Money and Banking

Senior Fellow Mark Thornton is interviewed on The Power & Market Report. Dr.

Thirteen powerpoint slides lead you through Dr. Thornton's presentation. There exist strong correlations between either the announcement or the completion of the world's tallest building and GDP, but it is not held that you can accurately forecast a recession or financial panic by this measurement. Thornton suggests the common cause is artificially low interest rates.

The Greek debt crisis is often framed as a matter of Greek debtors against German creditors. But it’s really a matter of Greek and German taxpayers being exploited by their own governments which are promising to pay debts with other people’s money.

Our method of calculating GDP growth is hopelessly flawed, and is more likely determined largely by the growth of the money supply in the economy. So as the Fed pumps more, the economy appears to grow also.

China has recently devalued its currency. Like many governments, the Chinese government thinks this will help the economy by increasing exports. But it will really just destroy real wealth in the process.

The crash of 1929 came after a decade of interventionist politics following world War I. "Free markets" were blamed anyway. Decades later, we pursue even more interventionism, and when it fails, we blame "free markets" all over again.

As news of Venezuela’s suffering keeps coming through, one cannot help but feel a certain sense of dread. All governments control the money supply to essentially the same extent that Maduro’s administration does. All around the world we have monetary socialism, where national currencies are subject solely to political power. And one cannot help but wonder (and fear) how many more such economic disasters it will take before it becomes clear that socialism of all shapes, sizes, and degrees, is unrealizable, unbearable, and unforgivable.  

Governments have long hated physical cash because it allows for untraceable purchases. But a bigger problem for governments is the fact that holders of cash can signal a lack of trust in central banks by removing all their cash from the financial system.

Consumer prices have been stable, but we should pay attention to 2014's decline in the money supply which mirrors a similar decline from 1927 and 1928, which was followed by a collapse in industrial production.

The Fed is talking about raising interest rates, but it knows that any move in that direction is likely to cause a recession and more economic pain. But it also knows it can't keep forcing down interest rates forever.