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Central Banks Do Not Prevent Financial Crises or Control Inflation

Posted by M. C. on August 21, 2025

Central banks have become the dominating force in financial markets.

Modern central banking has shown that no single authority should set interest rates and liquidity.

As such, central banks are not a limit to risk-taking, rising government spending and budget irresponsibility, but rather a tool that enables market and government excess.

https://mises.org/mises-wire/central-banks-do-not-prevent-financial-crises-or-control-inflation?utm_source=MI+Subscriptions&utm_campaign=42d171aa16-EMAIL_CAMPAIGN_2024_03_01_07_02_COPY_01&utm_medium=email&utm_term=0_-fb69bb184c-592102341

08/16/2025 • Mises Wire •Daniel Lacalle

Easing and tightening decisions move all assets from bonds to private equity. Their role is supposed to be to control inflation, provide price stability, and ensure normal market functions. However, there is little evidence of any success in achieving their goals. The era of central bank dominance has been characterised by boom-and-bust cycles, financial crises, policy incentives to increase government spending and debt, and persistent inflation. Recently developed economies’ central banks have taken an increasingly interventionist role.

The creation and proliferation of central banks over the past century promised greater financial stability. Nevertheless, as history and current events continually show, central banks have not prevented financial crises. The frequency and severity of these crises have fluctuated but have not declined since central banks became the leading figure in financial market regulation and monetary interventions. Instead, central banking has introduced new fragilities and changed the nature, but not the recurrence, of financial turmoil.

Empirical evidence dispels the myth that central banks ended the era of frequent financial crises. Regardless of central bank oversight, a credit boom preceded one in three banking crises. Who created those credit booms? Central banks, through the manipulation of interest rates. According to Laeven and Valencia’s comprehensive database, there were 147 banking crises between 1970 and 2011 alone, in an era of near-universal central bank dominance. Financial crises remain a persistent global phenomenon, occurring in cycles that coincide with episodes of credit expansion. Central banks have often prolonged boom periods with low rates and elevated asset purchases and created abrupt bust moments after making mistakes about inflation and credit risks.

According to Reinhart and Rogoff’s work, the rate of crises has not dramatically changed with central banking. Instead, the forms of crises evolved. Twin crises (banking and currency) remain common, and the severity, measured in output loss or fiscal costs, has often increased, especially as financial institutions and governments grew intertwined with monetary authorities.

The Great Financial Crisis of 2008, the Eurozone sovereign debt crisis, and the 2021–2022 inflationary burst rank among the events with the highest costs in history, contradicting the view that central banks have neutralised the risk or costliness of crises.

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Peter Schiff: Price Controls Are Coming

Posted by M. C. on March 12, 2024

“Housing isn’t driving anything. Housing’s just gone along for the ride. The driver is Maxine Waters and her buddies in Congress. They’re driving the inflation bus, not housing. Housing’s just riding in the bus along with everything else. The driver of inflation is deficit spending and the money that the Federal Reserve prints to monetize that debt.”

With price controls look for shortages that will make covid shortages look mild.

SchiffGold.com

Price Controls Are Coming

This week, Peter reacts to politicians’ sophomoric views on inflation and explains the recent surge in the price of gold. He also comments on the first day of Jerome Powell’s congressional testimony. Be sure to watch Peter’s special extra episode from earlier this week if you missed it. 

Peter thinks the price of gold has finally broken free from resistance, and it’s going to keep rising. Because retail investors have been dumping gold recently, a retail sell-off is unlikely to bring gold below where it is now:

“This rally is the first rally to new highs where the public is not participating. In fact, for weeks—actually months— leading up to the new high, the public was getting out of gold. … I think that’s a great contrarian indicator, and I think that’s a sign that this rally has legs, because normally the market peaks when you get a rush of buyers that come in. And now the market gets overbought, it gets saturated, and then there’s a correction.”

Even more promising for gold is the fact the central banks are increasing their purchases of the yellow metal, and they aren’t planning on selling it anytime soon:

“The central banks are the buyers, and they’ve got huge war chests of foreign currency reserves, plus they can print their own money and use that to buy gold. And I don’t think the central banks are that price sensitive. … They don’t want to run the price up, they want to buy it, but their goal is to have more gold, and their goal is not to sell any of this gold.”

https://youtube.com/watch?v=CpmEmrP5OEo%3Fembeds_referring_euri%3Dhttps

If the retail sector stops selling and central banks keep buying gold, they’ll inevitably bid its price up even higher than it is today:

“The market is under supplied, and it’s about to run into a huge increase in demand. And what does that tell you? That means that the price of gold has a long way to go to catch up to clear that market. Gold is very undervalued right now, and it has been for some time, and that is the opportunity to buy it before it’s repriced to a realistic valuation.”

Pivoting to recent political news, Peter takes aim at Congresswoman Maxine Waters, who spuriously claims that housing prices cause inflation. Peter corrects her:

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Inflation Is a Giant “Skim” on the American People | Mises Wire

Posted by M. C. on August 19, 2023

Inflation created by central banks allows government to ALWAYS have the money it wants—and be first in line to get it.

https://mises.org/wire/inflation-giant-skim-american-people

Charles A. Smith

The price of a McDonald’s hamburger in the United States has inflated 3.75 percent annually over the last seventy years. McDonald’s has grown from a tiny hamburger stand in Des Plaines, Illinois, to the second largest fast-food chain on earth. Scale economies alone (never mind process and productivity improvements) should’ve allowed the price of a burger to decline materially over this period.

Why didn’t it? What forces and institutions have conspired to inflate the cost of a simple meal by more than thirteen times over two generations? Many Mises Wire readers know the answer, but few Americans are economically astute enough to understand or describe what Vladimir Lenin called the “surest means of overturning the existing basis of society.”

Simply put, inflation is a giant “skim”—perpetrated in a symbiosis of money creation by bankers and government-affiliated central bank bureaucrats, the two institutions with the power to create money from nothing. Inflation creates a nice, cushy existence for each group. And the bankers and bureaucrats always get their money.

If steady price deflation were operative—as is the case in a properly functioning consumer economy, where productivity improvements flow into lower consumer prices—the world would be quite different today and far more difficult for bankers and bureaucrats.

With steadily falling prices, bankers must do proper credit analysis. They must set aside ample reserves and generally run their institutions more conservatively. Credit analysis is far more difficult in deflation as borrowers must continuously sell more goods to service their loans rather than relying on boosting prices. Secured loans become problematic as pledged assets devalue. Banking generally becomes a lot more work—and more risky. The period of 1865 to 1910 in the United States was a perfect example of this sort of environment. Record bank failures and enormous financial volatility accompanied steady deflation and one of the greatest periods of economic prosperity and innovation in our nation’s history.

In short, deflation creates risks for banks, so banks conspire with the government to create enough money so they don’t have to deal with it. The “balls to the wall” and “heads I win, tails you lose” practices we’ve become familiar with in banking today are both allowed and inspired by the permanent inflationary regime.

The other major inflation conspirator (and greatest beneficiary) is government. Think of inflation as oxygen for politicians and carbon monoxide as a public vote cast to raise taxes. Steady (2 percent, say?) inflation creates a reliable ratcheting effect on every taxpayer in the land, and a nice, smooth, foamed runway for bureaucrats. And should our benevolent leaders decide the inflation/tax runway isn’t wide enough or smooth enough? They simply borrow the difference (i.e., the deficit) and inflate that away too!

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The Controlled Demolition Of Nation-States

Posted by M. C. on June 30, 2023

Why would nations give a bunch of global bankers a monopoly to control the supply of money, when that awesome power allows them to impoverish and manage everyone else?  Why would politicians who claim to care about income inequality perpetuate a system that specializes in producing income inequality?  The answer is simple: governments are concerned exclusively with power and do not care about preserving democratic ideals, personal freedom, or the livelihoods of their people.

https://www.zerohedge.com/economics/controlled-demolition-nation-states

Tyler Durden's Photo

BY TYLER DURDEN

Submitted by J.B. Shurk via American Thinker,

Generally speaking, central banks are empowered to control the supply of money by employing a number of tools that include buying government debt, selling government bonds, adjusting reserve requirements, and setting official interest rates.  Operating under various legal mandates to sustain an overall healthy economy, central banks ostensibly pursue policies that will produce relatively low inflation, steady economic growth, and low public unemployment.  

What if these stated goals are merely talking points meant to justify a central bank’s continued monopoly over a nation’s creation of money, and the true objective of any central bank is to maximize wealth for the wealthiest economic players?  Central banks, after all, are usually institutionally independent from government interference.  They are private firms managed by the world’s financial elite.  How might a central bank pursue a hidden agenda to grow the wealth of its friends at the public’s expense?

The easiest and most effective way would be to create artificial “boom and bust” cycles during which economies greatly expand and then quickly shrink.  How does this work in practice?  First, a central bank lowers interest rates — the cost of borrowing money — and thereby encourages ordinary citizens to take out loans.  These loans are used to buy houses and cars and start small businesses.  By artificially lowering interest rates below the natural market rate, central banks stimulate consumer purchases and small business expenditures beyond what Adam Smith’s “invisible hand” would have rendered on its own.  Investors who have an economic interest in selling houses, cars, and inventories for small businesses all benefit from the central bank’s intervention.

Additionally, because central banks have encouraged borrowing, they have pumped more money into the greater economy.  With the supply of money artificially increased, some individuals are willing to pay more now than before for the same goods or services.  Consequently, the prices of goods and services increase, producing inflation.  There are two important effects stemming from inflation: (1) a middle-class citizen on a fixed income must now pay more for living expenses, while (2) a higher-class citizen who owns stocks, homes, and other assets will see the currency-denominated value of those assets increase.  In other words, inflation acts as a tax on poorer individuals who own little and a supplement for wealthier individuals who own much.  While a middle-class citizen living paycheck-to-paycheck will effectively have less income, a higher-class citizen whose principal wealth exists in the form of assets will have increased net wealth.  Inflation effects a wealth transfer from the poor to the rich.

Now, a central banker will insist that artificially low interest rates and easy borrowing have made it possible for consumers to own more things and for fledgling entrepreneurs to start small businesses that would have otherwise never existed.  A less charitable description would be that low interest rates have induced ordinary citizens to buy things that they cannot afford, take on long-term debt, and risk their financial futures on business start-ups that may well fail.  Sometimes those risks pay off and produce rags-to-riches success stories.  When interest rates suddenly rise, however, they often end with unpaid bills and the eventual bank seizure of those cars, homes, and business assets.  A central bank’s easy money programs momentarily increase consumer ownership and small business creation before inviting financial distress and repossession as rent, payroll, inventory expenses, and other fixed costs increase.

During the “boom” side of the cycle, central banks produce a lot of momentary “winners” and increase overall national wealth by encouraging consumer spending and inflating the currency-denominated value of assets.  During the inevitable “bust” side of the cycle, however, the real winners emerge when the super-wealthy scoop up a bankrupt population’s primary assets for pennies on the dollar.  

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‘Cash Is Printed Freedom’ – 530,000 Austrians Betrayed After Referendum On Cash Payments In The Constitution

Posted by M. C. on June 2, 2023

As Remix News previously reported, privacy and civil rights organizations have long advocated the right to cash with the argument that privacy, civil liberties, and finical security are at stake. Abolishing cash would force citizens to conduct all transactions through a digital medium, such as mobile payments, credit cards, or digital currencies. Banks and electronic mediums remain vulnerable to hack attacks and even natural disasters, for example, if the power grid were to be knocked out. The Swedish Civil Contingencies Agency, which is a part of the Ministry of Justice, warned in one report that a totally cashless society would be extremely vulnerable if the country were attacked or exposed to a natural disaster

https://www.zerohedge.com/geopolitical/cash-printed-freedom-530000-austrians-betrayed-after-referendum-cash-payments

Tyler Durden's Photo

BY TYLER DURDEN

Authored by John Cody via Remix News,

A world without cash would lead to “financially incapacitated” citizens, argues the Freedom Party of Austria (FPÖ)…

After 530,000 Austrians signed a referendum petition calling for the right to cash payments to be enshrined in Austria’s constitution in 2022, Austria’s political class is refusing to move forward with adding this legal right, warns the Freedom Party of Austria (FPÖ).

“Nowhere else in the world is an everyday life without cash so clearly rejected as in Austria. We see this justified desire of the population, which is reflected in the popular petition ‘For unrestricted cash payment,’ as a concrete work order to the parliament!,” said Finance and Budget Spokesman of the Austrian Freedom Party (FPÖ) Hubert Fuchs during a parliamentary debate.

Although the referendum is not binding, in a country of 8.9 million, the fact that over half a million signed the referendum petition shows a broad level of resistance against the push for digital currencies promoted by central banks across the world and institutions like the World Economic Forum (WEF). It was the 13th most popular referendum in the country’s history. However, the center-right Austrian People’s Party (ÖVP), which has long been said to have backed the right to cash, is now joining the left-wing parties of Austria and blocking all attempts to add this right to the country’s constitution.

FPÖ says ‘cash is freedom’

Fuchs sees the great support for the petition as a clear mandate to the National Council, which is one of the two houses in Austria’s parliament.

“The initiators and supporters of this petition do not just want words of thanks. Rather, it is a concrete request to the National Council to ensure that the federal government finally gets its act together. But let me report from the finance committee: Our motion for the preservation of cash was once again rejected by the ÖVP. So it’s all just lip service and fine words, while these are not followed by action,” said Fuchs.

Austrian Freedom Party financial spokesman Hubert Fuchs. (Austrian Parliament)

The ÖVP is reportedly attempting to blame their coalition partners, the Greens, but the FPÖ rejects these claims. Fuchs argues that if “nothing can be brought forward in the country (through legislation), one should step soon again to the ballot box — the republic would be served thereby very much.”

The FPÖ, known for its stance against Russia sanctions and its calls to stop immigration by building “Fortress Austria,” is currently the most popular party in the country, with polls putting it at approximately 27 percent. The party, although conservative, takes a skeptical view of unbridled free market capitalism, and argues that the government must protect against real estate speculators and provide generous cash benefits to encourage Austrians to have more children.

The party has also made the right to cash payments an intrinsic part of its platform, arguing that they ensure freedom from government oversight and also protect Austrians from predatory banks and credit card institutions.

“We, the Freedom Party — in contrast to all other parties — have already been campaigning for years for the preservation of cash as well as for the anchoring of the right to cash payments in the constitution. This was also included in the ÖVP-FPÖ government program (of the previous government), but unfortunately could no longer be implemented. And I wonder why, if all parties are in favor of preserving cash, especially the Austrian People’s Party (ÖVP), they have not tabled a motion on this today?” asked Fuchs. “According to the current legal situation, there is no real obligation to accept cash. The relevant legal provisions need to be tightened up here.”

Fuchs also said in his speech that implementing a financial system where only digital currencies exist would lead to an increase in money laundering and covert financing of terrorism, as according to him, digital and cryptocurrencies are a hotbed for criminality.

“This freedom of choice must continue to exist in the future. Cash is data protection in action. Cash is printed freedom. And another aspect should not remain unmentioned: Without cash, how are children supposed to learn how to handle money and thus how to do business? Money at their fingertips is very important for children. But it is not only important for children, but also for adults in terms of their own spending control,” explained the FPÖ finance and budget spokesman.

Fuchs may be referring to the practice of many consumers reverting back to cash to better control spending, which is a trend seen in the United States this year. Experts argue that using physical cash instead of electronic payments helps people better control and track their spending.

However, the FPÖ also points to a new Marketmind study, which shows that 48 percent of women and 40 percent of men in Austria cannot get a credit card due to their low income and are therefore dependent on cash. 

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Clive Maund – Genocide is their End Game and everything that has happened and is happening is due to a meticulously planned and sinister plot being implemented by the narrow clique of gangsters who now control our world. – Ultimate-Survival

Posted by M. C. on November 11, 2022

https://billkloss.law.blog/2022/11/10/clive-maund-genocide-is-their-end-game-and-everything-that-has-happened-and-is-happening-is-due-to-a-meticulously-planned-and-sinister-plot-being-implemented-by-the-narrow-clique-of-gangster-2/

Posted by Brandon Campbell

“In a nutshell, they are to cull a large percentage of the human race and to turn the survivors into a completely controlled army of slaves who own nothing and are dictated to and tracked, traced and monitored 24 / 7 everywhere, even inside their own homes, which of course they will no longer own.”

“It only starts to make sense when you understand that everything that has happened and is happening is due to a meticulously planned and sinister plot being implemented by the narrow clique of gangsters who now control our world.”

The period from 1945 to 2019 was for many a “Golden Age” – a period of relative peace, prosperity, stability, and freedom. This has now ended as the most dangerous and destructive timeline in the history of the World has begun, initiated by malevolent and extremely ruthless Plutonian forces characterized by a complete lack of empathy intent on creating a global totalitarian regime. If this timeline is not derailed soon – and there is little sign that it will be – the result will be death, destruction, and enslavement on a biblical scale for the majority of humanity and we are already seeing this starting. Examples of other such inflection points in history that lead to catastrophe are the shooting of Archduke Ferdinand in Sarajevo that triggered the onset of the 1st World War and the declaration of war on Germany by Britain in 1939, using the excuse that it had a pact with Poland, but what we are seeing now is an order of magnitude higher and truly global in nature so that nowhere on Earth will escape the dragnet. This time around the trigger is the timed release of a relatively harmless virus that has been heavily hyped by the media non-stop to make the public think it is akin to the Black Death.
With respect to the timing of the release of the virus and attendant media hysteria, this was determined by two factors. One was that the global debt situation had become critical with the world economy on the verge of collapse – they needed a crisis to provide the excuse for another orgy of money creation, so they crashed world markets into March and put the blame on the virus.

This guide below can help you in a survival situation

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The Lost Ways prepares you to deal with worst-case scenarios with the minimum amount of resources just like our forefathers lived their lives, totally independent from electricity, cars, or modern technology.

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The way the heist works couldn’t be simpler. Those in control collapse the world economy and force the majority of its population into massive debt just to survive. Those with any assets worth stealing are then given an ultimatum – hand them over or starve or be sent to the debtors’ prison, which in the US will doubtless mean utilization of the vast sprawling network of FEMA camps. 
Around this time a large proportion of the world’s population deemed surplus to requirement and an unnecessary burden on the environment and a nuisance will be culled (meaning killed) either by lethal injection or starvation…

—

We now have almost the entire world population unknowingly engaging in occult rituals that are designed to transport them into a new subservient reality. This is the first time this has ever happened in the history of the world… It is important to understand that this narrow but extremely wealthy and powerful clique at the top of the pyramid already controls everything – Central Banks including and especially the Fed, governments, politicians, and judiciaries, who are nearly all “for sale”, the clergy, the media, etc. 

(left, Clive Maund) 
They don’t entirely control the internet yet …but they are working on it, and soon they will close this window. As for their objectives, in a nutshell, they are to cull a large percentage of the human race and to turn the survivors into a completely controlled army of slaves who own nothing and are dictated to and tracked, traced, and monitored 24 / 7 everywhere, even inside their own homes, which of course they will no longer own.

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oftwominds-Charles Hugh Smith: The Era of All-Powerful Central Banks Is Over

Posted by M. C. on November 4, 2022

http://charleshughsmith.blogspot.com/2022/11/the-era-of-all-powerful-central-banks.html?m=1

The era of all-powerful central banks is over for a simple reason: they failed: they failed their citizens, their nations, and they failed the world. Their policies have pushed wealth and income inequality to extremes that have destabilized the planet’s social, political, economic and environmental spheres.

As I have endeavored to explain for many years, this is the only possible outcome of central bank dominance. Once Finance becomes the primary mover of everything else, then it distorts everything into a skimming machine that benefits the few with access to central bank funding at the expense of everyone else.

Once finance dominates, then both the “market” and government become servants of finance. I say “markets” because once markets have been financialized, they serve the interests of cartels and monopolies and cease to be markets at all.

Government, regardless of the advertised “brand”, becomes an auction where the highest bidder gains control of governance and regulation, which are bent to serve the interests of the few with access to central bank largesse.

As the charts below illustrate, this is the top 0.1%, with a substantial “trickle down” to the top 1% and top 10%. The bottom 90% have lost ground not just economically but also politically and socially.

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The People Who Engineered Record Inflation Want To Control Cryptocurrency

Posted by M. C. on October 5, 2022

The Federal Reserve’s most important payment system, FedACH, which processes over 50 million transactions per day, still takes 2-3 days for payments to clear. It’s so outdated, it’s as if they’re still sending satchels full of cash via Pony Express.

It’s also ridiculous that the people who have failed in every possible aspect of their responsibility think that they’re qualified to administer a brand new financial system.

These Central Banks failed to anticipate inflation. They failed to recognize it. They failed to do anything about it for more than a year. And now they’re hellbent on causing a recession.

They’ve pretty much been a complete disaster. Yet now they want to be in charge of crypto too. Are these people serious??

Tyler Durden's Photo

BY TYLER DURDEN

WEDNESDAY, OCT 05, 2022 – 06:30 AM

Authored by Simon Black via SovereignMan.com,

On the First of May in the year 1716, a swashbuckling Scottish entrepreneur was making this pitch of his lifetime to the head of the French government in Paris.

The entrepreneur’s name was John Law. By all accounts he was incredibly charismatic and had a flamboyant, larger than life personality. He was something like Adam Neumann, formerly of WeWork… the kind of person who could talk anyone into anything.

And John Law’s pitch that day was to launch an entirely new financial system.

King Louis XIV had just died eight months before, leaving France in terrible financial ruin. Decades of endless wars, palaces, and profligate spending had bankrupted the French government.

The situation was so dire, in fact, that there was hardly any gold left in the French treasury. So the new head regent of the government, Duke Philippe II of Orleans, was desperate for a solution.

Law made him a bold proposal: the Duke would provide Law with a special banking license. And in exchange, Law would create a new system of paper money that would bring more gold into France and help pay off the crippling national debt.

Philippe agreed. And, only a few weeks later, John Law’s new Banque Generale Privee was in business.

It turned out that people loved the idea of paper money. And within a year, his paper bank notes were circulating widely throughout the French economy, and the government even accepted them for tax payments.

Law made his paper money even more valuable in late 1717, after he had taken control of the Mississippi Company.

The French Mississippi Company was something like the Dutch East India Company; it was a private enterprise that had received a royal monopoly over all the land and resources in France’s American colonies.

Almost immediately after securing rights to the monopoly, Law offered shares of the Mississippi Company to the public; it was like a giant IPO.

But Law sweetened the deal by allowing people to pay up to 75% of the share price using his bank’s paper money.

The Mississippi Company IPO was a smashing success. It was so popular that Law was offered bribes, sex, and political favors from French nobles in exchange for the opportunity to buy a few extra shares.

The famous philosopher Voltaire was eye witness to this, and wrote, “I myself saw him pass through the galleries of the Palais-Royal followed by dukes and peers, Marshalls of France, bishops of the Church.”

And at first the share price soared. Bear in mind the Mississippi Company had zero activity. Hardly anyone was living in France’s southern colonies in America, and there was virtually no trade or commerce going on.

The government even tried deporting criminals to America, trying to increase the population of the colonies. They offered hundreds of acres of land for free to anyone who would go. Yet economic activity still failed to transpire.

Eventually the French public realized the truth; there would be no gold, no gems, and no riches coming from the Mississippi Company. And the stock price began to quickly collapse.

Law tried to prop up the stock price by creating more paper money (backed by absolutely nothing), and using that new money to buy shares of the Mississippi Company.

But all he ended up doing was creating inflation; with so much new paper money circulating in the economy, prices everywhere rose.

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Do People Accept Money Because Government Endorses It?

Posted by M. C. on September 24, 2022

Money must emerge as a commodity because something can be demanded as a medium of exchange only if it has a pre-existing barter demand.

https://mises.org/wire/do-people-accept-money-because-government-endorses-it

Frank Shostak

Demand for goods arises because of perceived benefits. For instance, individuals demand food because it nourishes them. This is not so, however, about pieces of paper we call money, so why do we accept them?

According to Plato and Aristotle, the acceptance of money is a historical fact endorsed by government decree. It is government decree, so it is argued, that makes a particular thing accepted as the general medium of the exchange. Carl Menger, however, doubted the soundness of that view, writing:

An event of such high and universal significance and of notoriety so inevitable, as the establishment by law or convention of a universal medium of exchange, would certainly have been retained in the memory of man, the more certainly inasmuch as it would have had to be performed in a great number of places. Yet no historical monument gives us trustworthy tidings of any transactions either conferring distinct recognition on media of exchange already in use, or referring to their adoption by peoples of comparatively recent culture, much less testifying to an initiation of the earliest ages of economic civilization in the use of money.

Why Conventional Demand—Supply Analysis Fails to Explain the Price of Money

How does something the government proclaims become the medium of the exchange, acquiring value? We know that the price of a good is the result of the interaction between demand and supply. From this, we could reach a conclusion that the price of money is also set by the laws of demand and supply.

While demand for goods emerges because of perceived benefits, people demand money because of its purchasing power with respect to various goods. The demand for money depends upon the purchasing power of money while the purchasing power of money depends on the demand for money.

We are caught in a circular trap. (The demand for money is dependent on its purchasing power while the purchasing power is dependent for a given supply on the demand for money). The circularity seems to vindicate the view that the acceptance of money is the result of the government decree.

Mises Supports Menger’s Insight

Ludwig von Mises’s regression theorem supports Menger’s insights. Mises not only solved the money circularity problem, but he also confirmed Carl Menger’s view that money didn’t come from a government decree.

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Even When There Is Inflation, the Fed STILL Fights Falling Prices

Posted by M. C. on June 15, 2022

 Instead, the central scenario is surely that the Fed has flooded the system with so much money (only some of the excess removed during the period of hawkish turn and taking account of cumulative price rises) that the natural downward rhythm of prices will not show up in outward reality. Rather, the Fed will use the relief from symptoms of inflation in the consumer price data to double down on monetary inflation. This would show up at first in a new episode of asset inflation.

The more government helps…

https://mises.org/wire/even-when-there-inflation-fed-still-fights-falling-prices

Brendan Brown

Under any remotely sound money regime the aftermath of war and/or pandemic is highly likely to feature a sharp decline in the prices of goods and services on average. Even under unsound money regimes there are powerful forces operating towards lower prices once the war/pandemic recedes. Strong injections of monetary inflation, however, can overpower them.

The Fed and all the foreign central banks which follow its lead and/or doctrines are apparently of the intention that this time the decline in prices will not take place. Instead, they state the aim of their monetary policies, to be achieved within two years, as a decline of the inflation rate from present near-term highs to 2 percent.

In combatting the powerful “natural rhythm” of prices downwards in the aftermath of pandemic and war we should expect the Fed and foreign central banks to marshal a tremendous amount of monetary power. That will occur beyond an intermission where central banks are ostensibly trying to rein back the monetary inflation which has reached its peak virulence in 2021–22. 

Precise measurement of monetary inflation, including its stages, is impossible under the present monetary regime where the supply and demand conditions for monetary base—and the attributes of base money—have been deeply corrupted. In thinking about the next monetary inflation injections, history provides considerable insight.

The aftermaths of supply shocks are full of inflation danger, even though recession intervenes and mitigates this for some time. Monetary inflation has accompanied all the great supply shocks and sometimes preceded them as in the present case of pandemic and war. Here monetary inflation stretches all the way back to 2012/13.

In the aftermath of World War I and the Spanish flu pandemic (1918–19), US consumer prices fell by around 20 percent (from mid-1920 to end-1921). The fall in prices stemmed both from deliberate monetary deflation (starting in late 1919 as the Benjamin Strong–dominated Fed sought to reverse the monetary inflation in the half-year following the armistice) and the easing of supply restraints (with huge gluts developing for many primary commodities). 

After World War II there was an almost 5 percent decline in CPI from mid-1948 to the end of 1949, overlapping the recession of November1948 to October 1949. There was no sudden substantial monetary policy tightening during that time. But the around 30 percent rise of consumer prices during 1946–47 coupled with the constancy in outstanding supply of high-powered money stock meant this shrunk far in real terms. Accordingly, the overhang of excess money supply dwindled. 

Towards the end of the Korean War (1950–53) and into its aftermath consumer prices were relatively flat (mid-1952–55), having risen by almost 12 percent between mid-1950 and the end of 1951. That was despite the McChesney Martin Fed following an inflationary monetary policy as evident first in asset inflation and later in an eruption of consumer price inflation (the second half of the 1950s). In effect the “natural rhythm” downward of prices as wartime constraints eased and a sustained leap in productivity growth got under way meant that monetary inflation did not produce at first the symptom of consumer price inflation.

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