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 mises.org
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.
What 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.
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.
Stanley Fischer points out where the imaginary savings glut he believes to have spotted is hiding.
Photo credit: Jim Watson / APA / AFP
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.
Ambrose 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
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.
Money velocity is widely considered “too slow”. But what does the formula really tell us?
“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.
Illustration via dailyreckoning.com
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.
A 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 ma-shops.de
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.
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).
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.
Cartoon via theguardian.com
What Determines a Currency’s Value?
At the end of March the price of the euro in terms of US dollars closed at 1.1378. This was an increase of 4.7 percent from February when it increased by 0.3 percent. The yearly growth rate of the price of the euro in US dollar terms jumped to 6 percent in March from minus 2.9 percent in February.
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