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By popular thinking, whenever the central bank raises the growth rate of the money supply through the buying of financial assets such as Treasuries this pushes the prices of Treasuries higher and their yields lower. This is labeled as the monetary liquidity effect. This effect is inversely correlated with interest rates. Furthermore, an increase

According to the post-Keynesian School of Economics economist Hyman Minsky, the capitalist economy has an inherent tendency to develop instability that culminates in a severe economic crisis. The key mechanism that pushes the economy toward a crisis is the accumulation of debt. According to Minsky, during “good” times businesses in profitable

According to modern portfolio theory (MPT), financial asset prices always fully reflect all available and relevant information, and any adjustment to new information is virtually instantaneous. Thus, asset prices respond only to the unexpected part of information since the expected portion is already embedded in prices. For example, if the central

Many economists believe that inflationary expectations cause general increases in prices. For instance, if there is a sharp increase in oil prices, people will form higher inflationary expectations that set in motion general increases in the prices of other goods and services. According to the former Federal Reserve chairman Ben Bernanke,

Many people believe that a general increase in stock prices is an important factor in economic growth. However, this is a questionable observation. The view that the stock market drives economic growth originates from the observation that changes in stock prices precede changes in economic data. We suggest that various economic indicators are

When the economy goes into a recession, most economic commentators believe that the government and the central bank should take steps to counter the rise in unemployment. Some economists believe that lowering unemployment can be achieved without any cost, given that the unemployed workers are idle. According to Paul Krugman , “If you put 100,000

Contrary to what Krugman says in his attack on Austrian business cycle theory in Slate , the Austrian or Misesian business cycle theory is not about the creation of too much capacity, but rather about the generation of uneconomic investment or malinvestment. It is about the use of scarce real funding contrary to the wishes of consumers i.e. the

From The Asian Wall Street Journal February 22, 1999 The Japanese government made several moves last week that may portend a shift to more aggressive efforts to expand the money supply. The Ministry of Finance’s decision to reverse course and once again begin buying government bonds, and the Bank of Japan’s decision to cut interest rates to an

The Asian Wall Street Journal June 15, 1999 THE DANGER OF DRAINING ASIA’S POOL OF FUNDING The word recovery is on the lips of a lot of Asia experts these days. But if Asia’s economic policy makers are to witness a long-term recovery, they will first need to reverse the interventionist policies that have distorted the real cost of capital in the

[Delivered at the Mises Institute conference, Austrian Economics and the Financial Markets, September 16, 1999, Toronto, Canada.] The word deflation is currently on the lips of many economists. Bank of Japan Governor Masaru Hayami has reiterated in parliament that the central bank will keep its ultra-easy monetary policy unchanged until the threat