Monday, May 14, 2018

Monetary Fallacies and Inflationary Bubbles

Ludwig von Mises
Richard Ebeling emails:

Dear Bob,

I have a new article on the Future of Freedom Foundation website on, “Monetary Fallacies and Inflationary Bubbles.”

 Is America heading for a continuing period of growth and prosperity, or is the country possibly facing another economic downturn due to, at least partly, an artificial boom? Its never easy to know what the future holds in store, but the task is made a bit easier through the Austrian theory of the business cycle.

Ninety years ago, in 1928, the Austrian economist, Ludwig von Mises published,
“Monetary Stabilization and Cycle Policy.” Many things have happened over the last nine decades, but Mises’ monograph still holds invaluable insights about money, monetary policy and the causes of the business cycle.

His criticisms of attempts to “scientifically” measure the price level and price inflation are still fundamentally valid in our own time, when central banks declare that their monetary policy goal is to “target” price inflation at two percent a year. Equally still relevant is his analysis of how monetary expansions generate distortions and imbalances in the “microeconomic” structure of relative prices and wages, that bring in their wake misallocations of resources, capital and labor, that are hidden from view when the “macroeconomic” focus is on the general and average rate of price inflation.

This takes on especial significance, Mises explained, when the central bank’s “injection point” from which increases in the supply of money and credit are introduced is the banking system. The result is an artificial lowering of market rates of interest that create mismatches between real savings in the economy and amounts and types of investment that will be found to be unsustainable in the longer run. Thus, monetary-induced “booms” inescapably end in economic and financial “busts.” The history of the boom that preceded the 2008-2009 financial and investment and housing bust is easily traced out with the assistance of the Austrian theory of inflations and recessions.

Thus, though written many decades ago, Ludwig von Mises’ “Monetary Stabilization and Cyclical Policy,” is still a useful guidebook for understanding the economics of our own time.



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