Contrary to popular thinking, there is no such thing as a price level that should be stabilized by the central bank in order to promote economic prosperity.

Original Article: “Is Price Stability Really a Good Thing?”
One of the mandates of the Federal Reserve System is to attain price stability. It is held that price stability is the key as far as economic stability is concerned. What is it all about?
The idea of price stability originates from the view that volatile changes in the price level prevent individuals from seeing market signals as conveyed by changes in the relative prices of goods and services.
For instance, because of an increase in the demand for apples, the prices of apples increase relatively to the prices of potatoes. This relative price

Many economic commentators are in favor of phasing out cash. They are of the view that cash provides support to the shadow economy and permits tax evasion. It is also held that in times of economic shocks that push the economy into a recession the rising demand for cash exacerbates the downturn—it becomes a factor of instability. Rather than spend money and boost aggregate demand, the increased demand for cash works against this. Consequently, it is argued that individuals’ access to cash should be curtailed in order to minimize the potential negatives that cash can pose to economy’s health.
Furthermore, it is held that in the modern world there is hardly any need for cash since most transactions can be settled by means of electronic money transfer.
The Emergence

One of the mandates of the Federal Reserve System is to attain price stability. It is held that price stability is the key as far as economic stability is concerned. What is it all about?
The idea of price stability originates from the view that volatile changes in the price level prevent individuals from seeing market signals as conveyed by changes in the relative prices of goods and services.
For instance, because of an increase in the demand for apples, the prices of apples increase relatively to the prices of potatoes. This relative price increase gives an impetus to businesses to increase the production of apples relative to potatoes.
By being able to observe and respond to market signals as conveyed by changes in relative prices, businesses are said to be

Writing in the Investment Monitor on March 18, 2021, Klaus Schwab, the founder of the World Economic Forum, was urging the replacement of the present economic system. According to Schwab, the present system is deficient, since it only benefits a small minority of the population while leaving all the others at a visible disadvantage.
Schwab is of the view that a system that strives at attaining maximum profits, which he labels as shareholder capitalism, is bad news for the well-being of most individuals. He is also of the view that a system where the government runs the show together with the private sector, labeled state capitalism, is also deficient.
Klaus Schwab recommends another system, which he labels stakeholder capitalism. This system according to Schwab

Most commentators label increases in the prices of goods and services over a period of time as inflation. Ludwig von Mises however, held that the popular definition of inflation is erroneous. He wrote in Economic Freedom and Interventionism (p. 99),
Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term ‘inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer

It is not possible to replace productive credit by means of the easy monetary policies of the central bank. If this could have been done, then the world would have already ended poverty.

Original Article: “‘Idle Resources’ Are Problems Caused by the Central Bank”
Resources that are utilized to promote economic prosperity in normal times become underutilized during recessions. Some experts are of the view that what is required are policies which will increase the availability of credit to make greater use of underutilized resources. On this Ludwig von Mises wrote,
Here, they say, are plants and farms whose capacity to produce is either not used at all or not to its full extent. Here are piles of unsalable commodities and hosts of unemployed workers. But here are

Why do individuals desire to have money, which cannot be consumed and produces nothing? To provide an answer to this one must go back in time to establish how money emerged.

Original Article: “Why Does Money Have Value? Not Because the Government Says It Does.“.
Why does the dollar bill in our pockets have value? According to some commentators, money has value because the government in power says so. For other commentators the value of money is on account of social convention. What this implies is that money has value because it is accepted, and why is it accepted? … because it is accepted! Obviously, this is not a good explanation of why money has value.1
The difference between Money and Other Goods
Now, demand for a good arises from its perceived benefit. For

Warum Geld seinen Wert nicht vom Staat erhält

Warum hat der Geldschein in unserer Tasche einen Wert? Einigen Kommentatoren zufolge hat Geld einen Wert, weil die Regierung, die an der Macht ist, dies sagt. Für andere ist der Wert des Geldes auf die gesellschaftliche Konvention zurückzuführen. Dies bedeutet, dass Geld einen Wert hat, weil es akzeptiert wird, und warum wird es akzeptiert? … weil es akzeptiert wird! Offensichtlich ist dies keine gute Erklärung dafür, warum Geld einen Wert hat.[1]
Der Unterschied zwischen Geld und anderen Gütern
Die Nachfrage nach einer Ware ergibt sich aus ihrem wahrgenommenen Nutzen. So fragen die Menschen beispielsweise Lebensmittel nach, weil sie ihnen nach dem Verzehr Nahrung bieten. Bei Geld ist dies nicht der Fall. Murray N.

Why does the dollar bill in our pockets have value? According to some commentators, money has value because the government in power says so. For other commentators the value of money is on account of social convention. What this implies is that money has value because it is accepted, and why is it accepted? … because it is accepted! Obviously, this is not a good explanation of why money has value.1
The difference between Money and Other Goods
Now, demand for a good arises from its perceived benefit. For instance, people demand food because of the nourishment it offers them once consumed. This is not so with respect to money. According to Murray N. Rothbard,
Money, per se, cannot be consumed and cannot be used directly as a producers’ good in the productive

Most economists are of the view that through the inspection of economic data it is possible to identify early warning signs regarding boom bust cycles. What is the rationale behind this way of thinking?
During the 1930s the National Bureau of Economic Research (NBER) introduced the economic indicators approach to ascertain business cycles. A research team led by W.C. Mitchell and Arthur F. Burns studied about 487 economic data points in order to establish what business cycles are all about. Mitchell and Burns had concluded that
[b]usiness 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,

Most economists are of the view that through the inspection of economic data it is possible to identify early warning signs regarding boom bust cycles. What is the rationale behind this way of thinking?
During the 1930s the National Bureau of Economic Research (NBER) introduced the economic indicators approach to ascertain business cycles. A research team led by W.C. Mitchell and Arthur F. Burns studied about 487 economic data points in order to establish what business cycles are all about. Mitchell and Burns had concluded that
[b]usiness 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,

"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."–John M. Keynes1
It is held by many commentators that the Fed’s monetary policy, which is aimed at achieving price stability, is the key factor for attaining stable economic growth.
It is also held that what prevents the attainment of price stability is the fluctuations of the federal funds rate around the neutral interest rate, also known as the natural interest rate.
The natural interest rate, it is held, is one that is consistent with

Most commentators’ regard savings as harmful to economic growth on the ground that savings are associated with fewer outlays. These commentators portray economic activity as a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.
If for whatever reason people become less confident about the future, it is held that they are likely to cut back on their outlays and hoard more money. Consequently, once an individual spends less, this worsens the situation of some other individual, who in turn also cuts his spending.
A vicious circle emerges—the decline in people’s confidence causes them to spend less and to hoard more money. This

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

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

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

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,

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

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 –

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

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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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

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.,

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

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

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

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

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

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

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,