During my normal daily pleasures of reading through the mises site I came across a post by Robert Murphy. While reading the comments I startled upon a minor epiphany regarding the ABCT and was hoping to get some clarity. I have not had a chance to read into great detail about the ABCT yet and wanted to get some clarification from those who have.
Does the ABCT claim that booms. due to the nature of their cause, can create:
A) HyperInflation as more credit is made available to sustain a perpetual boom
B) Natural resource scarcity as more credit is made available mis-allocatioons of resources are dropped into unsustainable industries in the form of malinvestment. Promoting the boom only further promotes the misplacement of competitive resources. Ultimately, and possibly, causing a shortage of resources which also drive up prices of actual desireable goods as all objects created compete for the same underlying pool of resources.
C) A or B, and/or A and B together?
I understand I need to read up on it but if anyone can breifly clarify I’d truely appreciate it.
B. Inflation from a central bank creating money out of nothing or from fractional reserve banking gives businesses incorrect signals about the future of the marketplace. These business make investments in areas that can only be sustained with continued credit expansion. Sooner or later the central bank to fight inflation or the depositors of fractional reserve banks hastily withdraw their money causing the banks to raise interest rates(Even a little). The businesses depending on the cheap credit find they can nolonger get it and become unprofitable.
As for hyperinflation, ONLY a central bank with the force of government on its side can create enough inflation to be considered hyperinflation. Individuals would simply stop using the currency and use something else as money long before the dramatic prices increases the hyperinflation creates. The business cycle DOES NOT CAUSE hyperinflation. The central banks in reaction to the business cycle create the inflation.
DO we experience price inflation or monetary inflation or a little of both.
Price inflation due to the fact that commodities are wasted through mal-investment. Both responsible and irresponsible firms must compete for the same pool of resources (Steel, fuel, food, labor, ect…) Monetary inflation due to what you’ve stated. Banks lending more?
Aggregate prices cannot rise without an increase in the supply of money and credit. That is if the money supply is constant, then some sectors can see price increases, but it would have to come at the cost of pricing in other sectors.
The only way to lift all boats (all prices in the economy) is a rising tide (an increase in the total money supply).
It is impossible for prices to rise above the amount of money available for exchange. Instead, we would see deflation, that is purchasing power would increase per dollar, rather than the effects of inflation, which is a decrease of purchasing power per unit of currency.
You really should do the reading, you’re asking questions that could be solved with the briefest amount of study.
I actually have done surface level reading. Nothing too detailed about the ABCT but what struck the question was a discussion on a blog post. The questions may seem elementary but reading some of the comments on this blog post has made me re-analyze things.
One thing that struck me was commidty scarcity duing the midst of mal-investment. Take wood and timber for example. During a housing boom the timber industry may also boom. All of this general wealth which is harvested and created is ultimately wasted and destroyed. This for example
Houses are then destroyed as they are unused or the cost to maintain is too high. All the energy/capital/labor/and other expense that went into this creating this huge bubble actually caused neighboring industry’s to dwindle as available labor/capital/resources was being soaked up (like a sponge)by this huge bubble. I think Hazlitt is the one who is always stating that we should be mindful of the not seen
Since much of the capital that went into the bubble is ultimately destroyed and possibly completly un-used than I have to think that many of those resources raise in price per unit as they are all being competed by regular industry’s and bubble industrys. Like timber…
Right, there is capital destroyed and so there is less capital and it becomes more expensive, which drives the boom businesses based on malinvestment bust as they cannot afford to complete their long term projects. Some of their resources are released back into the economy (even if it just human capital).
But in an economy where the too big to fails are propped up, they continue to burn resources, crowd out viable competitors and withhold market share from their more efficient and capable competitors, then price inflation can continue unchecked as everyone, good and bad, continues to bid on a declining resource pool.
Does that help?
The first Tom Woods video I linked may be a big help on this discussion track.
