Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21
Last Chance to GET FREE Money Crypto Mining with Your Desktop PC - 2nd May 21
Will Powell Lull Gold Bulls to Sweet Sleep? - 2nd May 21
Stock Market Enough Consolidation Already! - 2nd May 21
Inflation or Deflation? (Not a silly question…) - 2nd May 21
What Are The Requirements For Applying For A Payday Loan Online? - 2nd May 21
How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part1 - 1st May 21
INDIA COVID APOCALYPSE - 1st May 21
Are Technicals Pointing to New Gold Price Rally? - 1st May 21
US Dollar Index: Subtle Changes, Remarkable Outcomes - 1st May 21
Stock Market Correction Time Window - 30th Apr 21
Stock Market "Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom" - 30th Apr 21
Three Reasons Why Waiting for "Cheaper Silver" Doesn't Make Cents - 30th Apr 21
Want To Invest In US Real Estate Market But Don’t Have The Down Payment? - 30th Apr 21
King Zuckerberg Tech Companies to Set up their own Governments! - 29th Apr 21
Silver Price Enters Acceleration Phase - 29th Apr 21
Financial Stocks Sector Appears Ready To Run Higher - 29th Apr 21
Stock Market Leverage Reaches New All-Time Highs As The Excess Phase Rally Continues - 29th Apr 21
Get Ready for the Fourth U.S. Central Bank - 29th Apr 21
Gold Mining Stock: Were Upswings Just an Exhausting Sprint? - 29th Apr 21
AI Tech Stocks Lead the Bull Market Charge - 28th Apr 21
AMD Ryzen Overclocking Guide - 5900x, 5950x, 5600x PPT, TDC, EDC, How to Best Settings Beyond PBO - 28th Apr 21
Stocks Bear Market / Crash Indicator - 28th Apr 21
No Upsetting the Apple Cart in Stocks or Gold - 28th Apr 21
Is The Covaids Insanity Actually Getting Worse? - 28th Apr 21
Dogecoin to the Moon! The Signs are Everywhere, but few will Heed them - 28th Apr 21
SPX Indicators Flashing Stock Market Caution - 28th Apr 21
Gold Prices – Don’t Get Too Excited - 28th Apr 21
6 Challenges Contract Managers Face When Handling Contractual Agreements - 28th Apr 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How Inflation Destroys the Wealth of Nations

Economics / Inflation Mar 06, 2014 - 03:08 PM GMT

By: Joseph_T_Salerno

Economics

Brendan Brown is a rara avis — a practicing financial economist and shrewd observer of financial markets, players, and policies, whose prolific writings are informed by profound theoretical insight. Dr. Brown writes in plain English yet can also turn a phrase with the best. “Monetary terror” vividly and succinctly characterizes the policy of the Fed and the ECB (European Central Bank) to deliberately create inflationary expectations in markets for goods and services as a cure for economic contraction; the “virus attack” of asset price inflation well describes the unforeseeable suddenness, timing, and point of origin of asset price increases caused by central bank manipulation of long-term interest rates and the unpredictable and erratic path the inflation takes through the various asset markets both domestically and abroad.


Indeed Dr. Brown’s prose is reminiscent of some of the best writers in economics and economic journalism such as Lionel (Lord) Robbins and Henry Hazlitt. And like these eminent predecessors, Brown is generous to a fault in carefully evaluating the views of those he criticizes, while rigorously arguing his own position without waffling or compromise. Best of all, Brown is fearless in naming names and ascribing blame to those among the political elites and the upper echelons of financial policymakers whose decisions were responsible for the chaotic state of the contemporary global monetary system.

In this book, Brown deploys his formidable expository skills to argue the thesis that the current crisis and the impending collapse of the EMU (European Monetary Union) are attributable to profound flaws in the original monetary foundations of the euro. These flaws rendered the EMU particularly vulnerable to the asset price inflation virus which was originally unleashed on an unsuspecting world by the Federal Reserve shortly after the euro saw the light of day in 1999.

In the course of presenting his case, Brown courageously stakes out and defends several core theoretical positions that are in radical opposition to the prevailing orthodoxy. For example, Brown strongly dissents from the conventional view of what constitutes monetary equilibrium. He explicitly rejects the position associated with Milton Friedman and Anna Schwartz that is now deeply entrenched in mainstream macroeconomics and central bank policymaking. This superficial doctrine arbitrarily and narrowly construes monetary equilibrium as “price stability” in markets for consumer goods and services, while completely ignoring asset markets. In contrast, Brown formulates a much richer and more profound concept of monetary equilibrium that draws on the ideas of Austrian monetary and business cycle theorists, namely Ludwig von Mises, Friedrich Hayek, Lionel Robbins, and Murray Rothbard.

In Brown’s view, a tendency toward monetary equilibrium obtains when monetary policy refrains from systematically driving market interest rates out of line with their corresponding “natural” rates. Interest rates determined on unhampered financial markets are “natural” in the sense that they bring about spontaneous coordination between voluntary household decisions about how much to save and what profile of risk to incur and business decisions about how much and in what projects to invest. Such coordination ensures accumulation of capital and increasing labor productivity and a sustainable growth process that maintains dynamic equilibrium across all goods and labor markets in the economy. The main thing that is required to maintain monetary equilibrium in this sense is strict control of the monetary base as was the case, for example, under the classical gold standard regime. In the context of existing institutions, which is Brown’s focus, monetary equilibrium requires a rule strictly mandating the Fed to completely abstain from manipulating market interest rates and, instead, to exercise tight control over growth in the monetary base.

Brown’s concept of monetary equilibrium therefore countenances — indeed, requires — price deflation over the medium run in response to natural growth in the supplies of goods and services. This was the experience during the heyday of the classical gold standard in the latter part of the nineteenth century when declining prices went hand-in-hand with rapid industrialization and unprecedented increases in living standards. For Brown, it is precisely the attempt to stifle this benign and necessary price trend by a policy of inflation targeting on the part of “deflation phobic” central banks that inevitably distorts market interest rates and creates monetary disequilibrium.

Brown explains that such monetary disequilibrium is not necessarily manifested in consumer price inflation in the short run. In fact, it is generally the case that the symptoms first appear as rising temperatures on assets markets. Indeed some episodes of severe monetary disequilibrium, such as those that occurred in the U.S. during the 1920s, the 1990s, and the years leading up to the financial crisis of 2007-2008, may well transpire without any discernible perturbations in goods and services markets. Yet overheated asset markets are completely ignored in the Friedmanite view of monetary equilibrium that underlies the Bernanke-Draghi policy of inflation targeting. Brown perceptively argues that one reason for the wholesale neglect of asset price inflation is the positivist approach that is still dominant in academic economics. Speculative fever in asset markets is nearly impossible to quantify or measure and thus does not neatly fit into the kinds of hypotheses that are required for empirical testing.

Having laid out his theoretical approach, Brown uses it as a foundation to construct a compelling interpretive narrative dealing with the origins, development, and dire prospects for the euro. In the process, he pinpoints and details the flawed decisions and policies of the ECB and the Federal Reserve that account for the current condition of the euro. But Euro Crash tells more than the story of the currency of its title; it unravels and makes sense of the complex tangle of events and policies that have marked the parlous evolution of the global monetary system since the 1990s.

This book is a radical challenge to the prevalent, but deeply flawed, doctrines that have defined monetary policy since the 1980s. Be forewarned: reading it is a bracing intellectual experience. Like a headlong dive into a cold pool, it will refresh your mind and awaken it to a wealth of new ideas.

Editor’s Note: This article is adapted from Joseph Salerno’s foreword to the new third edition of Brendan Brown’s book Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations.]

Joseph Salerno is academic vice president of the Mises Institute, professor of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics. He has been interviewed in the Austrian Economics Newsletter and on Mises.org. Send him mail. See Joseph T. Salerno's article archives. Comment on the blog.

© 2014 Copyright Joseph Salerno - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in