I just cracked open the book and like Human Action i find myself highlighing and margin writing more then reading. My question it this, de Soto mentions one of the main reasons we have not seen price inflation is that the inflation has been checked by technological progress (or thus we would have seen price deflation), yet, doesn’t this contradict the theory that credit expansion is misallocating resources? How can innovations in technology keep down inflation while, such credit expansion should be misdirecting capital investment.
Question 2: Since spill over effects allow other countries to adopt newly created technology more efficiently, given that they have a more stable monetary policy then the U.S. shouldnt this mean that their wealth will grow increasingly in relation to the U.S.
The price deflation is something that comes about from changes in the market. The price inflation from an expansion of the money supply isn’t.
These days, you could say that the price of electronics are dropping quickly with time, resulting in price deflation. That is the market at work.
An expansion of the money supply tends to be injected in certain areas of the economy, and as the money works its way through the system, the prices of goods in general tends to rise.
So we still have an increase in just about all prices as a result of monetary inflation, and a decrease in prices in some areas as a result of improvements with respect to efficiency.
None of this changes the fact that a credit expansion by a central bank will cause the interest rate to be lower than the natural rate of interest and cause an expansion in the higher-order stages of production.
Dr. Murphy has an example of the boom-bust in this article: http://mises.org/daily/3155 There really isn’t any focus on price deflation or monetary inflation, but it does a good job of explaining how changes in the structure of production can lead to the unsustainable boom. You could try to imagine prices changing here as a result of monetary inflation or price deflation, but I don’t see how it would change the fact that the economy’s structure of production is unsustainable.