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Now, Austrian business cycle theory holds that
increases in the money supply that stimulus more generally,
leads to increases in prices as
a process of the distortions in the economy's capital structure
that are brought about up through credit expansion. What austrians call, 'mal
investment.'
Now, some critics of Austrian business cycle theory,
Paul Krugman for example, have said the fact that
consumer prices, measured by the CPI, have not increased dramatically
since 2008, is a very strong argument against
Austrian business cycle theory. According to these critics,
Austrians- or they say, Austrians would have expected
Zimbabwe style hyper-inflation as a result of quantitative easing
and the other sorts of stimulus programs. We haven't seen anything like that,
consumer prices have been relatively stable, therefore the Austrians must be
wrong,
we must really be in a Keynesian style liquidity trap,
the economy must be operating below potential, we need even more stimulus.
Now, these kinds of arguments fundamentally misunderstand,
maybe deliberately so, what the Austrians have said about credit
expansion.
Austrian economics holds that credit expansion and other kinds of stimulus
causes mal investment in the economy. Investment in the wrong kinds of goods
and services.
In particular, increased investment in capital-intensive,
lengthy, or more roundabout, capital goods
and structures of production. This does cause distortions
in the economy and it does artificially increase prices
in particular sectors. But nowhere in Austrian business cycle theory
is it claimed that the immediate effect of credit expansion
is a rise in consumer prices, much less a rise in
an artificially constructed and increasingly meaningless
aggregate, such as the CPI. In fact, if you look at prices
of valuable assets, we see a great deal of
asset price inflation since 2008.
Prices of equities, stock market of course, is one example,
prices of commodities, minerals, and so forth.
Land, in particular agricultural land, collectibles and other valuable items,
those prices have increased dramatically since 2008.
Such that around the world many commentators are beginning to worry
about asset price inflation
and asset price bubbles. So,
events since 2008 have
strongly- are looks very consistent with what the Austrians have said
about the effective monetary policy. Namely, were not helping the economy,
we're not creating real growth, we're simply perpetuating the mal
investments
that got us in trouble in the first place with the financial crisis
and the recession.