Oztok: Why you should be more skeptical of good economic news | Opinion

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“What I want to emphasize is that these actions are not market phenomena. What I mean by that is that if the market signals are not coming from the law of supply and demand and free transactions between businesses and individuals, but rather from a central planning authority, then market price signals will be distorted,” writes columnist Murat Oztok.




Iowa Secretary of State Paul Pate recently announcement that Iowans recorded the most new business entities in fiscal year 2022 in state history.

According to the report, 33,331 new businesses registered with the secretariat between July 1, 2021 and June 30.







new business records

According to the report, 33,331 new businesses registered with the secretary’s office between July 1, 2021 and June 30, 2021.




“Despite rising inflation and supply chain disruptions, this data shows Iowa entrepreneurs are investing in businesses in our state,” Pate said. declared. “I’m very proud of the work we’ve done to make it faster and easier than ever to start a new business in Iowa.”

The press release highlighted the importance of the recently implemented reduced filing fees and accelerated filing system as the reason for the record increase in business filings.

Although it sounds hopeful and conveys a positive message, it produced the opposite reaction when I first read it. Let me explain why.

A large amount of data and research papers in the field of economics show the relationship between government regulation and business activity. I support the idea of ​​speeding up the process of starting a business because, in general, removing additional barriers caused by government bureaucracy will make entrepreneurs more likely to start a new business, which will lead to more businesses in the long run. . I have to give the secretary some credit, but I can’t go without saying that the reason we’ve seen such a big increase wasn’t caused by these process adjustments alone. In fact, it probably contributed very little to the overall spike. But if it’s not the new implementations that caused this boom, then what is?

For a short answer, we need to look at Pate’s statement again from a different angle. He said “despite the rise in inflation”, but to properly assess the situation, the first part of the sentence must be replaced by “because of the rise in inflation”.

In my previous article, I talked a bit about inflation. In summary, you will get price increases if you have too much money for too few goods. Before explaining my reasoning further, let’s check the overall US data to see if the upward trend was only prominent in the state of Iowa.







monthly business applications

“As you can see from the graph, the increase in business apps is a trend we’re seeing across the country. You can check out the business start stats report if you want more information,” writes columnist Murat Oztok.



As you can see from the graph, the increase in business apps is a trend we’re seeing across the country. You can view business creation statistics report if you want more information.

You might be thinking, “If we get more business start-ups and a boost in entrepreneurship, then this inflation story can’t be as bad as people say, can it? unfortunately, it’s not that simple. So what is the relationship between rising inflation and increased business activity, and why am I skeptical of “good news”?

The Federal Reserve, the central bank of the United States, lowers interest rates to stimulate economic growth. After COVID-19, the central bank set rates at an effective lower bound of 0-0.25%, which is historically very low. They did this because they predicted the effects and lockdowns of COVID-19 would weigh on economic growth and pose risks to the labor market, so they wanted to encourage more borrowing and spending.

What I want to emphasize is that these actions are not market phenomena. What I mean by this is that if market signals do not come from the law of supply and demand and free transactions between businesses and individuals, but rather from a central authority of planning, then market price signals will be distorted.

When market signals are distorted, in this case the Fed keeping rates artificially low, then many business and investment opportunities will appear more profitable than they actually are. The inability of investors to accurately predict either the pattern of consumer demand in the future or the eventual availability of more efficient ways to meet consumer demand leads to a bad investment. Bad investing is always the result of people’s inability to accurately predict future conditions. But these errors are usually compounded by the deceptive effects of hidden inflation.

For historical comparison, the Fed in the late 1920s artificially kept interest rates low, causing a boom, especially in the stock market. In the era known as “The Roaring Twenties”, stock prices rose 50% in 1928 and 27% in the first ten months of 1929. The Fed attempted to calm what it considered such as an overheated stock market by tightening credit, which ended the economic boom and caused the Great Depression.

Ludwig von Mises, whom I consider to be the greatest economist and political scientist of the 20th century, brought a whole new perspective to understanding money, inflation and recessions and provided arguments against mainstream economic thinking. In his book “Human Action”, he writes: “The popularity of inflation and credit expansion, the ultimate source of repeated attempts to make people prosperous by credit expansion, and therefore the cause of fluctuations business cycles, is clearly manifested in the usual terminology. The boom is called good business, prosperity and recovery. Its inevitable consequences, the readjustment of conditions to real market data, are called crisis, collapse, bad business and depression. People rebel against the idea that the “element is to be seen in the bad investment and overconsumption of the boom period and that such an artificially induced boom is doomed to failure. They are looking for the philosopher’s stone to make it last.”

This is why I worry about positive economic news that is out of the ordinary. We live in strange times and should probably ask ourselves often if we are interpreting data from an unbiased and objective perspective.

I want to end this article by sharing the story of Nobel Laureate Milton Friedman Quotation on inflation.

“Inflation is like alcoholism, either way, when you start drinking or when you start printing too much money, the good effects come first, the bad effects come later. “

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