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My book Money Cycles - The Curse of an Elastic Money Supply is now available on Amazon:
You might have been told differently, but most economies today are never actually economically stable. Under current monetary regimes, financial stability is only a temporary phenomenon as economies around the world are in fact inherently unstable by design. Presently, this is the case more so than perhaps ever before.
In "Money Cycles", the curse of an elastic money supply is explained in detail and its effects on economic progress in general and the business cycle and stock market valuations in particular are exposed. The author presents a comprehensive account of how the banking system creates money and expands the quantity of money, how you can compile accurate and relevant money supply aggregates, and how the money cycle is the main determinant of the business cycle. In the final part of the book, the Austrian theory of the business cycle is described and applied to demonstrate how the money cycle determines stock market booms and the crashes that must follow.
I've included the preface and contents below for those keen on learning more about the book.
In today’s mixed economies, large-scale financial crises originate mostly in the banking sector, but are fundamentally caused by unsound monetary systems. It is the existing monetary system that brought about the previous banking crisis. It is also this system that will bring about the next one. I was not aware of this fact the day Lehman Brothers failed. This book is a result of research completed in recent years in an effort to understand the true nature of the business cycle, stock market cycles, and financial crises and why they will continue to be regular features of economic developments around the world.
Wall Street, hedge fund managers and other investment professionals, financial pundits and economists have few reservations about presenting their views on changes in asset prices, employment, interest rates, and trade. Very few of them however seem to incorporate changes in the quantity of money in their analyses. This to me remains a bit of a conundrum as the great majority of prices are quoted in monetary terms. This is also a primary reason this book deals extensively with monetary developments. The book’s focus on this subject must not however be misconstrued as it being the only relevant economic variable for economic progress or lack thereof. Nothing could be further from the truth. Having said that, it seems to me that the powerful effects changes in the money supply have on asset prices and economic progress is at best underestimated and at worst ignored. To my experience, this must be due to a lack of education and a general deprivation of exposure to this more than a century-old science. A goal of this book is therefore to reintroduce this old knowledge in a concentrated manner as the nonmonetary aspects of economics are written about extensively elsewhere by all schools of economic thought.
In many ways, this is a book about what transpires when increased consumption and investment are driven by inflationary credit growth rather than increased production and savings. It is the elastic currencies employed around the world today that make such moves away from economic equilibrium effortless. As it turns out, consumption and investment not fully backed by production and savings have important repercussions for not only the stock market, other asset prices, and prices in general, but more importantly for economic growth and people’s standards of living.
At the time of writing, financial markets appear to indicate all is swell. Major U.S. stock market indices are hitting new all-time highs. Underneath however, things are not quite so rosy. Many large European banks are struggling and Monte dei Paschi, the oldest surviving bank in the world today, is currently being bailed out with taxpayers’ money. Across the pond, U.S. banks are as poorly capitalised as ever though their cash balances, in total and compared to net assets, are substantially higher today than in 2008. The debt problems in the U.S. and many countries in the Eurozone have for years been attempted solved with more of what created them in the first place: more debt and lower interest rates. Consequently, the excesses accumulated during the previous decade have not been dealt with, but have instead been magnified. There is no painless way out of this economic mess. But for it to be dealt with conclusively causes, rather than symptoms, need to be addressed. Government spending and interventions must be reduced drastically over time. A determined move toward the implementation of hard currencies needs to be initiated. Central banks as lenders of last resort must be ended. If not, economic growth will increasingly become a relic of the past and increased poverty, not prosperity, will become firmly established as the norm. I attempt to answer why in this book. Economic regression has already been on its way for at least a decade and arguably much longer in many so-called developed nations. No matter what path is chosen, with the proviso that central banks will contain what they may deem “excessive” price inflation, cash will soon again be king and stock markets will again tumble. This year, 2017, might very well be the year when it all unravel once again.
The great majority of the sources used in this book were found on the Mises Institute website. This is not by design, but solely due to the tremendous collection of writings, especially old books, from the classical- and Austrian economics schools of thought the institute have made freely available to all. For that I thank the Mises Institute for opening up a whole new world of knowledge to me and many others. As Thomas Sowell once so wisely explained, "It takes considerable knowledge just to realize the extent of your own ignorance.”
Finally, facts have been presented as accurately as possible and established theories have been stated as fully as deemed necessary for the messages I try to get across. The interpretation of those facts and theories are in many cases subjective however and my analysis and conclusions may therefore at times differ even from others having a similar philosophy to mine. All errors and omissions are my own.
Norway, January 11th 2017
PART I. MONEY
CHAPTER 1. THE ROLES AND FUNCTIONS OF MONEY
CHAPTER 2. THE VALUE OF MONEY & LUDWIG VON MISES’ REGRESSION THEOREM
PART II. THE MONETARY SYSTEM & THE MONEY SUPPLY
CHAPTER 3. FRACTIONAL RESERVE BANKING
CHAPTER 4. CENTRAL BANKING: THE FEDERAL RESERVE
CHAPTER 5. THE MONEY SUPPLY
CHAPTER 6. MONEY SUPPLY AGGREGATES PUBLISHED BY THE FEDERAL RESERVE
CHAPTER 7. THE “AUSTRIAN” TRUE MONEY SUPPLY
CHAPTER 8. THE MONETARY BASE
CHAPTER 9. HISTORICAL DEVELOPMENTS OF THE U.S. MONEY SUPPLY AND MONETARY BASE
PART III. THE MONEY CREATION PROCESS
CHAPTER 10. HOW BANKS CREATE BANK CREDIT: MAKING LOANS AND BUYING SECURITIES
APPENDIX: THE DEPOSIT CREATION PROCESS: BANKS MAKING LOANS
APPENDIX: THE DEPOSIT CREATION PROCESS: BANKS PURCHASING SECURITIES CHAPTER 11. HOW THE FEDERAL RESERVE CONTROLS THE BANKING SYSTEM’S EXCESS RESERVES AND THE MONEY SUPPLY
CHAPTER 12. ALTERNATIVE MONETARY SYSTEMS: ELASTIC VS. INELASTIC MONEY
FULL RESERVE BANKING
THE GOLD STANDARD
PART IV. PRICES, VALUATION AND APPRAISAL
PART V. THE TIME MARKET
CHAPTER 13. THE LOAN MARKET: SAVINGS, BORROWINGS AND THE INTEREST BRAKE
CHAPTER 14. THE LOAN MARKET: THE SAVING-INVESTMENT RELATION
CHAPTER 15. THE FACTORS OF PRODUCTION: LAND, LABOUR, AND CAPITAL
CHAPTER 16. THE STRUCTURE OF PRODUCTION
PART VI. THE PURCHASING POWER OF MONEY
CHAPTER 17. THE MONEY RELATION
CHAPTER 18. CONSUMER PRICE INFLATION: THE SEEN AND THE UNSEEN
PART VII. ECONOMIC GROWTH
CHAPTER 19. MALINVESTMENT, OVERCONSUMPTION AND SQUANDERING OF MEANS
CHAPTER 20. WHAT “PRODUCTION” IS. AND WHAT IT IS NOT.
CHAPTER 21. THE IMPORTANCE OF PRODUCTION, SAVING, AND INVESTMENT: A TALE OF TWO ISLANDS
SAY WHAT, PRODUCTION OPENS A DEMAND FOR PRODUCTS?
CHAPTER 22. THE ECONOMIC MEANING OF PROFIT
CHAPTER 23. THE ECONOMIC SIGNIFICANCE OF SAVING
FORCED SAVING AND INVOLUNTARY SAVING
CHAPTER 24. THE ECONOMIC CONSEQUENCES OF DEBT
LACK OF LENDING – THE CULPRIT FOR LACKLUSTRE ECONOMIC GROWTH?
CHAPTER 25. ECONOMIC GROWTH: NATURAL AND INFLATIONARY – SOUND AND UNSOUND
NATURAL ECONOMIC GROWTH
CHAPTER 26. A NOTE ON ECONOMIC ACTIVITY
CHAPTER 27. A NOTE ON GDP
PART VIII. MONEY CYCLES & THE ECONOMY
CHAPTER 28. MONEY CYCLES DEFINED
CHAPTER 29. THE BANK CREDIT CYCLE
CHAPTER 30. THE BANKING CRISIS – A HOUSE OF CARDS
CHAPTER 31. THE AUSTRIAN THEORY OF THE BUSINESS CYCLE
CHAPTER 32. THE CONTRADICTORY MISSIONS OF CENTRAL BANKING: STABLE PRICE INFLATION & ECONOMIC STABILITY
CHAPTER 33. THE “ECONOMIC STIMULUS” FABLE AND THE MONETARY CRANK
PART VIIII. MONEY CYCLES & THE STOCK MARKET
CHAPTER 34. THE FUNDAMENTALS OF A STOCK MARKET BOOM
INDIRECT AND DIRECT EFFECTS OF AN EXPANDING MONEY SUPPLY ON STOCK
CHAPTER 35. THE FUNDAMENTALS OF A STOCK MARKET CRASH
CHAPTER 35. THE FUNDAMENTALS OF A STOCK MARKET CRASH
CHAPTER 36. THE STOCK MARKET AS A LEADING RECESSION INDICATOR
CHAPTER 37. STOCK MARKET SELL-OFFS AS RECESSION TRIGGERS
CHAPTER 38. THE MONEY SUPPLY-TO-SAVING RATIO
CHAPTER 39. MONEY CYCLES – A SHORT SYNTHESIS