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Mises Wire -Mises Institute, March, 3, 2019,
3 pgs.,
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Reviewer comment:
The author believes that the 'boom and bust' cycles that have occured so
frequently in the 19th -20th centuries have been due to the policies and
actions of central banks. He begins by noting that in the 18th century 'there
were no regularly recurring booms and depressions." And there were no
central banks.
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He continues: 'The boom-bust phenomenon is
somehow liked to the modern world. But what is the link? The source of the
recurring boom-bust cycles turns out to be the alleged 'protector' of the
economy - the central banks themselves."
But in the 19th century the US had no central bank but did have several
'boom-bust' events. And that that time the Bank of England (which did exist in
the 18th century) did not initially have a legal mandate to 'protect' the
economy.
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He continues: "A loose central bank
monetary policy, which results in an expansion of money out of 'thin air' sets
in motion an exchange of nothing for something, which amounts to a diverson of
real wealth from wealth-generating activities to non-wealth-generating
activities.
This is very true and is rightly cited here for the problem this 'money'
expansion helps to enable. But it is governments that are exchaning 'nothing
for something'. What they are exchanging is credit, which has become the
largest component of the money supply. But this is a 20th and 21st century
phenomena. In the 19th century the largest NYC 'Wall street' banks were
regularly blamed for having a 'tight money' not loose monetary policy.
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He then writes: "The expansion in
activities that are based on loose monetary policy is what an economic 'boom'
(or false economic prosperity) is all about."
I agree with this, but 'loose money' can and did occur when there actually was
no real 'policy' involved.
And, further, "Once however, the central bank tightens its monetary
stance, this slows down the diversion of real wealth, from wealth producers to
non-wealth producers."
He continues with a description of what happens to wealth creation when this
happens. He focuses on the details of what occured in the US between 2007 and
2011. And he includes a very apt graph showing the US AMS moving up and down
and curently moving down. He continues to fault the FED with causing the
problems. "The central bank, the key factor behind recurrent boom-bust
cycles".
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He then focuses on the 'time lag' between
changes in monetary policy and changes in market prices and real economic
activity. And these 'time lags' are different for money and real economic
activity.
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He notes that: "Fed policy makers regard
themselves as being the responsible entity authorized to bring the so-called
economy onto the path of stable economic growth and stable price
inflation."
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Finally, he points to the growth rate of the
adjusted money supply (AMS) created by the Fed. He prints a graph depicting
this rate between 2007 and 2019. He observes that this rate was growing between
May 2007 and October 2011 and continues to dominate the economy. But the annual
growth rate has been declining since October 2011 and this will dominate
economic activity now and in the future. This portends a lack of growth in the
size of the real wealth in the country.
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This is another of the frequent articles
critizing the policies and actions of the Fed. But these would be more useful
if the authors also discussed WHY the bureaucrats - economists - populating the
Fed believe theories that cause them to promote these theories and take these
actions.
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