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Source link: http://archive.mises.org/7055/george-selgin-on-the-misesian-style-cycle/

George Selgin on the Misesian-style cycle

August 31, 2007 by

In the Christian Science Monitor, here is George Selgin:

The subprime lending crisis also shows that, while central banks certainly have the power to expand a nation’s spending power, they can’t guarantee that the extra power gets used as intended, namely, to give a roughly uniform boost to the overall demand for goods. On the contrary: The crisis supports the argument, first developed by Austrian-school economists Ludwig von Mises and Friedrich Hayek, that the techniques central banks employ to increase spending power are bound to distort spending patterns by driving lending rates below their sustainable, “natural” levels.

By injecting the new money they create into credit markets, central banks create an artificially high demand for long-term investments, such as real estate, in which interest costs loom large. Think back a few years. Even your auto mechanic was bragging about “flipping” condos with easy credit. That’s a natural consequence of the way central banks distort spending patterns. The trouble, however, is that the new money does eventually swell overall demand, including the demand for credit. Interest rates soon rise, ending the investment boom. Regrets multiply.

The ending isn’t as thrilling: “The Fed must be taken out of the fine-tuning business. Instead, it must observe a strict and unambiguous monetary rule, such as one calling for the Fed to announce and stick to an inflation-rate target.”

But he knows that.

{ 6 comments }

Nolan August 31, 2007 at 8:39 am

Did anyone see Squawk Box on CNBC this morning (Aug. 31)? Brian Wesbury from First Trust Portfolios was the guest host and cited Human Action as one of his favorite books on economics.

iceberg August 31, 2007 at 12:59 pm

Jesus Huerta De Soto might favor such policy that Selgin proposes, becuase it graduates the US fractional-reserve central bank system a step closer toward the 100% reserve free-banking system, and in his determination he considers the rigid European monetary-rule to be an improvement over the fluctuating US system.

See Money, Bank Credit and Economic Cycles, chart on Page 793 http://mises.org/books/desoto.pdf

Blah August 31, 2007 at 1:11 pm

The subprime lending crisis also shows that, while central banks certainly have the power to expand a nation’s spending power…

What does it mean to “expand a nation’s spending power”? Is that just an increase in consumer spending? Why would an increase in consumer spending necessarily be good, even if the Fed could “guarantee that the extra power gets used as intended”?

From Rothbard’s America’s Great Depression:

“…an increase in hoarding, in total demand for money, is, as we have seen, no social calamity. In response to the needs and uncertainties of depression, people desire to increase their real cash balances, and they can only do so, with a given amount of total cash, by lowering prices. Hoarding, therefore, lowers prices all around, but need exert no depressing effect whatever upon business. Business, as we have pointed out, depends for its profitability on price differentials between factor and selling prices, not upon general price levels. Decrease or increase in total monetary spending is, therefore, irrelevant to the general profitability of business.”

Frank September 1, 2007 at 9:55 am

The Fed might consider targeting the aggregate savings rate as it is fundamental that with out real savings productivity and growth are impaired. Consumers would be less inclined to squander their after tax income if the Fed Funds Rate were 9%. They would also be wary of borrowing for that which they don’t need. I don’t advocate 9% in absolute terms but rather whatever rate creates a decision making process when confronted with a choice between consumption and savings.

Harriette Hitzfelder April 12, 2011 at 12:16 am

You actually make it seem so easy with your presentation but I find this matter to be really something that I think I would never understand. It seems too complex and extremely broad for me. I am looking forward for your next post, I’ll try to get the hang of it!

Barrie Moomey July 18, 2011 at 11:47 am

In the awesome design of things you actually receive a B+ with regard to effort. Exactly where you lost us was on the specifics. As as the maxim goes, details make or break the argument.. And that couldn’t be much more accurate right here. Having said that, let me tell you just what did do the job. The text is actually incredibly engaging and that is most likely why I am taking an effort in order to opine. I do not make it a regular habit of doing that. 2nd, whilst I can certainly notice the leaps in reasoning you come up with, I am definitely not sure of how you appear to unite your ideas which inturn make your conclusion. For the moment I will yield to your point however hope in the foreseeable future you actually link your dots better.

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