tag:blogger.com,1999:blog-8897997766931633186.post3136435167366313760..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: More Austrian Cycle TheoryBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-8897997766931633186.post-83412574370341784582010-04-22T07:06:17.159-04:002010-04-22T07:06:17.159-04:00Steve:
I am making the last point. Once the pri...Steve:<br /><br />I am making the last point. Once the price level has adjusted enough to get rid of the excess supply of money, the source of added real credit supply is gone and the market interest rate equals the natural interest rate. There is no more source of distortion in relative prices.<br /><br />And I am arguing that this process is unlikely to last long enough to generate significant investments based on the distorted relative prices (or really, composition of demand.)<br /><br />I am writing this comment after I have made a new post where I suggest that perhaps the liquidity effect of an excess supply of money can add persistence.<br /><br />I also plan to take back my statement about Mises going wrong with interest rate targeting--that is what central banks love to do.<br /><br />On the other hand, if we are thinking about an regime of steady money growth aimed at stable cash expenditures growth, stable price inflation, or just money supply targeting, any malinvestments that are systematic effects of monetary disequilibrium get liquidated. I can't see how it couldn't be within a few years at most. But then there are these public finance impacts that last as long as the regime lasts.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-9047839149748801152010-04-18T15:18:03.785-04:002010-04-18T15:18:03.785-04:00Steve:
Thanks for the comment.
I will think more...Steve:<br /><br />Thanks for the comment.<br /><br />I will think more about it.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-56794930853355082372010-04-18T13:58:10.356-04:002010-04-18T13:58:10.356-04:00"To the degree the inflation process involves..."To the degree the inflation process involves excess supplies of money and money is being lent into existence, the market rate is pushed below the natural interest rate and the demands for more interest elastic goods expand relative to the demands of less interest elastic goods. However, this results in larger or smaller shortages of these goods. This might impact the composition of output, but the entire process only lasts as long as there is an excess supply of money. Once prices adjust enough so that the real quantity of money equals the real demand for money, and they are growing together, there is no more impact on the composition of demand and so no tendency to impact the composition of output."<br /><br />Bill: aren't you missing the key Austrian point that you do recognize in the public finance version? Namely: once the demands for final goods begin to shift, derived demand will lead to shifts in the structure of capital (including human capital) to produce more of some goods and less of others. Because some, if not most, of those investments in human and physical capital are irreversible or are costly to refit to later demands, they will lead to persistent distortions in the cost of production that would not have appeared in the absence of the inflation. <br /><br />I agree with you, of course, that we can get back to monetary equilibrium *in the aggregate* through price adjustments that equilibrate the real demand and supply of money, but as Hayek said of Keynes, those aggregegates also conceal the most important processes of adjustment. <br /><br />Returning to ME does not mean all of the errors of the disequilibrium adjustment process are also wiped out. Capital goods (and human capital) cannot be costlessly refit and any response in their composition due to the inflation will persist.<br /><br />Now you might say that the disequilibrium process is sufficiently short that no owners of capital will have reason to engage in substitution or new investment in response to inflation-distorted prices. Maybe, maybe not, but that's a different question.Steven Horwitzhttp://myslu.stlawu.edu/~shorwitznoreply@blogger.com