Free Republic

For most economists the velocity of money circulation is an important factor in determining the prices of goods and services. If, for example, the quantity of money increased by 10 percent in a given year, while the price level has remained unchanged it would mean that there must have been a decline of about 10 percent in the velocity of money circulation. If the quantity of money remained unchanged but there has been a 10 percent increase in the price level in a given period, it would mean that there must have been an increase in the velocity of money...

But we have another more permanent inflation problem. It was first described in a famous article by economist William Baumol in the American Economic Review in 1967. Baumol noted that productivity, measured as the amount of “stuff” that could be produced per worker in a given time, varies across sectors. In those that produce physical output — whether cars, wheat, toilet seats or whatever — productivity has risen consistently, driven by technical innovations and the increasing use of machines in production. In contrast, in services such as producing educated students, staging arts performances and designing government policies, productivity growth has...

Mises Institute: How would you translate your new book’s title into English? Andreas Marquant: I would like to say The State Causes the Poverty It Later Claims to Solve. This is the title of my article on mises.org last December. An even better title could be The Austrian Answer to Thomas Piketty. MI: Your book addresses the issue of income inequality. Is income inequality a bad thing? AM: First of all, inequality and income inequality are natural phenomena because people are different. They all have different talents and that is a reason for the division of labor. It’s also a...

Foreign individuals and businesses long ago cut back on their purchases of U.S. bonds. Their place was taken by foreign central banks. The central banks simply created money in their own currency and used it to buy our bonds.The Federal Reserve always knew that we couldn’t rely on foreign central banks to buy our bonds forever. This may be the main reason it began the program called quantitative easing, in which the Fed created money out of thin air specifically to buy back U.S. debt.Quantitative easing may have been intended to be a kind of insurance policy. If foreign central...

The fear of deflation serves as the theoretical justification of every inflationary action taken by the Federal Reserve and central banks around the world. It is why the Federal Reserve targets a price inflation rate of 2 percent, and not 0 percent. It is in large part why the Federal Reserve has more than quadrupled the money supply since August 2008. And it is, remarkably, a great myth, for there is nothing inherently dangerous or damaging about deflation. Deflation is feared not only by the followers of Milton Friedman (those from the so-called Monetarist or Chicago School of economics), but...

A common argument for dumping the Euro is that it is overvalued, and that the ECB (European Central Bank) is unwilling to correct this so-called “problem.” This overvaluation is regularly cited as being over 10 percent against the dollar. The Swiss central bank surrendered control of its money supply by fixing its currency at 1.2 against the Euro essentially on the notion that its currency was “overvalued.” Advocates of a Euro breakup consider that a country with its own currency can then follow an independent monetary policy ensuring a competitive exchange rate. Never mind that neither the USA nor Great...

If I were a business owner, must I sell to you? If you answer yes, you must balance that requirement with your obligation to buy from me. All trade is bilateral. Well, to be more exact, and since we live in a country where a nebby uncle named Sam interferes in many trades, it is better to state that all free trade is bilateral.[1] In a modern economy, money facilitates exchange. So, typically, a good or service is exchanged for money, with both sides of the trade benefiting a priori. Of course, one side could end up regretting the trade,...

When US money supply measured by M2 stood at $11 trillion in December 2013, I calculate that total broad money of the next largest 50 countries ranked by GDP amounted to the equivalent of a further US$67 trillion at current exchange rates. And that’s only on-balance sheet: we must add in global shadow banking, estimated by the Financial Stability Board to have been an extra $67 trillion in 2011, probably about $75 trillion today, given its recent rapid growth in China. So when we look at US broad money supply, we should be aware there is a further mountain of...

Enough people were upset with my previous post claiming that Mt. Gox is suffering a bitcoin bank run because it is holding only a fractional bitcoin reserve that it caused me to think twice about the claim.I could have been wrong, but I doubt it.Actually, the backlash was strong enough that it made me think that perhaps I was using some common terms in strange ways. I referred to Mt. Gox as a bank, which is a stretch by some definitions, but it definitely stores bitcoin for clients and as such, acts as a custodian.Maybe it was the term “bank...

Ever wonder what a digital bank run looks like? Nearly one million Mt. Gox users are finding out first hand.The Tokyo-based exchange, popular amongst currency traders, has risen in prominence by offering its customers storage services in a variety of currencies. This effectively makes it act as an online bank. One such “currency” that it allows accounts to be denominated in is bitcoin.Yesterday the exchange halted withdrawals of the digital currency, citing a technical malfunction. It promises to reopen for business on February 10th. What many news sources are missing is that this is not a particularly new development –...

Paul Singer is the manager of the $23 billion Elliott Management hedge fund. In a recent letter to investors in the fund, he expressed bearish sentiments on bitcoin, while remaining bullish on gold despite its recent fall in price. Wrote Singer: There is no more reason to believe that bitcoin will stand the test of time than that governments will protect the value of government-created money, although bitcoin is newer and we always look at babies with hope. If you want an alternative currency, check out gold. It has stood the test of thousands of years as a store of...

The gap between the rich and poor continues to grow. The wealthiest 1 percent held 8 percent of the economic pie in 1975 but now hold over 20 percent. This is a striking change from the 1950s and 1960s when their share of all incomes was slightly over 10 percent. A study by Emmanuel Saez found that between 2009 and 2012 the real incomes of the top 1 percent jumped 31.4 percent. The richest 10 percent now receive 50.5 percent of all incomes, the largest share since data was first recorded in 1917. The wealthiest are becoming disproportionally wealthier at...

>A number of readers and bloggers have recently suggested there must be collusion between America and China over the transfer of physical gold from Western capital markets. They assume that governments know what they are doing, so there is a bigger game afoot of which we are unaware.The truth is that China and Western capital markets view gold very differently. You will hardly find anyone in the London Bullion Market who regards gold as money; and for them if gold is no longer money Chinese demand for it is not a monetary issue. Instead it threatens the bullion banks’ business...

In November, the ECB (European Central Bank) surprised the markets by dropping its refinancing rate to 0.25 percent to avoid dreaded deflation, and announced it seeks to keep “price growth steady at about 2 percent” which is obviously a target and not a ceiling. Recently-tame inflation data is “worrisome” for many economists and has increased calls for the ECB to be even more aggressive. Central bankers and economists remain committed to the idea that the economy can be managed by manipulating prices in the aggregate. Most economists will say a little inflation is a good thing. If an entrepreneur makes...

Dasani Coates, the 11-year-old homeless child profiled in Andrea Elliott’s highly praised five-part New York Times feature, arrived on stage at Wednesday’s inauguration ceremonies to serve as a poignant symbol of—in Mayor de Blasio’s words—“the economic and social inequalities that threaten to unravel the city we love.” But far from providing a window into inequality, the Times series, “Invisible Child,” is better understood as a beautifully reported but muddled revival of decades-long evasions about underclass poverty. Dasani’s story is moving but hardly new. Anyone who lived in New York—or D.C., Detroit, or Chicago, for that matter—in the 1980s and early...

The efforts underway by the Service Employees International Union, and its political and media allies, to raise the minimum wage from $7.25 to $15 per hour would, if successful, cause major unemployment among low-skilled workers, who are the supposed beneficiaries of those efforts. The reason is not only the fact that higher wages serve to raise costs of production and thus prices, which in turn serves to reduce physical sales volume and thus the number of workers needed. There is also another equally, if not more important reason in this case, and it is a reason which is only very...

Three yards of black fabric enshroud my computer terminal. I am mourning the passing of an old friend by the name of Common Sense. His obituary reads as follows: Common Sense, aka C.S., lived a long life, but died from heart failure at the brink of the millennium. No one really knows how old he was, his birth records were long ago entangled in miles and miles of bureaucratic red tape. Known affectionately to close friends as Horse Sense and Sound Thinking, he selflessly devoted himself to a life of service in homes, schools, hospitals and offices, helping folks get...

It is little wonder that early Democrats garnered such popular support and would demand Andrew Jackson end America’s experiment with central banking. Jackson called it “dangerous to the liberty of the American people because it represented a fantastic centralization of economic and political power under private control.” It’s hard to believe that guy who said that is now on the $20 bill. Jackson also warned that the Bank of the United States was “a vast electioneering engine” that could “control the Government and change its character.” These sentiments were echoed by Roger Taney, Jackson’s Treasury Secretary, who talked of the...

Starting in spring 2014, the Bureau of Economic Analysis will release a breakthrough new economic statistic on a quarterly basis. It’s called Gross Output, a measure of total sales volume at all stages of production. GO is almost twice the size of GDP, the standard yardstick for measuring final goods and services produced in a year.This is the first new economic aggregate since Gross Domestic Product (GDP) was introduced over fifty years ago.It’s about time. Starting with my work The Structure of Production in 1990 and Economics on Trial in 1991, I have made the case that we needed a...

If one looks at the current paper money system and its negative social and social-political effects, the question must arise: where are the protests by the supporters and protectors of social justice? Why don’t we hear calls to protest from politicians and social commentators, from the heads of social welfare agencies and leading religious leaders, who all promote the general welfare as their mission? Presumably, the answer is that many have only a weak understanding of the role of money in an economy with a division of labor, and for that reason, the consequences of today’s paper money system are...