This book presents a detailed theory of fluctuations in the level of economic activity in a mixed economy based largely on microeconomic principles applied to the fractional reserve banking system. the intention is to explain the cause of the depression of the 1930s and to account for the post-World War II economy. Although certain elements in society receive credit for promoting destructive economic policies, the cause of depressions as presented here remains the relatively unknown central banking system itself--aggravated by mismanagement of the existing system.

This theory can be called the distortion theory of the business cycle and can be generalized into a theory of the longer, more interesting inflation/depression cycle. This information has high potential value to business economists, investors, and talented amateurs.

Macroeconomic cycles derive primarily from one variable--the behavior of the money supply. If you can know only one thing, you want to know the path of the money supply over the forecast period. This allows you to address the two most important macroeconomic variables: price inflation and the cyclical state of the economy.

Inflation

The lag profile for new monetary growth becoming price inflation covers a four-year period. For that period, after new money is injected into the system, it causes price inflation. the mean and strongest lag is two years (see Figure 8.2). This lag profile lasts long enough for the lag reaction alone to allow considerable progress in forecasting inflation. If . . .