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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

It’s Economic Logic: Increasing the Minimum Wage Creates More Unemployment

14 days ago

Some economists believe that the increase in the minimum wage will boost unemployment, while other economists think otherwise. Hence, they believe that raising the minimum wage would raise the living standards of workers.For example, in a study conducted in the 1990s, economists David Card and Alan Krueger examined a minimum-wage rise in New Jersey by comparing fast-food restaurants there and in an adjacent part of Pennsylvania, finding no impact on employment. Other economists, however, found that the increase in minimum wages increased employment. Given the contradictory results, is there an alternative approach to decide whether an increase in the minimum wage will result in an increase or reduction in employment?Can Historical Data Inform Us on How the Economy

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Krugman: Low Unemployment Causes Inflation, Not Monetary Expansion

March 5, 2024

In an article in the New York Times on March 27, 2018, Paul Krugman argues that economists who believe increases in money supply cause inflation are wrong. According to Krugman, the key factor that sets inflation in motion is unemployment. While a decline in the unemployment rate is associated with an increase in the rate of inflation, an upsurge in the unemployment rate is associated with a decline in the rate of inflation.Krugman believes inflation is about general increases in the prices of goods and services, which we suggest is a flawed definition. To ascertain what inflation really is, we must establish how this phenomenon emerged, tracing it back to its historical origin.The Essence of InflationInflation is an act of embezzlement. Historically, inflation

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Does the Balance of Payments Determine Exchange Rates?

February 26, 2024

Some economists believe that the balance of payments is what determines currency exchange rates. In fact, exchange rates are always about the purchasing power of some currencies relative to others.
Original Article: Does the Balance of Payments Determine Exchange Rates?

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Does the Balance of Payments Determine Exchange Rates?

February 14, 2024

It is a common belief that a key factor in determining the currency exchange rate is the balance of payments. An increase in imports increases the demand for foreign currency. To obtain the foreign currency, importers buy it using domestic currency, which strengthens the exchange rate of the foreign currency against domestic money. Conversely, an increase in exports, in which exporters exchange their foreign currency earnings for domestic currency, increases the value of the domestic currency exchange rate against the foreign currency.
In this way of thinking, exporters determine the supply of foreign currency while importers determine the demand for it. Hence, the interaction between supply and demand establishes a foreign currency exchange rate.
Following this

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Can an Easy Money Policy Increase Employment of “Idle Resources”?

January 11, 2024

Whenever an economy falls into a recession, many economists point out that the economic slump means there will be idle capital and labor. Resources that could be employed are now unemployed because the economic slump has softened aggregate demand for goods and services.
So-called experts believe the government must increase the overall demand in the economy since stronger demand will permit idle resources to be employed again. Hence, many economists recommend that the central bank adopt an easy monetary stance to strengthen aggregate demand.
It appears to be quite simple: boost expenditure on goods and services and this, in turn, will strengthen the overall output in the economy by the multiple of the expenditure, thanks to the Keynesian multiplier. According to

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Modern Portfolio Theory Is Mistaken: Diversification Is Not Investment

December 27, 2023

According to modern portfolio theory (MPT), financial asset prices always fully reflect all available and relevant information, and any adjustment to new information is virtually instantaneous. Thus, asset prices respond only to the unexpected part of information since the expected portion is already embedded in prices.
For example, if the central bank raises interest rates by 0.5 percent, and if market participants anticipated this action, asset prices will reflect this expected increase prior to the central bank’s raising interest rates. Note that once the central bank lifts the interest rate by 0.5 percent, this increase will have no effect on asset prices since stock prices have already adjusted. However, should the central bank raise interest rates by 1

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Does Debt Make Capitalism Financially Unstable?

December 20, 2023

According to the post-Keynesian School of Economics economist Hyman Minsky, the capitalist economy has an inherent tendency to develop instability that culminates in a severe economic crisis. The key mechanism that pushes the economy toward a crisis is the accumulation of debt.
According to Minsky, during “good” times businesses in profitable sectors of the economy are rewarded for increasing their debt levels. The more one borrows, the more profit one seems to make. The rising profit attracts other entrepreneurs and encourages them to raise their debt levels.
Since the economy is doing well and borrowers show visible improvements in their financial health, lenders are more eager to lend. Over time, however, the pace of debt accumulation starts to rise much faster

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Inflationary Expectations Do Not Cause Inflation

December 14, 2023

According to mainstream economists, the expectation of inflation leads to higher prices. That is impossible, however, because actual inflation involves real increases in the money supply.
Original Article: Inflationary Expectations Do Not Cause Inflation

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A Rising Stock Market Does Not Drive Economic Growth

December 7, 2023

Many people believe that a general increase in stock prices is an important factor in economic growth. However, this is a questionable observation.
The view that the stock market drives economic growth originates from the observation that changes in stock prices precede changes in economic data. We suggest that various economic indicators are heavily influenced by money supply, which also drives stock prices.
The price of something is the amount of money asked for per unit. When an increased money supply enters a market, more money is being paid for those goods, which means the prices of those goods have increased. Furthermore, when money is increasing in supply, it does not move instantly to all markets. Instead, it moves from one market to another with time

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Can Econometric Models Provide a Laboratory Setting for Economic Analysis?

November 21, 2023

Econometric model building attempts to produce a laboratory with controlled variables. By means of mathematical and statistical methods, an economist establishes functional relationships between various economic variables.
For example, personal consumer outlays are related to personal disposable income and interest rates, while fixed capital investments are explained by the past stock of capital, interest rates, and economic activity. A group of such estimated relations constitutes an econometric model.
A comparison of the goodness of fit of the dynamic simulation versus the actual data is an important criterion in assessing the reliability of a model. (In a static simulation, the model is solved using actual lagged variables. In a dynamic simulation, the solution

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Time Preference Is the Key Driver of Interest Rates

November 9, 2023

By popular thinking, whenever the central bank raises the growth rate of the money supply through the buying of financial assets such as Treasuries this pushes the prices of Treasuries higher and their yields lower. This is labeled as the monetary liquidity effect. This effect is inversely correlated with interest rates.
Furthermore, an increase in the money supply after a time lag strengthens economic activity and this pushes interest rates higher. Note that we have here a positive correlation between economic activity and interest rates.
After a much longer time lag, the increase in the growth rate of money supply is starting to exert an upward pressure on the prices of goods and services. Once prices begin to move higher, the inflation expectations effect

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A Fed-Induced “Neutral” Interest Rate Is a Contradiction in Terms

November 2, 2023

The New York Federal Reserve said on Tuesday, September 5, 2023, that the estimate for the neutral rate for Q2 has eased to 0.57 percent from 0.68 percent in Q1. Analysts typically translate that rate into a real-world setting by adding the neutral rate to the Fed’s 2 percent inflation target. The current reading suggests that a federal funds rate of around 2.5 percent would represent a neutral setting. Given that the Fed’s current target rate range is between 5.25 and 5.5 percent, this suggests that the interest rate policy remains very restrictive.
Based on this, it is quite likely that the Fed will loosen its interest rate stance ahead. This view is further reinforced by the massive increase in the ratio of the federal funds rate target to the neutral rate of

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Why Must Supply Precede Demand? Understanding Economic Foundations

October 28, 2023

Popular economic thinking holds that consumer spending is the most important driver of the economy. Actually, demand can’t exist without something first being supplied.
Original Article: Why Must Supply Precede Demand? Understanding Economic Foundations

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The Central Bank Policy Interest Rate vs the Natural Rate

October 12, 2023

While central banks use administered interest rates in hopes of emulating the natural rate, these efforts are always going to fail. Without free markets, there is no natural rate.

Original Article: The Central Bank Policy Interest Rate vs the Natural Rate

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Why Must Supply Precede Demand? Understanding Economic Foundations

October 11, 2023

In the market economy, wealth generators do not produce everything for their own consumption. Part of their production is used in exchange for the produce of other producers. Hence, in the market economy, production precedes consumption.
This means that something is exchanged for something else. This also means that an increase in the production of goods and services sets in motion an increase in the demand for goods and services.
According to David Ricardo,
No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the

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Real Economic Growth Depends on Savings

September 27, 2023

The US consumer sentiment index, compiled by the University of Michigan, fell to 69.5 in August from 71.6 in July. A weakening consumer sentiment index is seen as indicating a potential downturn in consumer spending and the economy in general.
Most economic commentators agree that individual consumption rather than saving is the key to economic prosperity. Saving, they believe, hinders economic growth because it coincides with weakening demand for goods. In this theory, economic activity is depicted as a circular flow of money in which one individual’s spending is part of the earnings of another.
If, however, individuals become less confident about the future, they are likely to cut back on their outlays and hoard more money, thereby diminishing the earnings of

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Does Technical Knowledge Always Lead to Economic Growth?

September 26, 2023

Economists and political elites fondly claim that economic growth is due to increased technological knowledge. That is only partly true.

Original Article: Does Technical Knowledge Always Lead to Economic Growth?

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Easy Money Is a Much Bigger Economic Problem than Debt

September 4, 2023

While many economists claim that high overall debt levels can lead to economic recessions, irresponsible government spending and money expansion are the real culprits.

Original Article: "Easy Money Is a Much Bigger Economic Problem than Debt"

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Do Monopolies Cause Inflation?

August 4, 2023

The yearly growth rate of the consumer price index jumped from 5.4 percent in June 2021 to 9.1 percent in June 2022. Some economists attributed this increase to monopolies. According to Business Insider, economists at the Federal Reserve Bank of Boston have claimed that monopolies help keep the prices of goods and services high.
Most economists believe that monopolies make markets less efficient by influencing the prices and the quantity of products. Efficiencies emerge because monopolies deviate 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 has the following features:
There are many buyers and sellers in the market.Goods are

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How People Determine the Value of a Good

July 19, 2023

Why do individuals pay higher prices for some goods than others? The common reply references laws of supply and demand, but what are these laws? The answer is found in the law of diminishing marginal utility.
Most economists explain this law by describing the satisfaction one derives from consuming a good such as an ice cream cone. The satisfaction derived from consuming a second cone might be less than the satisfaction derived from the first cone, and so on. Mainstream economics concludes that the more of any good we consume in each period, the less satisfaction, or utility, we derive out of each additional unit, so the price that one is willing to pay per unit also declines.
By quantifying utility, economists can introduce mathematics here to determine the

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Econometric Models Cannot Fulfill the Role of an Economics Laboratory

June 7, 2023

Many economists believe that economics must emulate the physical sciences with controlled experiments to be credible. Econometric models, they claim, can fulfill the role of laboratory experiments.
Through mathematical and statistical methods, an economist supposedly establishes relationships between various economic variables. For example, personal consumer outlays are related to personal disposable income and the interest rates, while capital expenditure is explained by the past stock of capital, the interest rates, and economic activity. Various estimated relations—i.e., equations, which are grouped together—constitute an econometric model.
A comparison of the model’s dynamic assumptions versus the data establishes the model’s reliability. (In a static

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Is the US Banking Crisis Over? It Has Barely Begun

June 2, 2023

According to some commentators, the US banking crises is over, or at least can be easily managed by the Federal Reserve System. In addition, the Fed chairman has vouched for the health of the US banking sector.
However, the banking crisis is likely in its early stages. What has started as the collapse of regional banks is likely to spread to national banks. The key reason for that is the decline in the pool of savings and continuation of fractional reserve lending in which banks are legally permitted to use money placed with them in demand deposits in lending activities. Banks treat deposits as though they were loaned to them.
Although permitted by law, from an economic point of view, this results in money creation leading to consumption not supported by

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Understanding Relationships between Money Supply and Liquidity

May 31, 2023

Can the injection of new money into the economic system enhance economic growth? Not really. Increasing (or decreasing) the money supply affects the demand for money but doesn’t make us wealthier.

Original Article: "Understanding Relationships between Money Supply and Liquidity"

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Is There an Optimum Growth Rate of Money?

May 26, 2023

Monetarists believe there is an optimum growth rate of money. However, a fiat money system itself is unstable, so there is no optimum growth rate.

Original Article: "Is There an Optimum Growth Rate of Money?"

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Government Budget Deficits Cannot Stimulate True Economic Growth

May 10, 2023

A central tenet of Keynesian economics is that governments must run budget deficits to stimulate economic growth. But government spending actually shrinks the economy.

Original Article: "Government Budget Deficits Cannot Stimulate True Economic Growth"

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Is There an Optimum Growth Rate of Money?

May 10, 2023

It is widely held that a growing economy requires a growing money stock because economic growth increases demand for money. Many economists also believe that failing to accommodate the increase in the demand for money leads to a decline in consumer prices. This could destabilize the economy and produce an economic recession or even a depression.
Some economists who follow Milton Friedman—also known as monetarists—want the central bank to target the money supply growth rate to a fixed percentage. They hold that if this percentage is maintained over a prolonged period, it will create economic stability.
The idea that money must grow to support economic growth implies that money sustains economic activity. However, money’s main job is to be a medium of exchange, not

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