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Frank Shostak

Frank Shostak

Frank Shostak is an Associated Scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. He received his bachelor's degree from Hebrew University, master's degree from Witwatersrand University and PhD from Rands Afrikaanse University, and has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University.

Articles by Frank Shostak

The Present Fiat Monetary System Is Breaking Down

18 days ago

The heart of economic growth is an expanding subsistence fund, or the pool of real savings. This pool, which is composed of final consumer goods, sustains individuals in the various stages of the production process. The increase in the pool of real savings permits the expansion and the enhancement of the infrastructure, and this strengthens economic growth. An increase in economic growth for a given stock of money implies more goods per unit of money. This means that economic growth, all other things being equal increases the purchasing power of money.
Note that most individuals are likely to strive to improve their living standards. This means that individuals are likely to aim at expanding the pool of real savings, which will in turn strengthen economic growth

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Economic Growth Requires Savings, Not Money Pumping

29 days ago

Keynesians believe that economic growth can occur only with an expanding supply of money. Growth doesn’t need more money; it needs more savings.

Original Article: "Economic Growth Requires Savings, Not Money Pumping"
This Audio Mises Wire is generously sponsored by Christopher Condon. 

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Behavioral Economics Challenges the Rationality of Consumer Choices

29 days ago

A relatively new area of study in economics, behavioral economics, has started to gain popularity. The behavioral economics framework emerged because of dissatisfaction with the neoclassical theory regarding consumer choice. A major problem with the neoclassical theory is that human beings are presented as if hardwired with a scale of preferences. Regardless of circumstances, this scale is considered to remain the same at all times.
Mainstream economics argues that, if preferences are constant, it is possible to compress preferences into a mathematical formulation called a utility function. Similarly, the assumption of constancy is considered an important characteristic of rationality.
According to behavioral economics, however, human beings are not considered

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Economic Growth Requires Savings, Not Money Pumping

December 16, 2022

The U.S. personal savings rate eased in September to 3.1 percent from 3.4 percent in August. In September 2021 the savings rate stood at 7.9 percent. By popular thinking, a decline in the savings rate during an economic slowdown is regarded as supporting economic activity.
In the National Income and Product Accounts (NIPA), savings are established as the difference between disposable money income and monetary outlays. Disposable income is defined as all personal income minus taxes. Personal income includes wages and salaries, transfer payments, income from interest and dividends, and rental income.
The NIPA framework is based on the Keynesian view that spending by one individual becomes part of the income of another individual, so the spending of the purchaser is

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Deflation Is Not a Problem: Reversing It Is

December 2, 2022

The yearly growth rate of the Consumer Price Index (CPI) fell to 7.7 percent in October from 8.2 percent in September. Note that in October 2021 the yearly growth rate stood at 6.2 percent. Some experts are of the view that it is quite likely that the momentum of the CPI might have peaked.
We suggest that the decline in the yearly growth rate of the CPI is from the sharp decline in the momentum of money supply. The yearly growth rate of our monetary measure for the US stood at almost 80 percent in February last year against 13.5 percent in February this year (see chart).

Because of the time lag between changes in money supply and changes in the CPI, it is quite possible that the yearly growth rate of the CPI is poised for a visible decline ahead (see chart).

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Can Increases in the Supply of Gold Lead to Boom-Bust Cycles?

November 14, 2022

According to the Austrian business cycle theory, the boom-bust cycle emerges in response to a deviation in the market interest rate from the natural interest rate, or the equilibrium interest rate. As a rule, it is held, the tampering with market interest rates by the central bank sets the boom-bust cycle in motion.
Given this viewpoint, one might suggest that even with a gold standard without a central bank, an increase in the supply of gold money will lead to the lowering of market interest rates. This in turn is likely to cause the deviation of the market interest rates from the natural or the equilibrium interest rate. Consequently, this could set in motion the boom-bust cycle.
Murray Rothbard, however, believed that increases in the supply of gold could not

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Are Seasonally Adjusted Economic Data Useful?

October 27, 2022

It is not possible to establish the conditions of the economy by just inspecting the data as a whole, according to many economists. What is required, instead, is to break the data into its key components, which supposedly will enable economists to identify the true state of the economy.
Components That Drive the Data
According to popular thinking, data that is observed over time—labelled as time series—is driven by four components, these are:
The trend component
The cyclical component
The seasonal component
The irregular component
The accepted position is that over time the trend determines the general direction of the data. The cyclical component portrays fluctuations in the data due to the business cycle influence. The effect of seasons such as winter, spring,

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Federal Reserve Tampering with Interest Rates Distorts the Shape of the Yield Curve

October 23, 2022

For many commentators, a change in the shape of the differential between the long-term interest rate and the short-term interest rate—i.e., the yield spread provides an indication of the likely direction of the economy in the months ahead. Thus, an increase in the yield spread raises the likelihood of a possible strengthening in economic activity in the months to come. Conversely, a decline in the yield spread is seen as indicative of a possible economic downturn ahead.
A popular explanation regarding the shape of the yield curve is provided by the expectations theory (ET). According to ET, expectations for an increase in the short-term interest rate sets in motion an upward sloping yield curve, while the expectation for a decline in the short-term interest rate

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What Do Supply and Demand Curves Really Tell Us? Not Very Much

October 17, 2022

It is commonly held that prices of goods and services can produced by means of supply and demand curves. These curves describe the relationship between the prices and the quantity of goods supplied and demanded.
Within the framework of supply-demand curves, an increase in the price of a good is associated with a fall in the quantity demanded and an increase in the quantity supplied. Conversely, a decline in the price of a good is associated with an increase in the quantity demanded and in a decline in the quantity supplied.
The equilibrium price is established at the point where the two curves intersect. At this point, the quantity supplied, and the quantity demanded is equal—at the equilibrium price the market is said to “clear.”
The framework of supply-demand

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Does Bank Lending by Itself Set Off Boom and Bust Cycles?

October 16, 2022

Popular thinking says that banks are the key factor in the expansion of credit. However, is this really the case?
For example, take a farmer Joe that produces two kilograms of potatoes. For his own consumption, he requires one kilogram, and lends the rest for one year to a farmer Bob. The unconsumed one kilogram of potatoes that he agrees to lend is his savings.
The precondition for lending is that there must be savings first, as lending must be backed by savings. By lending one kilogram of potatoes to Bob, Joe agrees to give up ownership over these potatoes for a year. In return, Bob provides Joe with a written promise that after one year he will repay 1.1 kilograms of potatoes, the 0.1 kilograms constituting interest.
The introduction of money does not alter the

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How the Policy of Price Stability Generates Greater Economic Instability

October 3, 2022

Many mainstream economists believe that economic stability refers to an absence of excessive fluctuations in the overall economy. An economy with constant output growth and low and stable price inflation is likely to be regarded as stable, while an economy with frequent boom-bust cycles and variable price inflation would be seen as unstable.
According to popular thinking a stable economic environment with stable price inflation and stable output growth acts as a buffer against shocks, making it easier for businesses to plan. Thus, price level stability is the key for so-called economic stability.
Assume that people increase demand for potatoes versus tomatoes. This relative strengthening is depicted by the relative increase in the prices of potatoes. Successful

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Should the Fed Increase the Money Supply in Response to a Growing Economy?

September 29, 2022

Most commentators believe a growing economy requires a growing money stock because economic growth gives rise to a greater demand for money, which then must be accommodated. Failing to do so will lead to a decline in prices of goods and services which, in turn, destabilizes the economy and leads to a recession or, even worse, depression.
The main role of the Fed, then, is to keep the supply and the demand for money in equilibrium. An increase in the demand for money should be accommodated by the Fed. This is necessary to keep the economy on a path of economic and price stability.
If the growth rate of money supply does not exceed the growth rate of the demand for money, the accommodation is not considered as harmful to the economy, according to the theory. The

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Does Capitalism Itself Create Economic Instability or Is Central Banking the Culprit?

September 22, 2022

Instability in financial markets has brought back the ideas of post-Keynesian school of economics (PK) economist Hyman Minsky. Minsky held that the capitalist economy inherently is unstable, culminating in severe economic crisis, accumulation of debt being the key mechanism pushing the economy toward a crisis.
During “good” times, according to Minsky, businesses in profitable areas of the economy are well rewarded for raising their level of debt. The more one borrows the more profit one seems to be making. The rising profit attracts other entrepreneurs to join in and encourages them to raise their level of debt.
Since the economy is doing well, and borrowers financial health shows a visible improvement this makes lenders more eager to lend. Over time, however, the

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The Fed Is Wrong to Make Policies Based upon the Phillips Curve

September 17, 2022

Speaking at Jackson Hole, Wyoming, on August 26, 2022, the chair of the Federal Reserve, Jerome Powell, said the Fed must continue to raise interest rates—and keep them elevated for a while—to bring the fastest inflation in decades back under control. Powell said that a tighter interest rate stance is likely to come at a cost to workers and overall growth. However, he holds that not acting would allow price increases to become a more permanent feature of the economy and prove even more painful down the road.
“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” Mr. Powell said in a speech. “While higher interest rates, slower growth and softer labor market conditions will bring down

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We Cannot Interpret Economic Data Unless We Know Economic Theory

September 12, 2022

Most economic commentators believe that historical data is the key in assessing the state of the economy. Thus, if a statistic such as real gross domestic product or industrial production displays a visible increase, then the economy is stronger. Conversely, a decline in the growth rate says the economy is weakening.
It seems that one can establish the state of economic conditions simply by looking at the data. The so-called data that analysts are examining, however, is a display of historical information. According to Ludwig von Mises in Human Action:
History cannot teach us any general rule, principle, or law. There is no means to abstract from a historical experience a posteriori any theories or theorems concerning human conduct and policies.
Also, in the The

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Does Reducing Unemployment through Government Spending Boost the Economy?

September 9, 2022

Some experts hold that the key to economic growth is to strengthen the labor market, which is based on the view that because of the reduction in the number of unemployed workers, more individuals can afford to increase spending. As a result, economic growth follows suit.
The Expanding Pool of Savings—Not Declining Unemployment—Is the Key for Economic Growth
However, the key driver of economic growth is an expanding pool of savings, not the state of the labor market. Fixing unemployment without addressing the issue of savings will not increase economic growth.
The pool of savings funds the enhancement and the expansion of the infrastructure. An enhanced and expanded infrastructure permits an increase in the production of the final goods and services required to

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Throwing the Fed’s Machinery in Reverse: Fed Interest Rate Policies Continue to Damage the Economy

September 8, 2022

According to Federal Reserve minutes from last month, Fed officials expressed a willingness to push ahead with a tight interest rate stance to eradicate the inflationary menace. For most commentators, inflation is seen as a general increase in the prices of goods and services, so raising interest rates will soften the increase in prices.
The logic here is that a tighter interest rate stance will weaken the demand for goods and services and bring the overall demand in the economy in line with supply. This, in turn, arrests the upward pressures on the prices of goods and services, which is based on Keynesian ideas that demand for goods and services drives economic growth.
Based on this framework of thinking, if we observe strong increases in the prices of goods and

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Inflation in the USA: Where Do We Stand Today?

September 6, 2022

A decline in the yearly growth rate of the Consumer Price Index (CPI) to 8.5 percent in July from 9.1 percent in June has prompted many commentators to suggest that inflation has likely peaked. If this assessment is valid then it is held Fed policy makers are unlikely to push for an aggressive interest rate tightening in the months ahead. Before one decides to agree or disagree on the likely interest rate policy of the Fed there is the need to ascertain what do we mean by inflation.

The Essence of Inflation
The subject matter of inflation is embezzlement. Historically, inflation has originated when a country’s ruler such as the king would force his citizens to give him all of their gold coins under the pretext that a new gold coin was going to replace the old

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Do We Want Real Tax Cuts? How About Cutting Government Spending?

September 5, 2022

According to many economic commentators, an effective way to generate economic growth is through the lowering of taxes. The lowering of taxes, it is held, will place more money in consumers’ pockets, thereby setting in motion an economic growth. This way of thinking is based on the belief that a given dollar increase in consumer spending will lift the economy’s gross domestic product (GDP) by a multiple of the increase in consumer expenditure.
Assume that out of an additional dollar received individuals spend $0.9 and save $0.1. Also assume that consumers have increased their expenditure by $100 million. Because of this, retailers’ revenue rises by $100 million. Retailers in response to the increase in their income consume 90 percent of the $100 million—i.e., they

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Is a Recession Simply a Decline in GDP? What Does That Mean?

August 26, 2022

According to the National Bureau of Economic Research (NBER), the institution that dates the peaks and troughs of the business cycles:
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP [gross domestic product], real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.
In the view of the NBER dating committee, because a recession influences the economy broadly and is not confined to one sector, it makes sense to pay attention to a broad measure of aggregate economic activity, which is real GDP. The NBER dating committee views real GDP as the

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Will the US Dollar Weaken against Other Currencies?

August 23, 2022

In the July 26 Financial Times article entitled “Is the Dollar about to Take a Turn?,” Barry Eichengreen writes that the US dollar has had a spectacular run, having risen more than 10 percent against other major currencies since the start of the year. According to Eichengreen, the key reason behind the spectacular strengthening in the US Dollar is that the Federal Reserve has been raising interest rates faster than other big central banks, drawing capital flows toward the US.
However, given the likelihood of a recession and a decline in inflation, Eichengreen believes that the Fed could start softening its stance, weakening the dollar in the coming months. Note that Eichengreen, while attempting to explain the exchange rate determination, does not make a

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Is Economic Growth Synonymous with Ecological Destruction? The NYT Gets It Wrong (Again)

August 19, 2022

According to the New York Times (NYT) article July 17, 2022, “The pioneering economist says our obsession with growth must end,” a major threat to our living standard is the obsession with economic growth. Herman Daly—an economist that has been exploring for more than fifty years the relationship between economic growth and individuals’ living standards—is of the view that the pursuit of economic growth causing ecological harm.
He developed arguments in favor of a steady-state economy, one that forgoes the insatiable and environmentally destructive hunger for growth, recognizes the physical limitations of our planet and seeks sustainable economic and ecological equilibrium. According to Daly, the basic question that should be asked is whether growth ever becomes

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GDP Provides a False Reading of the State of the Economy

August 5, 2022

Most economists see GDP as a snapshot of the performance of the economy. However, it is better understood as a misleading statistic which fails to accurately describe what really is happening economically.

Original Article: “GDP Provides a False Reading of the State of the Economy”

The GDP (gross domestic product) statistic portrays a view that the key driving factor of economic growth is not the production of wealth but rather its consumption. Instead, it is a calculation of the value of final goods and services produced during a particular time interval, usually a quarter or a year. Since consumer outlays are the largest part of the overall demand, it is held by many commentators that consumer spending is the key driver of economic growth.
All that matters

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Government “Stimulus” Schemes Fail Because Demand Does Not Create Supply

July 27, 2022

By popular thinking, the key driver of economic growth is the increase in total demand for goods and services. It is also held that overall output increases by a multiple of the increase in expenditure by government, consumers and businesses.
It is not surprising, then, that most commentators believe that through fiscal and monetary stimulus, government can prevent the US economy falling into a recession. For instance, increasing government spending and central bank monetary pumping will strengthen the production of goods and services.
It follows then that by means of increases in government spending and central bank monetary pumping the authorities can grow the economy. This means that demand creates supply. However, is it the case?
Why Does Supply Precede

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GDP Provides a False Reading of the State of the Economy

July 23, 2022

The GDP (gross domestic product) statistic portrays a view that the key driving factor of economic growth is not the production of wealth but rather its consumption. Instead, it is a calculation of the value of final goods and services produced during a particular time interval, usually a quarter or a year. Since consumer outlays are the largest part of the overall demand, it is held by many commentators that consumer spending is the key driver of economic growth.
All that matters in this view is the demand for goods and services, which in turn will give rise almost immediately to their supply. Because the supply of goods is taken for granted, this framework ignores the various stages of production that precede the emergence of the final good.
In the GDP framework

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Inflation IS Money Supply Growth, Not Prices Denominated in Money

July 11, 2022

In the recent Wall Street Journal article “Inflation Surge Earns Monetarism Another Look,” Greg Ip writes that a recent surge in inflation is not likely to bring authorities to reembrace monetarism. According to Ip, money supply had a poor record of predicting US inflation because of conceptual and definitional problems that haven’t gone away.
The head of the monetarist school, the late Milton Friedman, held that inflation is always and everywhere a monetary phenomenon. Friedman and other monetarists believed that the key driving factor for general increases in prices is increases in money supply.
This viewpoint has come under scrutiny since the early 1980s because the correlation between inflation and money supply disappeared. According to Ip in 2020, Alan

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Krugman Is Wrong (Again): Artificially Low Interest Rates Created Bubbles

July 6, 2022

In his June 21 New York Times article “Is the Era of Cheap Money Over?,” Paul Krugman argues against the view that the Fed has kept interest rates artificially low for the past ten to twenty years. Other commentators have argued that these low interest rates have inflated bubbles everywhere as investors desperately look for something that will yield a decent rate of return.
Krugman expresses strong disagreement that the decline in interest rates caused bubbles and that the decline was artificial. For Krugman, the Federal Reserve sets short-term interest rates, which in turn determine long-term rates. He then suggests that there’s no such thing as an interest rate unaffected by policy.
The columnist then argues that what matters for the Fed’s policy is the natural

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Even after Admitting She Underestimated Inflation, Janet Yellen Still Doesn’t Understand What It Is

June 19, 2022

According to the June 1, 2022, Financial Times, Janet Yellen, the US Treasury secretary conceded she was wrong last year about the path inflation would take. Yellen told CNN:
There have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I didn’t fully understand, but we recognize that now.
To be able to say something meaningful about inflation, it is necessary to establish what inflation is all about. Note that for Yellen inflation is about the growth rate in the consumer price index, which year on year stood at 8.3 percent in April against 4.2 percent in April the year before.
The increase in the prices of goods and services is not inflation but rather the

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What Is Stagflation and What Causes It?

June 12, 2022

The occurrence of stagflation is associated with a situation of general strengthening in the momentum of prices while at the same time the pace of economic activity is declining. A famous stagflation episode occurred during the 1974û75 period, as year-on-year industrial production fell by nearly 13 percent in March 1975 while the yearly growth rate of the Consumer Price Index (CPI) jumped to around 12 percent. Likewise, a large fall in economic activity and galloping price inflation was observed during 1979. By December of that year, the yearly growth rate of industrial production stood close to nil while the yearly growth rate of the CPI closed at over 13 percent.

According to popular thinking of that time, the central bank influences the pace of economic

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Does an Increase in Demand Cause Economic Growth? How Keynesians Reverse the Roles of Demand and Supply

June 4, 2022

According to John Maynard Keynes:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories

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