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Economic malinvestment will always be a phenomenon that arises naturally in a free market - its a product of imperfect information. Thus, isolated booms and bus
by Qasaur 7y ago
Economic malinvestment will always be a phenomenon that arises naturally in a free market - its a product of imperfect information. Thus, isolated booms and busts are also a natural occurence in an economy as companies that aren't profitable shutdown due to aforementioned judgement errors.
The fundemental question behind the development of Austrian monetary theory is not why there are booms and bust, but why these errors of judgement occur throughout the economy in often times very different sectors at the same time. Turns out this is more often than not because of significant, and crucicially, artificial distortions to the price system that causes resources to be put to use in places where they otherwise would not be, and creates illusions of profits to those who control said resources (individual employees, investors, executivies in companies etc.). Eventually the law of scarcity catches up, and the bust materialises and prices realign themselves (through deflation, which establishment economists are terrified of) to what they should be in a natural price system.
The only way to avoid this inevitable deflationary collapse of prices is to continue the illusion, of course, which is what central banks have been doing since 2008. This makes the eventual realignment much worse though since the price system continues to be distorted to an extent larger than it previously was.
The panics that occured prior to the instatement of the Federal Reserve were more often than not caused by either inflationary policies pursued by the the Treasury and general government interference, as was the case in the panic of 1907 in an effort to save overleveraged banks, or overextension of credit (and consequent overexpansion of the money supply) by fractional-reserve banks. In most cases however, these recessions resolved themselves rather quickly and did not lead to prolonged depressions and recovery periods like we saw in the 1930s during the Great Depression.
- QuesnayJr 7y agoRead Friedman and Schwartz' Monetary History of the United States. The Great Depression was so severe because the money supply contracted so suddenly, which led to the largest deflation in US history. Mainstream economists worry about deflation because in the 30s it nearly doomed the entire system. The single largest quarter of growth in US history was the first quarter of FDR's first term, when he stopped the money supply from contracting further with the bank holiday and stopped defending the gold standard. It is amazing to me that we live in an era with tiny amounts of inflation despite large central bank interventions, and yet Austrians still presume to claim that their theory is vindicated. Prominent Austrians claimed we would have runaway inflation after QE, and it just didn't happen. There are no set of facts that will ever cause Austrians to admit their theory is wrong.
- Qasaur 7y ago>It is amazing to me that we live in an era with tiny amounts of inflation despite large central bank interventions, and yet Austrians still presume to claim that their theory is vindicated. I think it is amazing to me that economists have redefined the definition of inflation from an increase in the money supply to an increase in the consumer price index. Yes, we haven't seen significant rises in CPI yet, but you cannot deny there has been hyperinflation in other sectors of the economy like equities and real estate. As far as I can tell mainstream economists don't really believe in the Cantillon effect (that inflation happens in a gradual sector-by-sector fashion) so inflation in certain sectors of the economy is unthinkable as, according to them, money is neutral and inflation always happens everywhere at the same time and that for some reason CPI is the best measure for this. This is categorically and logically wrong and does not hold up to critical analysis. >Prominent Austrians claimed we would have runaway inflation after QE, and it just didn't happen. Just because it hasn't happened yet does not mean it won't happen. All fiat currencies have always throughout history, without exception, and always for the same reasons, ended with hyperinflation and the total destruction of the currency. I don't see how the US Dollar possesses properties that renders it immune to monetary laws.
- QuesnayJr 7y agoA general rise in the price level is what inflation means and what it's always meant. Even under the quantity theory of money there isn't a one-to-one correspondence between prices and the money supply, because the velocity of money has changed. The Fed and the BoE tried targeting the money supply in the early 80s, and they were unable to control the inflation rate because the velocity jumped around. We haven't seen hyperinflation in equities or real estate. Both are below their historical highs. Anyway, it's not "inflation" it's an asset bubble -- prices are too high given underlying cash flows. And if investors are so incompetent at investing that an increase in the money supply makes them immediately blow it at the casino, that's a strong argument that we can't trust markets to invest. The Austrian argument leads inexorably to an anti-Austrian conclusion. (I'm not convinced, but I'm not the one who thinks there's necessarily an asset bubble.) Nobody thinks CPI is automatically the best guess of inflation -- it's just one attempt. Everyone knows that prices don't all go and up and down together, and we have to use a proxy. Anyway, the Fed doesn't use CPI. They use PCE deflator, and they only consider goods where price changes are more persistent (so called "core inflation"). The vast majority of fiat currencies have not experienced hyperinflation so far. In contrast, all gold standard currencies have gone off the gold standard, so the historical evidence points strongly towards fiat, not against.