Most economists see GDP as a snapshot of the performance of the economy. However, it is better understood as a misleading statistic which fails to accurately describe what really is happening economically.

Original Article: “GDP Provides a False Reading of the State of the Economy”

The GDP (gross domestic product) statistic portrays a view that the key driving factor of economic growth is not the production of wealth but rather its consumption. Instead, it is a calculation of the value of final goods and services produced during a particular time interval, usually a quarter or a year. Since consumer outlays are the largest part of the overall demand, it is held by many commentators that consumer spending is the key driver of economic growth.
All that matters

By popular thinking, the key driver of economic growth is the increase in total demand for goods and services. It is also held that overall output increases by a multiple of the increase in expenditure by government, consumers and businesses.
It is not surprising, then, that most commentators believe that through fiscal and monetary stimulus, government can prevent the US economy falling into a recession. For instance, increasing government spending and central bank monetary pumping will strengthen the production of goods and services.
It follows then that by means of increases in government spending and central bank monetary pumping the authorities can grow the economy. This means that demand creates supply. However, is it the case?
Why Does Supply Precede

The GDP (gross domestic product) statistic portrays a view that the key driving factor of economic growth is not the production of wealth but rather its consumption. Instead, it is a calculation of the value of final goods and services produced during a particular time interval, usually a quarter or a year. Since consumer outlays are the largest part of the overall demand, it is held by many commentators that consumer spending is the key driver of economic growth.
All that matters in this view is the demand for goods and services, which in turn will give rise almost immediately to their supply. Because the supply of goods is taken for granted, this framework ignores the various stages of production that precede the emergence of the final good.
In the GDP framework

In the recent Wall Street Journal article “Inflation Surge Earns Monetarism Another Look,” Greg Ip writes that a recent surge in inflation is not likely to bring authorities to reembrace monetarism. According to Ip, money supply had a poor record of predicting US inflation because of conceptual and definitional problems that haven’t gone away.
The head of the monetarist school, the late Milton Friedman, held that inflation is always and everywhere a monetary phenomenon. Friedman and other monetarists believed that the key driving factor for general increases in prices is increases in money supply.
This viewpoint has come under scrutiny since the early 1980s because the correlation between inflation and money supply disappeared. According to Ip in 2020, Alan

In his June 21 New York Times article “Is the Era of Cheap Money Over?,” Paul Krugman argues against the view that the Fed has kept interest rates artificially low for the past ten to twenty years. Other commentators have argued that these low interest rates have inflated bubbles everywhere as investors desperately look for something that will yield a decent rate of return.
Krugman expresses strong disagreement that the decline in interest rates caused bubbles and that the decline was artificial. For Krugman, the Federal Reserve sets short-term interest rates, which in turn determine long-term rates. He then suggests that there’s no such thing as an interest rate unaffected by policy.
The columnist then argues that what matters for the Fed’s policy is the natural

According to the June 1, 2022, Financial Times, Janet Yellen, the US Treasury secretary conceded she was wrong last year about the path inflation would take. Yellen told CNN:
There have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I didn’t fully understand, but we recognize that now.
To be able to say something meaningful about inflation, it is necessary to establish what inflation is all about. Note that for Yellen inflation is about the growth rate in the consumer price index, which year on year stood at 8.3 percent in April against 4.2 percent in April the year before.
The increase in the prices of goods and services is not inflation but rather the

The occurrence of stagflation is associated with a situation of general strengthening in the momentum of prices while at the same time the pace of economic activity is declining. A famous stagflation episode occurred during the 1974û75 period, as year-on-year industrial production fell by nearly 13 percent in March 1975 while the yearly growth rate of the Consumer Price Index (CPI) jumped to around 12 percent. Likewise, a large fall in economic activity and galloping price inflation was observed during 1979. By December of that year, the yearly growth rate of industrial production stood close to nil while the yearly growth rate of the CPI closed at over 13 percent.

According to popular thinking of that time, the central bank influences the pace of economic

According to John Maynard Keynes:
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. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories

For most economists and politicians, the role of central bank authorities is to make the economy as stable as possible. What do they mean by economic stability? Economic stability refers to an absence of excessive fluctuation, so an economy with constant output growth and low and stable price inflation is likely to be regarded as stable.
An economy with frequent boom-bust cycles and variable price inflation would be considered unstable. According to popular thinking, a stable economic environment in terms of stable price inflation and stable output growth acts as a buffer against various shocks. This makes it much easier for businesses to plan. In this way of thinking in particular, price level stability is the key for economic stability.
For instance, a relative

On April 19, 2022, at the Economic Club in New York, the Chicago Federal Reserve Bank president Charles Evans said the Fed is likely to lift by year end its federal funds rate target range close to the neutral range of between 2.25 to 2.50 percent. Furthermore, on April 21, 2022, Fed chairman Jerome Powell corroborated this by stating that the Fed wants to raise its benchmark rate to the neutral level.
By popular thinking, the neutral rate is one that is consistent with stable prices and a balanced economy. Hence, in order to attain economic and price stability, Fed policy makers should navigate the federal funds rate toward the neutral rate range. The Swedish economist Knut Wicksell in the late nineteenth century articulated this framework of thinking, which has

For most experts, deflation is bad news since it generates expectations for a continued decline in prices, leading consumers to postpone the purchases of present goods, since they expect to purchase them at lower prices in the future. Consequently, this weakens the overall flow of current spending and this, in turn, weakens the economy. Economic activity, believe the experts, is a circular flow of money. Spending by one individual becomes the earnings of another individual, and spending by another individual becomes a part of the previous individual’s earnings.
If people have become less confident about the future decide to reduce their spending, this weakens the circular flow of money. Once an individual spends less, this worsens the situation of some other

The conventional view among mainstream economists, as presented by Milton Friedman, is that three factors determine market interest rates: liquidity, economic activity, and inflationary expectations.
In this viewpoint, whenever the central bank raises the growth rate in the money supply by buying financial assets such as Treasurys, this pushes the prices of Treasurys higher and their yields lower. Note that this is the monetary liquidity effect, which inversely correlates with interest rates.
An increase in the money supply after a time lag strengthens economic activity and this sets in motion the economic activity effect, which exerts upward pressure on interest rates. After a much longer time lag, the increase in the growth rate of money supply affects prices of

At the end of March this year the difference between the yield on the ten-year Treasury bond and the yield on the two-year Treasury bond fell to 0.010 percent from 1.582 percent at the end of March 2021.
Many analysts believe that a change in the shape of the yield spread provides an indication regarding where the economy is heading in the months ahead, with an increase in the yield spread raising the likelihood of a possible strengthening in economic activity in the months to come. Conversely, a decline in the yield spread is seen as indicative of a possible economic downturn ahead.

.
A Popular Explanation for the Shape of the Yield Curve
A popular explanation regarding the shape of the yield curve is provided by expectations theory (ET). According to ET, the

In the New York Times article “How High Inflation Will Come Down,” Paul Krugman suggests that the key for future inflation is inflation expectations. Krugman does not think that currently inflation expectations are comparable to the 1980s. According to him:
Forty years ago, as many economists will tell you, inflation was “entrenched” in the economy. That is, businesses, workers and consumers were making decisions based on the belief that high inflation would continue for many years to come. One way to see this entrenchment is to look at the wage contracts—typically for three years—that unions were negotiating with employers. Even then, most workers weren’t unionized, but these deals are a useful indicator of what was probably happening to wage- and price-setting

Most people believe lending is associated with money. But there is more to lending. A lender lends savings to a borrower as opposed to “just money.” Let us explain.
Take a farmer, Joe, who has produced two kilograms of potatoes. For his own consumption, he requires one kilogram, and the rest he agrees to lend for one year to another farmer, Bob. The unconsumed kilogram of potatoes that he agrees to lend is his savings.
By lending a kilogram of potatoes to Bob, Joe has agreed to give up for one year his ownership over these potatoes. In return, Bob provides Joe with a promise that after one year he will repay 1.1 kilograms of potatoes, with the 0.1 kilogram constituting interest. Note that the existence of savings is the precondition for lending (there must be

According to the popular way of thinking, our knowledge of the economy is elusive. Consequently, the best that we can do is to attempt to ascertain some facts of economic reality by applying various statistical methods to the so-called macro data.
For instance, an economist is of the view (i.e., he has a theory) that consumers’ outlays on goods and services are determined by personal disposable income and the interest rate. The personal disposable income and the interest rate, according to the economist’s view, are the driving variables of consumer outlays.
By means of a statistical method, the economist then converts this view into an equation. The established equation in turn is employed in the assessment of the future direction of consumer outlays.
If the

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 the summation of all personal money income less tax payments to the government. 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. The spending of the purchaser is the income of the seller. From this, it follows that spending equals income.
So if people maintain their spending, this keeps overall income coming in. Now, an increase in the supply of money affects the total amount of money

Recently, a relatively new economics called behavioral economics (BE) has started to gain popularity. Its practitioners, such as Daniel Kahneman, Vernon Smith, and Richard Thaler, were awarded Nobel Prizes for their contribution in the field of BE.
The BE framework emerged because of dissatisfaction with the neoclassical theory regarding consumer choices. In the neoclassical theory, individuals are presented as if a scale of preferences is hard-wired in their heads. Regardless of anything else, this scale remains the same all the time.
The practitioners of BE hold that this is unrealistic. To make the mainstream framework more realistic they are of the view that there is the need to introduce psychology into economics.
It is held that individual’s emotional state

Some commentators attribute the latest sharp increase in the Consumer Price Index to businesses pushing prices of goods higher in order to secure higher profits. (See the New York Times article “Democrats Blast Corporate Profits as Inflation Surges,” January 3, 2022). Note that the yearly growth rate of the Consumer Price Index jumped to 6.8 percent in November 2021 from 1.2 percent the year before. However, is it true that businesses are determining the prices of goods and services?

How Prices Are Established
As a rule, a supplier sets the price. After all it is the supplier who offers the goods to the buyers. So it is the supplier who must set the price of a good before he presents the good to the buyers.
In order to secure the price that will improve his lot,

Most experts tend to assess the strength of an economy in terms of real gross domestic product (GDP). The GDP framework looks at the value of final goods and services produced during a particular time interval, usually a quarter or a year. The GDP is formed as the summation of consumer outlays on goods and services; outlays by businesses on plants, machinery, and inventories; outlays by government; and exports less imports.
An increase in consumer outlays, businesses investment, and government outlays strengthens the economy as described by the GDP statistic. In addition, whenever the exports-imports differential shows a strengthening, the GDP statistic follows suit.
In this way of thinking, an increase in the components of GDP causes an increase in the overall

The price of the euro in terms of the US dollar closed at 1.135 in November, against 1.156 in October and 1.193 in November last year. The yearly growth rate of the price of the euro in US dollar terms fell to –4.8 percent in November from –0.7 percent in October. Some commentators are of the view that the US dollar is likely to weaken against the euro (i.e., the price of the euro in US dollar terms is likely to increase). The reason for this is the massive US trade balance deficit.

.
In September 2021 the US trade balance stood at a deficit of $80.9 billion, against a deficit of $62.6 billion in September last year (see chart). Again, some commentators regard a widening in the trade deficit as an ominous sign for the exchange rate of the US dollar against

According to the popular narrative, the role of the central bank is to navigate the economy along the so-called path of economic stability. By this way of thinking if various shocks cause the economy to deviate from this path, then it is the role of central bank policy makers to offset these shocks. This is done by means of suitable monetary policies. In line with this way of thinking to counter the shocks from covid-19, the US central bank, the Federal Reserve System, pumped a massive amount of money into the economy. This is depicted by the increase in the Fed’s balance sheet from $4.2 trillion in January 2020 to $8.5 trillion by October of this year—an increase of 102.7 percent. Because of this massive increase, the Austrian money supply (AMS) measure climbed

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.