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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

Why There’s So Much Confusion over What “Inflation” Means

7 days ago

Understood properly,  inflation is not a general increase in prices but is an increase in the money supply “out of thin air” which brings about the impoverishment of wealth generators.
When inflation is seen as a general increase in prices, then anything that contributes to price increases is called inflationary. In this framework, not only does the central bank have nothing to do with inflation, on the contrary, the bank is regarded as an inflation fighter.
But, on this Ludwig von Mises wrote,
To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call “inflation” the inevitable consequence of inflation, namely, the rise in prices. They are

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If We Want to Increase Demand in the Market, We Must First Increase Production

17 days ago

Following the ideas of John Maynard Keynes and Milton Friedman, many commentators associate economic growth with increases in the demand for goods and services.
Both Keynes and Friedman held that the Great Depression of the 1930s was due to an insufficiency of aggregate demand and that thus the way to fix the problem was to boost aggregate demand.
For Keynes, this could be achieved by having the federal government borrow more money and spend it when the private sector would not. Friedman advocated that the Federal Reserve pump more money to revive demand.
But there is never such a thing as insufficient demand. An individual’s demand is constrained by his ability to produce goods. The more goods that an individual can produce, the more goods he can demand, i.e.,

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Turning to Keynes in this Crisis Will Only Make Things Worse

September 21, 2020

In the New York Times on September 8, 2020, Paul Krugman wrote that
The CARES Act, enacted in March, gave the unemployed an extra $600 a week in benefits. This supplement played a crucial role in limiting extreme hardship; poverty may even have gone down.
For Krugman and many economic commentators, it is the duty of the government to support the economy whenever it falls into an economic slump. Following in the footsteps of John Maynard Keynes, most economists hold that one cannot have complete trust in a market economy, which is seen as inherently unstable. If left free the market economy could lead to self-destruction. Hence, there is the need for governments and central banks to manage the economy. Successful management in the Keynesian framework is done by

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What the Trade Balance Means for a Currency’s Purchasing Power

September 20, 2020

In July this year the US trade balance stood at a deficit of $63.6 billion against a deficit of $51 billion in July last year. Some commentators regard a widening in the trade deficit as an ominous sign for the exchange rate of the US dollar against major currencies in the times ahead.
For most economic commentators a key factor in determining the currency rate of exchange is the trade account balance. In this way of thinking, a trade deficit weakens the price of the domestic money in terms of foreign money while the trade surplus works toward the strengthening of the price.
By this logic, if a country exports more than it imports, there is a high relative demand for its goods and, thus, for its currency, so the price of the local money in terms of foreign money

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We’re Headed toward Stagnation—Unless the Fed Reins In Its Money Printing

September 9, 2020

The US Fed is considering lifting its inflation target above 2 percent in order to revive the economy. Contrary to the accepted practice, the Fed is not expected to raise an alarm if the measured price inflation begins to rise. The US central bank is not expected to counter this increase with a tighter monetary stance as in the past. In fact, the idea is to continue robust monetary pumping until the economic data points toward a strong economy.
According to most experts, when an economy falls into a recession the central bank can pull it out of the slump by pumping money. This way of thinking implies that money pumping can somehow grow the economy. The question is, How is this possible? After all, if money pumping can grow the economy, then why not pump plenty

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Why Economics Cannot Be Understood through Experimentation

September 4, 2020

In the natural sciences, a laboratory experiment can isolate various elements and their movements. There is no equivalent in the discipline of economics. The employment of econometrics and econometric model building is an attempt to create a laboratory where controlled experiments can be conducted.
Building an Economic Model
The idea of having such a laboratory is very appealing to economists and politicians. Once the model is built and endorsed as a good replica of the economy, politicians can evaluate the outcomes of various policies.

This, it is held, enhances the efficiency of government policies and leads to a better and more prosperous economy. It is also held that the model can serve as a referee in assessing the validity of various economic ideas. The

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How Central Banks Destroy Money’s Purchasing Power

July 12, 2020

Most economists hold that a growing economy requires a growing money stock on grounds that growth gives rise to a greater demand for money that 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 optimum growth rate in money supply. For instance, followers of Milton Friedman—also known as monetarists—want the central bank to target the money supply at a fixed percentage. They hold that if this percentage is maintained over a prolonged period, it will usher in an era of

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Why Central Banks Are a Threat to Our Savings

June 28, 2020

The US personal savings rate jumped to 33 percent in April from 12.7 percent in March and 8 percent in April last year. An increase in savings is regarded by popular economics as less expenditure on consumption. Since consumption expenditure is considered as the main driving force of the economy, obviously a rebound in savings, which implies less consumption, cannot be good for economic activity, so it is held. Saving and wealth—what is the relation?
To maintain their life and well-being, individuals require access to consumer goods. An increase in various consumer goods permits an increase in individuals’ living standards. What allows an increase in the production of consumer goods is the maintenance and the enhancement of the infrastructure of an economy.
With

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The Importance of Economic Theory in Understanding Historical Data

June 8, 2020

It is a common belief that sound economics must be based on facts and not on theoretical reasoning as such. Some commentators are dismissive of economic analysis that is not derived from the true data, since it is not describing the facts of reality as depicted by historical data. The use of the free market economy framework, without the central bank and government intervention and with businesses as a foundation to derive valid conclusions, is dismissed as nonsensical. After all, we don’t have a free market economy without a central bank and without government intervention. In order to be practical, it is held, economists should stick to the facts.
Can the State of an Economy Be Established Using Historical Data?
For most so-called practical economists,

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Defining “Inflation” Correctly

May 31, 2020

Inflation is typically defined as a general increase in the prices of goods and services—described by changes in the Consumer Price Index (CPI) or other price indexes.
If inflation is a general rise in measured prices, then why is it regarded as bad news? What kind of damage can it inflict? Mainstream economists maintain that inflation causes speculative buying, which generates waste. Inflation, it is maintained, also erodes the real incomes of pensioners and low-income earners and causes a misallocation of resources.
Despite all of these assertions regarding inflation’s side effects, mainstream economics doesn’t tell us how all of these bad effects are caused. Why should a general rise in prices hurt some groups of people and not others? Why should a general rise

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Let’s Hope Deflation Is Headed Our Way

May 22, 2020

The yearly growth rate of the US consumer price index (CPI) fell to 0.4 percent in April from 2 percent in April last year while the annual growth of the producer price index (PPI) plunged to –1.2 percent last month against 2.4 percent in April 2019.
Furthermore, the yearly growth rate of the import price index fell to –6.8 percent in April from –0.2 percent in April last year.
A general decline in the prices of goods and services is regarded as bad news since it is associated with major economic slumps such as the Great Depression of the 1930s.
In July 1932, during the Great Depression, the yearly growth rate of industrial production stood at –31 percent whilst the yearly growth rate of the CPI bottomed out at –10.7 percent in September 1932.
According to

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How Central Banks and Lockdowns Are Making the Crisis Worse

May 18, 2020

What typifies the phenomenon of the boom-bust cycle is that it is recurrent. What is the reason for this?
Loose monetary policies set the platform for various activities that would not emerge without the easy monetary stance. What loose monetary policy does here is to engineer the transfer of real savings from wealth generating activities to artificially stimulated activities, which we can label as bubble activities.
Over time, these loose monetary policies begin to manifest as increases in price inflation (consumer prices, producer prices, and/or asset prices) and various forms of distortions that economists call overheating.
To counter these side effects the central bank may reverse its earlier loose stance, as happened in 2018 when the Fed allowed interest

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Government Regulation against “Monopolies” Only Lowers Our Standard of Living

May 1, 2020

According to a popular way of thinking, monopolies undermine the efficient functioning of the market economy by being able to influence the prices and the quantity of products. Consequently, this undermines the well-being of individuals in the economy. By this way of thinking, the inefficiency emerges because of the deviation from the ideal state of the market as depicted by the “perfect competition” framework.
The “Perfect Competition” Framework
In the world of perfect competition, a market is characterized by the following features:
There are many buyers and sellers in the market.
Homogeneous products are traded.
Buyers and sellers are perfectly informed.
There are no obstacles or barriers to entering the market.
In the world of perfect competition, buyers and

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Creating More Money Won’t Revive the Economy

April 8, 2020

In response to the coronavirus, central banks worldwide are currently pumping massive amounts of money. This pumping, it is held, is going to arrest the negative economic side effects that the virus-related panic inflicts on economies. As appealing as it sounds we suggest that this view is erroneous.
The view that more money can revive an economy is based on the belief that money transmits its effect through aggregate expenditure. With more money in their pockets, people will be able to spend more and the rest will follow suit. Money then, as one can see in this way of thinking, is a means of payments and a means of funding.
Money, however, is not the means of payments but the medium of exchange. It does not have a life of its own; it only enables one producer to

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The Bureaucrats Can’t Fix This

April 5, 2020

In the midst of the emerging economic chaos triggered by the COVID-19 coronavirus, individuals are seeking answers from governments as to how to prevent the emerging economic disaster.
Most economic experts are sympathetic to this and are urging the authorities to push massive injections of money. Thus in the US the central bank has embarked on a $2 trillion stimulus. At the same time government officials are imposing draconian measures to keep the population in isolation. The isolation is expected to arrest the spread of the coronavirus.
Even if one were to accept that the total lockdown of the population will slow the spread of the virus, this will inevitably reduce the production of goods and services needed in the economy—needed to support individuals’ lives

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Diversification versus Risk

March 28, 2020

It is widely held that financial asset prices fully reflect all available and relevant information, and that adjustments to new information is virtually instantaneous. This way of thinking which is known as the Efficient Market Hypothesis (EMH) is closely linked with the modern portfolio theory (MPT), which postulates that market participants are at least as good at price forecasting as any model that a financial market scholar can come up with, given the available information.1
It is held that asset prices respond only to the unexpected part of any information, since the expected part is already embedded in prices. According to MPT, the individual investor cannot outsmart the market by trading based on the available information since the available information is

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No, Technology Shocks Aren’t Behind Recurring Business Cycles

March 22, 2020

Economic fluctuations, also known as business cycles, are seen as being driven by mysterious forces that are difficult to identify. Finn Kydland and Edward C. Prescott (KP), the 2004 Nobel laureates in economics, decided to attempt to find out what these forces were.1 They hypothesized that technology shocks are a major factor behind economic fluctuations and demonstrated that a technology-induced shock can explain 70 percent of the fluctuations in the postwar US data.
Kydland and Prescott’s Methodology: Calibrated Fixed Parameters (with a Layman’s Primer)
To do this, KP employed the Solow growth model (named after the 1987 Nobel laureate), which is based on the Cobb-Douglas production function of the following type:
Y=A*K(1-a)*Na
Here Y is real output, A is a

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Why Sweden’s Negative Interest Rate Experiment Is a Failure

March 9, 2020

According to the Financial Times’s February 20 article “Why Sweden Ditched Its Negative Rate Experiment,” economists are pondering whether Sweden’s central bank experiment with negative interest rate was a success.
Sweden’s Riksbank, the world’s oldest central bank, introduced negative interest rates in early 2015. The reason given by central bank policymakers for the introduction of the negative interest was to counter deflation. Note that for the period November 2012 to December 2014 the average yearly growth rate of the consumer price index stood at –0.1 percent.
According to the Financial Times analysts, it is still too early to judge whether negative rates have worked or have caused lasting damage to the economy and finance sector.
From the perspective of

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Some Problems with Worker Productivity Stats

February 19, 2020

According to the US Labor Department, worker productivity in the non-farm sector increased at an annual rate of 1.4 percent in the fourth quarter of 2019 after declining by 0.2 percent in the previous quarter. For the year, productivity increased 1.7 percent, up from 1.3 percent in both 2017 and 2018. It was the best annual showing since the 3.4 percent increase in 2010. For most commentators, an increase in productivity is considered an indication that the US economy is becoming healthier and wealthier.
After all, the increase in productivity means that workers are now generating a greater amount of goods per hour. Notwithstanding, there are serious doubts as to whether productivity figures here actually describe the facts of reality.
To calculate productivity,

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Government “Fixes” for the Trade Balance Are Far Worse Than Any Trade Deficit

February 16, 2020

In December 2019, the US trade account balance stood at a deficit of $48.9 billion, against a deficit of $43.7 billion in November and $60.8 billion in December 2018.
Most commentators consider the trade account balance the single most important piece of information about the health of the economy. According to the widely accepted view, a surplus on the trade account is considered a positive development while a deficit is perceived negatively. What is the reason for this?

US Trade Balance, 2000-2019(see more posts on U.S. Trade Balance, ) – Click to enlarge
Popular thinking holds that the key to economic growth is demand for goods and services. Increases and decreases in demand are behind the rises and declines in the economy’s production of goods. Hence, in

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How Keynesian Ideas Weaken Economic Fundamentals

February 3, 2020

Whenever there are signs that the economy is likely to fall into an economic slump most experts advise that the central bank and the government should embark on loose monetary and fiscal policies to counter the possible economic recession. In this sense, most experts are following the ideas of the English economist John Maynard Keynes.
Briefly, John Maynard Keynes held that one could not have complete trust in a market economy, which is inherently unstable. If left free, the market economy could lead to self-destruction. Hence, there is the need for governments and central banks to manage the economy.
Successful management in the Keynesian framework is achieved by influencing overall spending in an economy. It is spending that generates income. Spending by one

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Economic Stats Won’t Tell Us What Really Causes Recessions

January 1, 2020

Most economists are of the view that by means of economic indicators it is possible to identify early signs of an upcoming recession or prosperity. What is the rationale behind this opinion?
The National Bureau of Economic Research (NBER) introduced the economic indicators approach in the 1930s. A research team led by W. C. Mitchell and Arthur F. Burns studied about 487 economic data to ascertain the mystery of the business cycle. According to Mitchell and Burns,
Business cycles are a type of fluctuation found in the aggregate economic activity of nations. … a cycle consists of expansion occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next

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To Be Useful, Data Needs Theory

December 29, 2019

For most so-called practical economists, information regarding the state of an economy is derived from data. Thus, if an economic statistic such as real gross domestic product or industrial production shows a visible increase, it is considered indicative of a strengthening of the economy. Conversely, a decline in the growth rate is regarded as weakening. It seems that by looking at the data one can ascertain economic conditions. Is this the case, though? The so-called data that analysts are looking at is a display of historical information.
But 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

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Good Economic Theory Focuses on Explanation, Not Prediction

December 22, 2019

In order to establish the state of the economy, economists employ various theories. Yet what are the criteria for how they decide whether the theory employed is helpful in ascertaining the facts of reality?
According to the popular way of thinking, our knowledge of the world of economics is elusive — it is not possible to ascertain how the world of economics really works. Hence, it is held the criterion for the selection of a theory should be its predictive power.
So long as the theory “works,” it is regarded as a valid framework as far as the assessment of an economy is concerned. Once the theory breaks down, the search for a new theory begins.
For instance, an economist forms the view that consumer outlays on goods and services are determined by disposable

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Why Central Banks Aren’t Really Setting Interest Rates

December 12, 2019

Mainstream thinking considers the central bank a key factor in the determination of interest rates. By setting short-term interest rates, the central bank, it is argued, can influence the entire interest rate structure by creating expectations about the future course of its interest rate policy.
In this way of thinking, the long-term rate is an average of current and expected short-term interest rates. If today’s one-year rate is 4 percent and the next year’s one-year rate is expected to be 5 percent, then the two-year rate today should be 4.5 percent ((4%+5%)/2=4.5%).
Conversely, if today’s one-year rate is 4 percent and the next year’s one-year rate expected to be 3 percent, then the two-year rate today should be 3.5 percent ((4%+3%)/2=3.5%).
By this popular

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Exports: Currency Devaluation Won’t Grow the Economy

December 3, 2019

A visible weakness in economic activity in major world economies raises concern among various commentators that world economies have difficulties recovering despite very aggressive loose monetary policies. The yearly growth rate of US industrial production stood at minus 1.1 % in October, against minus 0.1% in September, and 4.1% in October last year. In the euro zone, the yearly growth rate of production stood at minus 1.7% in September versus minus 2.8% in the month before and 0.6% in September 2018. In addition, in China the growth momentum of industrial production remains under downward pressure with the annual growth rate declining to 4.7% in October from 5.8% in September and 5.9% in September the year before.

Industrial Production, 2000-2019 – Click to

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Capital Accumulation, Not Government, Is the Key To Technological Innovation

November 27, 2019

According to Mariana Mazzucato, the RM Phillips Professor in the Economics of Innovation at the University of Sussex, government is an important factor in the promotion of innovation and thus economic growth. In particular, she challenges the popular view that innovation happens in the private sector, with governments playing a limited role. Many commentators regard her as a revolutionary thinker that challenges the accepted dogma regarding the role of government in promoting innovations and economic growth.
In her 2013 book The Entrepreneurial State: Debunking Public vs. Private Sector Myths, Marianna Mazzucato argues that the United States’ economic success is a result of public- and state-funded investment in innovation and technology. In his critique of the

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Don’t Want a Liquidity Trap? More Saving Is the Answer

November 19, 2019

With interest rates in many countries close to zero or even negative, some commentators are of the view that monetary policy of the central banks are likely to become less effective in navigating the economy. In fact it is held that we have most likely reached a situation that the economy is approaching a liquidity trap. But what does this mean?
In the popular framework of thinking that originates from the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by yet another individual becomes part of the first individual’s earnings.
Recessions, according to Keynes, are a response to the fact that consumers — for some

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Why Friedman Is Wrong on the Business Cycle

November 14, 2019

According to an article in Bloomberg on November 5, 2019, Milton Friedman’s business cycle theory seems to be vindicated.
According to Milton Friedman, strong recoveries are just natural after particularly deep recessions. Like a guitar string, the harder the string is plucked down, the faster it should come back up.
Bigger recessions should lead to faster growth rates during the recoveries, to get the economy back to the pre-recession level of activity. In Friedman’s model, the size of the recession predicts the growth rate in the recovery.1
The Bloomberg article refers to a study by Tara Sinclair that employs advance mathematical techniques that supposedly confirmed Friedman’s hypothesis that in the US bigger recessions are followed by faster recoveries — but

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Why Government Should not Fight Deflation

November 10, 2019

For most experts, deflation is considered bad news since it generates expectations of a decline in prices. As a result, they believe, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future.
This weakens the overall flow of spending and in turn weakens the economy. Hence, such commentators hold that policies that counter deflation will also counter the slump.
Will Reversing Deflation Prevent a Slump?
If deflation leads to an economic slump, then policies that reverse deflation should be good for the economy. Or so it is held.
Reversing deflation will simply involve introducing policies that support general increases in the prices of goods, i.e., price inflation. With this way of thinking

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