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Source link: http://archive.mises.org/12890/credit-expansion-vs-simple-inflation/

Credit Expansion vs. Simple Inflation

June 4, 2010 by

shell game

There are instances in which the methods of genuine credit expansion are used for an utterly different purpose: to allow the government to take advantage of the facilities of banking as a substitute for issuing fiat money. FULL ARTICLE by Ludwig von Mises


Richard June 4, 2010 at 9:10 am

Correct me if I’m wrong, but is Mises saying that government printing and spending of money does not cause the business cycle if that money doesn’t find its way into the loan market first?

Dennis June 4, 2010 at 10:33 am

According to my understanding of Austrian Business Cycle Theory, the key causative factor is not inflation per se, but credit expansion and its artificial lowering of the rate of interest and the resulting inducement of businesses to lengthen the structure of production. However, the real resources have not been saved to enable the completion of the capital structure expansion.

Increases in the money supply will cause prices to rise and under fiat money regimes and legal tender laws will also have detrimental ethical and distributive effects. However, if a money supply increase does not first enter the economy through the loan market, it should not be a factor causing the business cycle.

cret June 4, 2010 at 1:47 pm

are business cycles harmful in a similar way as the detrimental ethical and distributive effects of increases in the money supply??

Dennis June 4, 2010 at 2:12 pm

Under a commodity, 100% reserve banking monetary standard that does not contain legal tender laws, an individual that supplies additional quantities of the money commodity is engaging in a free-market transaction that is fundamentallly different from tranactions that involve government fiat, legal tender laws, and fractional reserve banking.

newson June 5, 2010 at 2:39 am

yep. if money supply grew only via the government literally printing up the money and spending there would be none of the business cycle’s cluster of errors. naturally there would still be distributional effects as the early recipients enjoy higher purchasing power than the later ones.

cret June 4, 2010 at 1:44 pm

has that ever been said??

would printing and spending lots of money create something similar in effect to a business cycle??

newson June 6, 2010 at 9:31 am

no. after an adjustment period, people would factor in the inflation premium in their interest calculations. of course it channels wealth from productive to parasitic hands, and so impoverishes overall.

Jonathan Finegold Catalán June 4, 2010 at 2:32 pm

The key is in distinguishing money spent on consumer-goods versus capital-goods. Each has a different, opposite effect on the structure of production (flattening versus shortening, respectively).

Mike Sproul June 4, 2010 at 9:28 am

Mises should have distinguished two cases:

1) The money-printing or borrowing government with low net worth and bad credit, and
2) the money-printing or borrowing government with high net worth and good credit.

If a bad-credit country expands its issues of IOU’s (e.g., paper money) then that money will lose value. If a good-credit country does the same, the country will start to burn through its net worth, but the money will not lose value until net worth becomes too low to cover the issue of money.

Craig June 4, 2010 at 6:15 pm

I shouldn’t think a government’s credit-worthiness would change a thing.

The creation of money necessarily creates inflation. Mises was not talking about the issuance of the bonds, but the resultant government spending. It’s true that the bonds might retain their value, but the extra cash added to the money supply through the government’s spending would cause the price of goods and services to rise.

BioTube June 4, 2010 at 7:11 pm

Only states in the worst shape have bad credit; however, a state with a large amount of real savings in its vaults might be able to reduce size of the cycle its credit expansion causes(repaying war bonds with the sales of post-war surplus is the best example I can think of).

Mike Sproul June 4, 2010 at 7:31 pm

Assume both kinds of states issue $100. The good-credit state has enough resources to buy back that $100 at par, while the bad-credit state does not. All the good-credit state needs to maintain the value of its currency is the will to buy it back, should it ever depreciate. The bad credit state can’t buy the $100 back even if it wants to.

When people and firms with good credit issue IOU’s, those IOU’s hold their value. But if people and firms with bad credit issue more IOU’s, the IOU’s will lose value. It’s true of people and firms, and it’s also true of governments.

Ivan June 5, 2010 at 3:38 am

Totally immaterial.

jerry June 5, 2010 at 12:40 pm

Mike seriously, enough already with polluting the threads with this nonsense. I tied you in a knot using the exact words of your “theory” – you simply do not understand these issues, though you are certain you do. Continuing to push your “theory” while refusing to untie this knot makes you officially a blowhard.


Evan Foreman June 4, 2010 at 3:44 pm

What does the word* catallactically* mean?

Evan Foreman June 4, 2010 at 3:46 pm

What does the word *catallactically* mean? It is not in my dictionary.

Dick Fox June 4, 2010 at 4:07 pm

Richard Whately who coined the term in Introductory Lectures on Political Economy, published in 1831:

“CATALLACTICS … the “Science of Exchanges.”

billwald June 4, 2010 at 8:21 pm

The Fed and the Treasury just invented $3 trillion dollars but it none of it is being used to bid up prices through the process of supply and demand thus no inflation.

cret June 5, 2010 at 6:57 am

does credit expansion need to be extended to someone to actually be credit??

Martyn Strong June 5, 2010 at 10:59 am

Yes we need to have more credit but before we do add credit we need to be sure our capital markets are stable – what about this idea:

Capital markets are unstable. In the past there was no way to make them stable. But today we have computer power that can be used to make them stable.

By using the greater computer power of today we can have a much higher turn over of capital in the capital market. This higher turnover will make the market harder to game or control and the market will no longer have the unstable run ups or declines. Who can change or control the market when say 20% of the capital is trading each day?

So now that we have the compute power to provide for all these transactions that will smooth out the market how do we force people to turn over at a rate of 20% a day? Easy, put a cap gains tax of 0% (zero) on all gains of 7 days or less and put a cap gains tax of 90% of all gains of more than 7 days.

The likes of Yahoo, Micosoft and/or Sun Micro Systems will give us the systems that will provide automated software agents to support turning over one’s investments every 7 days (based on the specs you give the agent).

A system like this will make the financial markets work as smoothly as the local fruit market.

Stephen Grossman June 6, 2010 at 9:18 am

>Capital markets are unstable.

>Individuals are constantly producing, buying, and selling different things. So its a good thing
that capital markets are unstable so that they can supply people’s changing wants. Is there a Platonic Form of Capital Markets relative to which capital markets in the lower, gross, illusory,
concrete, material universe should be frozen? Is this Platonic Form of Capital Markets
knowable after studying Keynes or swallowing a tab of LSD? Inquiring minds want to know.

martyn strong July 6, 2010 at 5:44 pm

These are capital markets not trade markets.

Rick June 6, 2010 at 2:22 pm

You should be writing straight to DVD sci-fi scripts Martyn.

Stephen Grossman June 6, 2010 at 4:21 pm

>But today we have computer power that can be used to make them [capital mkts] stable.

And who will program the computers, Keynsians or monkeys?

martyn strong July 6, 2010 at 5:42 pm


Stephen Grossman June 11, 2010 at 12:55 pm

>Capital markets are unstable.

A cemetary is stable. A market must be unstable to coordinate changing values
and facts. A market in a caravan town thousands of years ago has a different
equilibrium, and properly so, than, eg, the NY Stock Exchange. Each individual
must evaluate changes. Stability is contextual. Perhaps you may find the stability,
such as it is, of a hunting-gathering economy more
to your liking. A new financial instrument, which more efficiently focuses
investments, _should_ change a capital market. I suggest, however, that
inflationists fear the specific instability of inflation. That is a bad instability.

martyn strong May 9, 2011 at 10:08 am

Capital markets are unstable in that they produce bubbles. You will not see a bubble in a fish market but in a housing or stock market you do see bubbles.

cret June 5, 2010 at 2:12 pm

work as smoothly as the local fruit market.

what does that mean. i see too many green bananas anyway.

what gets turned over every few days anyway??
and wy would it be yahoo?

martyn strong July 13, 2010 at 3:18 pm

In a fruit market there is no major run up or run down in price.

The things that get turned over and the capital market vehicles (the investments). Yahoo and their likes have been doing large numbers of transactions for some time now and therefore would be good at it.

Rick June 6, 2010 at 2:20 pm

Surging food prices around the world:


Jeff Mitchell June 6, 2010 at 4:28 pm

Well, our central bank is loaning to banks at 0%.. in effect printing money causing inflation.
Once you print more money and you don’t have the corresponding growth in economy you cause inflation.

In the case of Europe, their currency is devaluing, so it’s more expensive for them to buy goods abroad. Their central bank has only one directive really; to keep inflation at 2% so they have less of that problem.

Stephen Grossman June 11, 2010 at 12:57 pm

>our central bank is loaning to banks at 0%..

Hitting a computer key can’t be very expensive…

Affordable Credit Repair Specialist August 18, 2010 at 2:09 pm

Government intrusion in the financial and credit markets is rarely good and generally creates un-intended consequences.

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