Hi, there. I’m a student at George Wythe University, and I just finished reading The Austrian Theory of the Trade Cycle and Other Essays. This semester is the first I’ve ever heard about economics, and it is both eye-opening and very confusing for me.
I had a question in Hayek’s essay in the book on Inflation. He talks about the successive rise in prices during times of inflation, and I am wondering: If prices rise successively, do they fall in the same succession once the inflation stops (or maybe before, I don’t know much about this)?
This book was really good and although I’m still trying to understand it, so far I like what I’m reading.
If inflation stops, there won’t be any fall in prices. What will happen, is that they won’t keep rising. Maybe you’re asking what would happen in they deflate in the same way as they inflate. While its impossible to predict, as many market variables will certainly change, we should expect, ceteris paribus, a return to the price level of before.
Well, inflation (a general rise in prices) is caused by both printing money and by a general reduction of the supply of goods and services because of government appropriation of capital.
If the increase in the supply of money is stopped, then prices would not necessarily fall, but they should not go up. Now, market efficiency would tend to drive down the price of goods and services, so one would expect prices to slowly fall, as the market becomes more efficient.
If the government reduces spending, then more capital would be availabe to the private sector, which should increase efficiency and supply, which should result in a downward pressure on prices as well.
Because Mises says that the demand for Fiduciary media is nonexistent at the natural rate, or near the natural rate. Inflation presupposes the lowering of the market rate below the natural rate, even in relative terms. I would assume the opposite would be true if interest rates rise. Hence the purging of our malinvestments.