Free Essay About Economics Article Summary And Analysis
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The article reports on the True Austrian Money Supply (TMS2) that represents the broadest and preferred aggregate money supply for US. The supply had a decrease in year-to-year growth to 7.9% in August from the 8.2% in July. However, the rate is still within the country’s 20 years average of 8%. TMS2 comprise of currency and money substitutes including savings deposits, demand deposits, foreign deposits and government deposits. The author further states that Federal Bank takes a decrease in TMS2 seriously owing to the increasing possibility of a deflation bust. (Pollaro, 2014)
In addition, the Author explains the decrease’s possible effect with reference to the Austrian boom-bust model. In line with Austrian’s teaching that monetary inflation finally results to deflation busts, a bust could be expected given that the money supply is decreasing at rates that were experienced during the prior boom-bust cycles. However, the Author notes that other factors need to be considered in assessing possible busts including the level of economy’s debt, as well as leverage in the financial markets. (Pollaro, 2014)
In view of the article, the decrease in TMS2 in August 2013 was an indication of increasing risk for a monetary bust. That has been evidenced in the past trends where such decreases lead to busts such as the technology boom-bust and the housing boom-bust. Economic theory supports the author’s argument that a decrease in the money supply would result in an economic bust as shown on the following graph.
With initial money supply at TMS2, a decrease in the money supply would result in a shift to TMS2*. The shift would lead to change in interest rate from i to a higher interest rate i*. The resulting effect would be the inability for borrowers to meet their obligations hence the bust resulting in a financial crisis. The same case applied in the technology and the housing boom busts. (Barron & Lynch, 1989)
Barron, J. & Lynch G. Economics. London: Richard D. Irwin Inc. 1989. Print.
Pollaro, M. Deceleration in the Money Supply Increasing the Risk of an Economic Bust.
Forbes, 23 September 2014. Web. 13 Feb. 2015. http://www.forbes.com/sites/michaelpollaro/2014/09/23/deceleration-in-the-money-supply-is-increasing-the-risk-of-an-economic-bust/
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