As far as I understand Austrian Business Cycle Theory, an extra inflow of money would hav to come unexpected in order to create an unsustainable boom that goes bust once the money trickles down all the way and the participants in economy get used to the new conditions, and therefore inflation would have to continue if the governemnt wants to keep the boom booming.
How does this work when the central bank comunicates all its decsions?
In February 2003, I told all of my clients in no uncertain terms that the residential real estate market was going to collapse. I have since asked them why most of them didn’t listen to me. They’ve explained that when your business is thriving, you don’t ask questions. I can understand this.
Distorting money distorts prices.
Even if you know that the current prices are distorted that still does not mean you know what the correct prices would be. And there is no way to know, only through the pricing mechanism can economic calculation occur.
In addition to what has been said above, not everyone comprehends the economic effects that results from central bank policies.
This is called the rational expectations objection to the “Austrian” theory, it was voiced in Bryan Caplan’s internet article, Why I Am Not an Austrian Economist.
Here’s a quote from it,
Naturally, entrepreneurs will not turn down lower interest rates. Rather, the rational response to artificially low interest rates is to (a) make investments which will be profitable even though interest rates will later rise, and (b) refrain from making investments which would be profitable only on the assumption that interest rates will not later rise. If entrepreneurs followed this rule, then there would be no tendency for policy reversals to produce malinvestments.
Some here and elsewhere, like Roger Garrison, have responded that assuming entrepreneurs do know that the interest rates are artificial, it does not mean they know where rates should be. Essentially, this boils down, to people who agree with Garrison, to an imperfect knowledge problem.
Going further, some like Gene Callahan also answer that the Caplan argument assumes one actor only when the Fed also plays a role. They say that businessmen could theoretically react and calculate to a probability above .5, but that it would eventually be futile as the Fed counter-reacts, causing businessmen to essentially re-calculate.
I’m personally not convinced of the ABCT, but it’s not really because of rational expectations, I look at more of the internal inconsistencies within the “Austrian” theory overall that Caplan further alludes to in his article. Those are what make me question its aptness to explain away the business cycle as purely a cause of central banks.
if the government told you they were going to send easy money to endeavor X, would you head that way? This is how they control us with fiat. They drop dollars and people have to choose between taking a principled stand by not paying taxes and only trade in non-fiat money sources or they can lick the bankers’ boots and catch the extra change in their tin cup. Most arent willing to risk the wrath of unlicked boots and suffering even more heinous privations of liberty via imprisonment or death. So we twaddle along the circuitous path of eventual totalitarianism, smelling the fading roses along the way. Eventually, the price of compliance rises to match the price of rebellion and shot heard round the world cries - “Let’s get ready to rumble!” Hopefully the frugality of the shoppers of liberty will prompt the match sooner than later.
Also, i think the inflation policy shows the hypocrisy of keynesians and/or socialists. It seems they resort to incentives to move the masses to and fro but reject incentives as being effective in a free society. They seem to be saying that natural incentives are inferior to central banker born incentives. They ARE god.
There was a story on this forum some months ago about a Texas banker who knew the crash was coming and decided to instead build up reserves and wait it out. However, this meant that he had to shrink his business operations in the short-term and lay off his employees.
So even if you know the government policy of low interest rates is unsustainable, the people who bite on it will drive you out of the market.