Some commentators have tried to revitalize the old Keynesian idea of the liquidity trap. Although the trap itself follows from the J.R. Hicks IS-LM analysis, the basic idea is borrowed from J.M. Keynes. In fact, Japan has not been been in such a trap in the years following 1990, and the whole idea of the trap is gravely flawed.
The Fed has announced that it will turn its attention from fighting inflation to fighting deflation. There are serious problems with this approach, writes Frank Shostak. There is nothing wrong with lower prices, and if currency depreciation could improve economic conditions, poverty would have been eradicated a long time ago. In fact, pumping the money supply even more could lead to all round economic devastation.
There are clues and warnings, beyond mere contrarian instincts, that inflation will once again have her day. Inflation is a process that forcefully re-distributes wealth from one group to another. Prices do not change uniformly in this process, and those that get the new dollars before their costs have risen gain at the expense of those whose costs rise first.
The popular notion that an increase in the stock of money is socially and economically beneficial is one of the great fallacies of our time. It has lived on throughout the centuries, embraced by kings and presidents, politicians and businessmen. It has shattered numerous currencies, inflicted incalculable harm, and caused social and political upheavals.
When the first wave of hostilities ceased in Iraq (we shall see if a second wave appears later as Iraqis tire of the U.S. occupation), U.S. authorities made sure that dollars—lots of dollars—followed in the wake of the armed forces. It was believed that the dinar would disappear—but supply and demand intervened.
Most ordinary folk today live far better than did the Sun King himself. That advance in prosperity has not been built on government intervention, on needless consumption, nor on monetary debasement or otherwise the bilking of ones' creditors. It was built on savings being converted into capital.
Morgan Reynolds, most recently the chief economist for the Department of Labor, talks to the Austrian Economics Newsletter about his experience, the mistakes of the Bush administration, the business cycle, the status of labor unions in America, his intellectual formation in the Austrian tradition, and his predictions for the future.
The Principality of Liechtenstein is a small State in Central Europe, situated between Austria and Switzerland. Though its geographical location and diminutive size make it a somewhat anonymous State, its independent political climate gives rise to an exemplary model for the study of political and economic phenomena. But it is under serious attack today.
The World Bank has warned that central bankers around the world are running out of tools for dealing with the flagging global economy. The Fed, in particular, has almost no room left to cut interest rates. The report then turns to hand-wringing about the great monetary fear of our time: deflation.
