Econometric models are constructed with the idea that they can be substituted for authentic human action. Not surprisingly, they fail badly.
Original Article: Can Econometric Models Provide a Laboratory Setting for Economic Analysis?

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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

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

The field of behavior economics downplays the role of purposeful praxeology in economics. Austrian economics does not make that error.
Original Article: Reason versus Emotion in Economics: A Praxeological Response

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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

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

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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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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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

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

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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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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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

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

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

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

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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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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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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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

Keynesian economists say that during an economic slump, the government must run large budget deficits in order to keep the economy going. In contrast, Austrian economists maintain that increased budget deficits are usually monetized, leading to general price increases. Therefore, from this perspective, the government should avoid increasing budget deficits and instead balance the budget.
Government Spending Takes Resources from Wealth Generators
Governments do not generate wealth, as government spending uses resources that must be taken from people who generate wealth. This, in turn, undermines the wealth-generating process of the economy. This means that the effective level of tax is the size of the government.
For instance, if the government plans to spend $3

Keynesian economists claim that cutting costs in a business slowdown is counterproductive. As usual, the Keynesians have it backward.

Original Article: "Does Cost Cutting Undermine Economic Growth?"
This Audio Mises Wire is generously sponsored by Christopher Condon. 

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Keynesian economists claim that cost cutting by companies in order to protect profits can lead to an economic slump. They believe that if everyone tries to cut costs, demand from retrenched workers for goods and services weakens, and as a result corporate revenues and profits come under pressure. This necessitates new layoffs, and the downward spiral accelerates.
Popular thinking presents economic activity as a circular flow of money: spending by one individual becomes part of the earnings of another individual, and spending by this other individual becomes part of the first individual’s earnings. The idea is that recessions occur because consumers—for unknown reasons—cut expenditures and increase savings.
To Be Successful, Businesses Must Abide by Consumer

Keynesians and other economists believe the central bank can influence economic growth via monetary policy but that it may bring inflation. Thus, if the goal is faster economic growth and lower unemployment, then the economy may pay the price with a higher inflation rate. There is supposedly a tradeoff between inflation and unemployment, described by the Phillips curve: the lower the unemployment rate, the higher the rate of inflation; conversely, higher unemployment rates come with less inflation.
Some commentators maintain that once the unemployment rate falls below what’s known as the nonaccelerating inflation rate of unemployment (NAIRU), it sets off an inflationary spiral. This acceleration in the inflation rate takes place through increases in the demand for

At the heart of Keynesian business cycle theory is the so-called liquidity trap. Contra Keynes, however, economies don’t falter because a sudden increase in the demand for money.

Original Article: "Forget the Liquidity Trap—Loose Monetary Policies Cause Recessions"
This Audio Mises Wire is generously sponsored by Christopher Condon. 

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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

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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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

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

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).

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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).