 dollar gold certificate – this note was actually redeemable for gold on demand, i.e., it was a money substitute. Today irredeemable banknotes are “standard money”.

Image via


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The tenets of the Efficient Market Hypothesis and Modern Portfolio Theory

It is widely held that financial asset markets always fully reflect all available and relevant information, and that adjustment to new information is virtually instantaneous.


A Random Walk pbk.indd

Burton G. Malkiels bestseller “A Random Walk Down Wall Street”, which introduced EMH to the hoi-polloi. In a nutshell, the book suggests that self-directed investors cannot possibly outperform the market over the long term, because prices at all times already reflect all known information. It would be quite easy to refute this assertion empirically; even the existence of a single investor who regularly beats the market invalidates the hypothesis, and there is not just one such investor, there are probably thousands. But can EMH be refuted theoretically as well? Yes it can, as Dr. Shostak shows here (we would be inclined to suggest that the book’s greatest achievement was to fill the coffers of Burton Malkiel and his publishers).


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The Pool of Real Wealth

Last Thursday, the people of Britain voted in a referendum to leave the European Union (EU). Most commentators view Britain’s exit (“Brexit”) from the European Union as bad news for economic growth in the UK and the euro zone. As a result, it is argued, the growth rate in the rest of the world will be also badly affected.


David Simonds cartoon on British economyWhere is the UK economy going next? London bookies await your bets!

Cartoon via


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