Abstract: This article provides an Austrian overview of the inflation versus deflation debate which has captured the attention of the economics profession in the years following the US housing bust. Much of the Austrian analysis of this debate has focused on the massive expansion of the Federal Reserve’s balance sheet and attendant creation of new reserves. Several Austrian economists have predicted that the creation of new reserves will cause a massive increase in inflation. The money multiplier theory, on which these predictions are based, is criticized and an overview of the Austrian business cycle theory is provided to explain why banks are reluctant to issue new credit. Finally, an analysis of the politics of deflation is provided and a class theory is presented to explain why a policy of controlled credit deflation is more likely than a policy that would result in mass inflation or hyperinflation.
From what I understand, he is saying that what the Federal Reserve had done with QE1 was not inflationary because the only goal really has been to sustain home prices. But isn’t that itself inflationary since home prices are higher than they otherwise would be? I think he then goes on to explain that the Fed would not pursue a course of inflation, but it just does not make sense to me since any injection of money would be inflationary, even if it does not raise prices.