Mises knew that breakdowns of economic activity were the inevitable outcome of government interference in the monetary sphere. However, public opinion has not correctly diagnosed the root cause, regularly blaming instead the free market system — rather than the government — for the malaise. In times of crisis, people call for more government intervention in all sorts of markets, thereby setting into motion a spiral of intervention which, over time, erodes the liberal economic and social order.

It is therefore a rather discomforting truth that today’s governments the world over produce fiduciary media, the very kind of money Mises had warned us against.

It is an inflationary regime. The relentless rise in the money stock necessarily reduces the purchasing power of money to below the level that would prevail had the money supply not been increased. Early receivers of the new money benefit at the expense of those receiving it later.

What is more, the creation of fiduciary media artificially suppresses market interest rates and thereby distorts the intertemporal allocation of scarce resources. It leads to malinvestment, which must eventually erupt in collapsing output and employment. FULL ARTICLE

The diagnosis can be stated in just one sentence: Governments have caused the financial and economic debacle by suppressing the free market. And the recipe for ending the debacle reads as follows: Only the free market, and not the government, can end it. FULL ARTICLE

People are being told by governments, central bankers, and leading mainstream economists that money-base expansion is not inflationary — because the money would remain in the portfolios of banks and would not spill over into the hands of firms and private households. This is, to put it mildly, an uninformed view. Let us start right from the beginning, FULL ARTICLE

Suppressing market interest rates to the lowest level possible seems to have become a key objective for central banks around the world as they respond to the turmoil in financial markets, the decline in output and the deterioration in the labor market.However, it is a fatal policy: it amounts to fighting the correction of the debacle which has been caused by central banks’ downward manipulation of interest rates through a relentless increase in bank circulation credit and the money supply. FULL ARTICLE

Mises knew that capitalism, for a number of reasons, has politically powerful enemies. The most powerful, most destructive, and most vicious and subversive of these would be false monetary theory and, as a result, a misguided monetary system, as it inevitably will destroy the free societal order. “It would be a mistake to assume that the modern organization of exchange is bound to continue to exist. It carries within itself the germ of its own destruction; the development of the fiduciary medium must necessarily lead to its breakdown.” FULL ARTICLE

The German hyperinflation was the result of a policy that considered the financing of government debt by an accelerating increase in the money stock as the politically least unfavorable method. It seems that the state of opinion hasn’t actually changed much. Today, there is great public support when it comes to expanding the base-money stock for financing ailing banks, insurance companies and, most important, rising government debt. FULL ARTICLE

The government-controlled monetary regime — the most destructive force set into motion by state interventionism — has finally been blown to pieces. This is the message conveyed by the monetary fiasco in global capital markets, typically referred to as the international credit crisis. However, politicians and central bankers the world over are taking great efforts to hide this truth and its full consequences. FULL ARTICLE

Whenever financial markets set out to end the disastrous process through, a decline in economic activity, governments and their central banks will do whatever it takes to keep the fiat-money system going: lowering interest rates by increasing credit expansion and increasing the money supply. In the current situation, however, banks’ capacity to keep expanding the credit and money supply has been greatly diminished. FULL ARTICLE

Whatever the technicalities for propping up the government-sponsored paper-money systems may be, the decade-long debt binge will most likely end in inflation. This is because the “crisis” is widely perceived as a calamity — rather than the necessary economic correction of malinvestment brought about by central banks’ manipulation of market interest rates through credit and money expansion. On top of that, people fear deflation much more than inflation. Lower interest rates and more credit and money are seen as a remedy of the disease brought about by central banks’ artificial lowering of the interest rate through credit expansion. FULL ARTICLE

Mises’s work on the logical status of the science of economics needs to be brought back to public attention: his work actually forms the intellectual bulwark against the degeneration of the free societal order. The positivist-empiricist doctrine, which forms the core of today’s mainstream economics, is not only an intellectual failure; it also encourages — actually provokes — social relativism, thereby opening the door to anti-free-market policies, which, once set into motion, are difficult to reign in. In that sense, positivism is, if put into practice, an anti-capitalist doctrine. FULL ARTICLE

To Austrian economists, the so-called international credit market crisis is a prima facie case of the inherent destructive tendency of government-controlled paper money: it is the consequence of an excessive expansion of credit and money, which encourages uneconomic investment and leads to unsustainable debt burdens.

Once the inflation-fueled boom (the time span in which malinvestment occurs) is about to turn into bust (the period in which malinvestment is corrected), the government-sponsored central bank steps in and lowers the interest rate, in an effort to reverse the economic downswing into a boom.

Mises was aware that an inflation policy could not go on forever, but must break down sooner or later: “the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears.” FULL ARTICLE

The so-called “credit crisis” is gaining momentum. Investors increasingly question the solidity of the banking system, as evidenced by banks’ tumbling stock prices and rising funding costs. With bank credit supply expected to tighten, the profit outlook for the corporate sector, which has benefited greatly from “easy credit” conditions, deteriorates, pushing firms’ market valuations lower. In fact, peoples’ optimism has given way to fears of job losses and recession on a global scale.

The obsession with a policy of lowering the interest rate is rooted in a deep-seated ideological aversion against the interest rate. It is a destructive ideology, in particular if the government is in charge of the money supply. Because then the government central bank will lower the interest rate to whatever is deemed appropriate from the viewpoint of the government, pressure groups, and vested interest. FULL ARTICLE

The turmoil in the US subprime mortgage market has developed into an international credit crisis. It is eroding investor confidence in credit and credit-related products and, most important, raising concerns about the solidity of the banking sector, as evidenced by banks’ elevated funding terms and diminished stock prices.

As a direct response to the credit crisis, the US Federal Reserve Bank first paired the Federal Funds Target Rate twice — by 50bp on September 18, another 25bp on October 31, and another 25bp on December 11 — bringing the official rate to 4.25%. The lowering of borrowing costs came despite the fact that the FOMC had been stressing “inflation risks” since early 2006.

The cause of the international credit crisis has a name: the government-controlled paper-money regime.The turmoil in the US subprime mortgage market has developed into an international credit crisis. It is eroding investor confidence in credit and credit-related products and, most important, raising concerns about the solidity of the banking sector, as evidenced by banks’ elevated funding terms and diminished stock prices.

As a direct response to the credit crisis, the US Federal Reserve Bank first paired the Federal Funds Target Rate twice — by 50bp on September 18 and another 25bp on October 31 — bringing the official rate to 4.5%. The lowering of borrowing costs came despite the fact that the FOMC had been stressing “inflation risks” since early 2006. Then it dropped rates again in December.

The cause of the international credit crisis has a name: the government-controlled paper-money regime. This is the diagnosis when taking on board the theoretical insights provided by the monetary theory of the trade cycle (MTTC) as developed by Ludwig von Mises, one of the leading scholars of the Austrian School of economics. FULL ARTICLE

Why, after years of the market’s neglect of gold, is the paper money price of gold now on the rise? Would it be too far-fetched to assume that it could reflect market agents’ growing concern about a forthcoming great inflation of government controlled paper money?

Tensions in credit markets might indeed provoke fears that central banks could, by way of lowering interest rates, pump even more credit and money into the economies, in an attempt to fend off a credit crisis and potential losses in output and employment.

Mainstream economists may be relaxed about such a policy provided “inflation” — typically defined as a change in the consumer price index — remains “low.” Austrians, in contrast, not only consider an increase in credit and money supply inflationary; they would also point out that the very process of a relentless increase in government-sponsored credit and money supply is a recipe for disaster, that it will ultimately end in the destruction of the currency. FULL ARTICLE

The repercussions of the turmoil in the US subprime mortgage market are increasingly being felt around the world. What was initially thought to be a problem confined to a US credit market segment has increasingly transformed itself into an erosion of investor confidence in credit quality in general and, in some countries, concerns about the reliability of the banking sector.

The most obvious symptom of eroding confidence is the alleged “liquidity crisis.” The term “liquidity” usually denotes the possibility to buy or sell a financial asset at any one time without causing noticeable changes in the price of the product being bought or sold. Market participants speak of “illiquidity” when it is no longer possible to sell financial products, or if selling is possible only at greatly diminished prices.

In recent weeks, a number of financial market segments have indeed become illiquid in the sense defined above. FULL ARTICLE

Today’s national money regimes bear no resemblance to Mises’s sound-money principle. The quantity and quality of money is no longer a free-market phenomenon; it is determined by government-controlled central banks. From the Austrian point of view, today’s money regimes — even when taking into account the protections against government monetary mismanagement — would be incompatible with Mises’s principle of sound money. In fact, Austrians consider today’s monetary order a serious threat to the free societal order. FULL ARTICLE

Under today’s government-controlled paper-money standards, the world’s major economies have embarked upon an unprecedented expansion of credit, starting in the early 1980s. As credit growth has been outstripping economies’ rise in output, total debt levels in percent of gross domestic product (GDP) have increased strongly. Today, as soon as the credit pyramid showed the slightest signs of potential unwinding, central banks would be pressed to lower interest rates. This is because the public at large sees lower borrowing costs as a remedy against crisis — rather than its cause. What is more, highly indebted social groups have a preference for inflation, and an aversion to deflation. That said, a highly leveraged society might even be ready to accept a deliberate policy of (“controlled”) inflation rather than agree to a period of declining prices. FULL ARTICLE

The Austrians’ great concern is that a government-dominated money-supply regime would ultimately lead to economic and therefore political disaster; the objective of price stability would not alter such a dismal prediction. Even if a central bank succeeds in stabilizing a targeted price index, it would — by an ideologically motivated increase in credit and money supply — generously increase credit and money supply. It thereby distorts the economy’s price mechanism, promotes malinvestment and initiates subsequent economic downturns. And it is actually the latter with which the trouble really starts. FULL ARTICLE

Even under a regime in which government controlled central banks pursue deflation targeting there would be the risk of creating unsustainable debt levels for private households, firms and governments. A rising indebtedness (relative to income), in turn, would sooner or later tip the balance of societal preference in favor of debasing the value of money.

From the Austrian point of view, a government controlled money supply system, coupled with the price level stabilization idea, is inherently crisis prone, irrespective of inflation targeting or deflation targeting. That is why Austrians argue for an unconditional return to free-market money. They see it as a solution to the dangers emerging from today’s monetary regime. FULL ARTICLE

Had the gold standard been upheld, world economies had been spared many of the severe fiat-money-induced economic, social and political crises experienced seen in the latest decades, from which resulted the growing disenchantment with the idea of a free market order. A good first step forward: stopping any increase in the money supply. FULL ARTICLE