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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 Phillips Curve Myth

23 days ago

According to a popular way of thinking, the central bank can influence the rate of economic expansion by means of monetary policy. It is also held that this influence carries a price, which manifests itself in terms of inflation. For instance, if the goal is to reach faster economic growth and a lower unemployment rate then citizens should be ready to pay a price for this in terms of a higher inflation rate. Note that inflation is defined by a popular way of thinking as increases in the prices of goods and services.
It is held that there is a tradeoff between inflation and unemployment, which is described by the Phillips curve. (A.W. Phillips described a historical relationship between the rate of unemployment and the corresponding rates of wage increase in the

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Inflation Is a Form of Embezzlement

29 days ago

Monetary inflation is just a type of embezzlement. Historically, inflation originated when a country’s ruler such as king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process of minting new coins, the king would lower the amount of gold contained in each coin and return lighter gold coins to citizens.
Because of the reduced weight of gold coins that were returned to citizens, the ruler was able to generate extra coins that were employed to pay for his expenses. What was passing as a gold coin of a fixed weight was in fact a lighter gold coin. On this Rothbard wrote,
More characteristically, the mint melted and re-coined all the coins of the realm, giving the subjects back

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The Fed’s Power over Inflation and Interest Rates Has Been Greatly Exaggerated

July 1, 2021

It is widely held that the central bank is a key factor in the determination of interest rates. By popular thinking, the Fed influences the short-term interest rates by influencing monetary liquidity in the markets. Through the injection of liquidity, the Fed pushes short-term interest rates lower. Conversely, by withdrawing liquidity, the Fed exerts an upward pressure on the short-term interest rates.
Popular thinking also suggests that long-term rates are the 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

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Why Monetary “Stimulus” Won’t Prevent an Economic Bust

June 10, 2021

The increase in the growth rate of the Consumer Price Index (CPI) has fueled concerns that if the rising trend were to continue the Fed is likely to tighten its interest rate stance. Observe that the yearly growth rate in the CPI climbed to 4.2 percent in April from 2.6 percent in March and 0.3 percent in April 2020.
We hold that because of massive increases in the money supply, it is likely that the growth momentum of prices is going to follow a rising trend.

U.S. CPI YoY, 2000 – 2021 – Click to enlarge
Note that the yearly growth rate of money supply climbed to 79 percent in February from 6.5 percent in February 2020. Various increases in the prices of goods are just the manifestation of increases in money supply.
Once money enters a particular market,

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Understanding Minimum Wage Mandates: Empirical Studies Aren’t Enough

February 15, 2021

It is only through the increase in capital goods, i.e., through the enhancement and the expansion of the infrastructure, that labor can become more productive and earn a higher hourly wage.

Original Article: “Understanding Minimum Wage Mandates: Empirical Studies Aren’t Enough”
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.

President Joe Biden has promised to raise the minimum wage from $7.25 to $15 per hour.
Some economists are of the view that the increase in the minimum wage could cause an increase in unemployment. Other economists think that the increase is unlikely to harm the labor market. Hence, they are of the view that raising the minimum wage could lift the workers’ living standards.
For example, in a

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Fiscal Stimulus vs. Economic Growth

January 12, 2021

For most experts a key factor that policymakers should be watching is the ratio between actual real output and potential real output. The potential output is the maximum output that the economy could attain if all resources are used efficiently. In Q3 2020, the US real GDP–to–potential US real GDP ratio stood at 0.965 against 1.01 in Q3 2019.
A strong ratio (above 1) can be of concern because according to experts it can set in motion inflationary pressures. To prevent the possible escalation of inflation, experts tend to recommend tighter monetary and fiscal policies. Their preferred policy would be to soften aggregate demand, which is considered as the key driving factor behind the ratio’s rise above 1.

US Real GDP to Potential Real GDP Ratio, 2000-2022 –

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A Drop in the Money Supply Was Not the Cause of the Great Depression

November 22, 2020

In his writings, Milton Friedman blamed central bank policies for causing the Great Depression. According to Friedman, the Federal Reserve failed to pump enough reserves into the banking system to prevent a collapse in the money stock.1 The adjusted money supply (AMS), which stood at $26.6 billion in March 1930, had fallen to $20.5 billion by April 1933—a decline of 22.9 percent.2

According to Friedman, as a result of the collapse in the money stock, economic activity followed suit. Thus, by July 1932 year-on-year industrial production had fallen by over 31 percent (see chart). Also, year-on-year the Consumer Price Index (CPI) had plunged. By October 1932 the CPI was down 10.7 percent (see chart).

A close examination of the historical data shows that the Fed

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

October 20, 2020

An individual’s demand is constrained by his production of goods. The more goods an individual produces, the more of other goods he can secure for himself.

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Original Article: “If We Want to Increase Demand in the Market, We Must First Increase Production“.

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How Historians Changed the Meaning of “Liberalism”
Understandably enough, the current disfavor into which socialism has fallen has spurred what Raimondo Cubeddu (1997: 138) refers to as “the frenzy to proclaim oneself a liberal.” Many writers today have recourse to the stratagem of “inventing for oneself a ‘liberalism’ according to one’s

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

October 17, 2020

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

October 7, 2020

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.

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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:
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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