most references to inflation/credit expansion/frb (if true) whathaveyou on mises sites and lrc are negative.
they have been referred to as a disease or an ill, etc.
does credit expansion automatically result in malinvestment though?
does malinvestment result in higher prices when compared to wage increases?
with immediate (i assume credit expansion is rather immediate - ive never actually seen it) credit expansion (more money in demand deposit accounts), if a project could be funded ( if you know of specific examples say so) in 6 months that could facilitate a more efficient moveement of vital goods (ie. an oil pipeline instead of many trucks moving oil) and reduce the price of that good and others, would that be malinvestment??
under a 100 precent reserve system, several people would give up a portion of savings to fund the same project and it would take a year to complete - 6 months longer for the more efficient transport and use of goods?
would credit expansion in this case (and in actual cases) serve to speed up beneficial projects or make life easier, faster than the 100percent reserve system?
Two scenarios: I) there is capital around to build the pipeline, and II) there’s no capital around.
II. if there is no capital around to finance the pipeline, than you’ll need to more than double the monetary supply to “finance” the pipeline. But in the case of such breakneck expansion this single individual would have enough money to buy everything ever produced, and priced would jump several times in a few hours. As soon as this guy would start buying things needed with this money, prices would rise as to make it impossible for him to buy what he need. No pipeline is build, just the currency crashes and is lost forever.
I. Discern two sub-scenarios:
1.1) the project is worthwhile (profitable). People would themselves start selling their assets to finance the undertaking. No need of credit expansion.
1.2) the project is unworthwile: credit expansion funnels capital form uses where it is more urgently needed dot the construction of the pipeline, resulting in a lower standard of living for everyone.
from what i read credit expansion is primarily facilitated through demand deposit accounts. i assume that is true. that is what i read but it may not be.
if in a area one million dollars is deposited in dd acounts, 900 thousand is loaned out and 900 thousand of bank-credit is created with 100 thousand still in cash in accounts (based on a simple 10 precent reserve, i have read the banks can do away with a lot of reserve requirements now). the 900 thousand loaned goes to make a pipeline that brings down the price of oil making making everything on oil (a lot of stuff) a little cheaper.
the 900 thousand of bank credit (now in existence with the 900 thousand loaned out) say…drives up the prices of ball point pens and kleenex for a while, but once the pipeline is finished , since everything is cheaper to move, all bid up prices now fall once adjusted.
now…if with 100 percent reserves, 100 thousand people had to fork over 9 dollars each to an oil pipeline builder, well…that might (likely would) take longer than the oil pipeline builder just getting a loan created form fractional reserve banking. thus delaying the pipeline completion and lower prices for goods.
is that likely and has a similar thing actually happened.
Are you already familiar with the Garrison PowerPoint presentation that explains the macroeconomic effect of credit expansion? If not, you can find it on Mises.
To paraphrase what you are saying, if the bank simply creates money from nothing, pipelines can be built to lower prices of all goods. Everyone benefits. It’s a miracle! A miracle I tell you!
If the economic situation is as you present it above, why require banks to have any “reserves” at all? If such is the benefit (new pipelines, lowered prices, universal prosperity, etc) why restrict the credit expansion at all? Why not let credit expansion go to infinity? Wouldn’t unlimited money creation allow construction of pipelines to remote regions of the world? Why limit this to pipelines? There are all sorts of “needed” projects. As you are presenting it here, it sounds like credit expansion (money created from nothing) is the key to universal prosperity. It sounds like you are describing the end of scarcity.
Seriously, I believe the problem with your conclusion is the “seen” and “unseen” as described in Economics in One Lesson by Hazlitt. You are accounting for only the “seen” and not the “unseen”, which is just as real, as described by Bastiat. The unseen is many things, but I think the effect on the structure of production is easiest to describe, which you have not accounted for in your question.
Credit expansion (money printing) will cause a distortion to the structure of production. This is malinvestment. Resources are being diverted from sustainable activities into this pipeline project. Therefore, prices will begin to rise at specific points along the structure of production as the pipeline drains resources from the economy. Goods are scarce. As the project progresses, the original cost structure is now out of line. Steel, concrete, labor, etc. is now in short supply, prices rise. Simultaneously, consumers have not changed their patterns, they are actually consuming more, as Garrison points out. So, resources are rapidly being drained from this economy, prices rise as goods become scarce, and the Austrian boom / bust explanation is at hand.
Regarding “decreased prices of everything”, I don’t see how this can be. Sure, oil is now being delivered where is was not before (assuming the pipeline could actually be completed given the chaos at hand), and oil is being delivered more efficiently (the essence of your contention that prices would drop), but I think you need to consider the effect on the structure of production. Remember, too, that the original loan has to be paid back (with interest) and investors will expect a rate of return (or was the project entirely debt-funded, which would be even more problematic).
I’ve rambled on long enough. Bottom line, it looks like the project is a boondoggle and the Austrian business cycle will result from this adventure.
I see, my mistake then. I failed to mention the difference between inflation and credit expansion.
In the example you forward, if the bank loans out 900K and that’s all, there is absolutely no problem, and indeed the economy benefits form the new investment. I fully agree that this is what banks should have been doing all along.
What one must see is what happens if the banks loans out 900 dollars and an at the same time allow the depositor to pay checks on the original 1M instead of 100K. Only in this case has money been created, and only in this case inflation wreck havoc in the economy and ads nothing to the picture. Bank lie to everyone: you can have your cake and eat it too. That is pure fraud.
But you are right, to often “credit expansion” and “inflation” are used interchangeably, without merit. Austrians just assume that everyone sees the difference.
In the example you forward, if the bank loans out 900K and that’s all…
ok i didnt think there was much difference between credit expansion or inflation.
if you extend true credit…you give up the amount you credit to someone else
inflation/credit expansion was what i have read is a banking phenomenon where one extends true-credit to one party and then creates an equal amount of credit for another. and when this id carried out over an economy wide scale…well, the terms disease and ill were used to describe it.
but dont go off into credit expansion - inflation land…as long as you know what i was asking.
i dont know if its great or not. the use the word story in it several times. wouldnt it be great if the actually showed examples of what they are calling stories.