Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

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.


© 2005-2022 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