Tuesday, July 01, 2008

Frank Shostak's Confused Analysis

Frank Shostak today had an article on mises.org that was confused even by his standards. I don't have the time or will to correct all of his errors, but I'll discuss the two most important.

He for example asserts that "It is not possible for increases in the price of oil to set in motion a general increase in the prices of goods and services without corresponding support from the money supply."

But this overlooks the question as to just how this oil price increase happened in the first place if it wasn't caused by a higher money supply. Presumably, such an autonomous increase in the price of oil would be caused by falling supply for the home market (either in the form of falling total oil production or increase in foreign demand, which in the latter case means that the available global oil supply is diverted to foreign bidders). And since that falling supply of oil isn't cancelled out by any increase in the supply of other goods and services, this means the total supply of goods and services will fall. Lower supply of goods and services will given a certain money supply always raise the average price level.

Shostak's insistence on ignoring non-monetary factors is all the more puzzling since his money supply definition asserts that money supply have been stagnant since late 2004. While monetary factors usually tend to work with a time lag, the time lag is growing implausible long for Shostak to be able to explain the doubling of the oil price and general acceleration of price inflation with monetary inflation. This in turn implies that either his money supply definition is wrong or his analysis of the connection between money supply and prices is wrong. Or as a more likely third alternative, both of his theories are wrong.


Anonymous Larry said...

Stefan, I recommend that you educate the world on Austrian view. Not on bickering on which money supply measure to use. God knows the world's central bankers needs a lesson.

3:32 PM  
Blogger stefankarlsson said...

Bickering on which money supply measure to use may seem like a technical issue, but since using the wrong measure not only yields false signals for investors but also potentially discredits Austrian analysis, this is an important point.

9:20 PM  
Anonymous newson said...

from the chart i'm looking at, tms has dropped from a growth rate of 18% yoy in jan 2002 to 5% in jan 2008, having bounced off zero in 2007.

given tms only calculates us money growth, and that commodity prices are arguably more international than equity markets, who can say whether shostak's right or wrong about predicting commodity prices?
looking at a monthly oil chart, it has been almost exponential since 2007, and is certainly ripe for a technical correction. there's so much buzz in the mainstream media about oil, typical of a blow-off top. but shostak is wrong to be calling the oil market a bubble.

8:00 AM  
Blogger stefankarlsson said...

Newson, according to Frank Shostak himself the yearly growth rate was just 0.4% in the first quarter of this year, see here.

Possibly, this divergence is caused by the fact that he at least in the past did not include savings deposits and in this case likely used a number that didn't, while the so-called TMS measure published on mises.org does include savings deposits.

4:19 PM  
Anonymous newson said...

one other thing that always confuses me with shostak is the frequent reference to "the real pool of savings". supposedly that is an echo of mises' subsistence fund, but given it is an entirely hypothetical beast, and its health or otherwise could only be surmised after the fact (ie in recession one could conclude that the pool is drained), it seems a pointless abstraction.

what do you reckon?

5:08 PM  
Blogger FrankSlade said...

"Lower supply of goods and services will given a certain money supply always raise the average price level."

So if the amount of oil halves and its price doubles, and all other prices remain the same, you are describing this as an increase in the average price level?

2:06 AM  
Blogger stefankarlsson said...

Of course I do. And so would anyone familiar with the meaning of the concept "average". (Not that all other prices really are likely to stay unchanged).

10:37 AM  

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