Deflation would be good for the U.S. economy, if it weren’t for all of our debt. Deflation will make it even harder to pay existing debt, which unfortunately doesn’t deflate with everything else. So deflation will result in a whole lot more defaults and bankruptcies. There is a global re-evaluation of assets taking place, and it needs to occur. Too much credit has driven up prices for too long. This is going to get messy.

I agree with your conclusion that we have but two choices regarding the Federal Reserve system. As per the second choice you identify, namely, leaving the system in place and moving forward according to its logic, I’m not sure what you have in mind when you use the word “logic”.

By “logic” do you mean the Fed’s manipulation of the quantity of money? Or instead do you mean the Fed’s twin goals of avoiding deflation and promoting full employment? In other words, is your use of the word “logic” here in reference to Fed means, or instead to Fed ends?

Yes, that is the logic of the system. You can consistently do either of two things:
- replace the system by something totally different;
- leave the system in place and act according to its logic.
What you cannot do without badly screwing up things is maintaining the system but trying to negate its logic. It seems to me that a deflationary scenario à la Hülsmann is precisely this.

What does “prudence” call for? For guarding against depression by preventing ALL deflationary pressures from running their course?

By what standard do we define “prudence”? Relative to the standard of the Depression? This seems out of proportion to me.

Isn’t the Federal Reserve the arbiter of the flexibility of the quantity of money? If so, and if prices are sticky, as you say, to the downside, then the Fed becomes responsible for coordinating a quantity of money that accommodates the stickiness, no?

In defence of Ludwig: At least Keynes had a theory of depression, however imperfect. But the monetarists, the monetary disequlibrium theorists etc. have one too.
Only the Austrians haven´t. The confusion is on the part of the Austrians here. A theory of the unsustainable boom is one thing. A theory of depression is another.

Austriglide: no, of course, there is no general deflation. But be prudent: the history of the episode must still be written. We don´t know very exactly what is going on. We know more about, e.g., the Great Depression because Friedman and Schwartz wrote its history…

van Haaren: of course you are right. It´s naive. Also how would general deflation be possible without monetary contraction? If inflation is always and everywhere a monetary phenomenon, so should be general deflation. Still we can have, say, deflation of housing prices, which even Krugman predicted, but I don´t think this is what Hülsmann has in mind. It´s always possible to be “original” if one is prepared to risk one´s scientific reputation.

My point is a theoretical one: namely, the Fed shouldn’t have ever been in the market to begin with. From a theoretical point of view, the Austrian case, based on an analysis like the one I provide above, is in my opinion profoundly compelling.

Practically speaking, I’m not equipped to provide an analysis of the specific relative merits of more inflation vs. deflation. However, in no way do I subscribe to the view that the Fed should allow a period of deflation in order to somehow make markets more free. Such a view, in my opinion, is naive

Also, practically speaking, you use the phrase “massive deflation”. Is this really what we’re facing? Can anyone know the magnitude? Regardless, I agree with you that history can be, and perhaps therefore should be, a guide. We should probably be discussing the specific history in order to gain something of an empirical basis for this discussion.

Inquisitor, I gave you a direct quote from Hülsmann where he supports deflation. That makes him a deflationist. And my quote is only one of many in his book where he sings the praises of deflation. What is it they say if it walks like a duck…..

If you believe that Kenyes theories explain depression then I understand your confusion. All I can say is read Henery Hazlitt’s The Failure of the New Economics and perhaps it will help you see why 1600s Mercantilism has never worked and still doesn’t work.

In fact this analysis is incomplete and also a bit simplistic.(Suggestive expressions such a “poison”, “absurd” etc. are no substitute for cool analysis…)
In order to move to a (more) free market monetary regime, it is not necessary to first undo everything the government, central banks etc. have done, e.g. through monetary expansion, in order to “cleanse” the system. It is not necessary to add a deflation to the previous inflation to “undo” the effects of the latter. The excerpt from Mises above is quite pertinent. To give an (imperfect) analogy, if you want to privatize the prison system you do not want to liberate first all prisoners just because they were put in jail by the state.
It is true that preventing massive deflation is costly because you cannot avoid injection effects etc.
But these costs have to be weighted against those of massive deflation, which, if history provides any reference, are almost certainly greater.
Letting deflation run its course is not simply letting free play to the market, since in the free market this kind of scenario is unthinkable.
It may be tragic, but getting out of central planning in a more or less orderly manner, may still require a little planning.

I agree with Fundamentalist. Ignore the jealous comments. Take credit for having thought of it first.

It was an elegant and powerful idea to show a strong relationship between per capita GDP, Economic Freedom, and Life Expectancy. A picture worth a thousand words, and one that is difficult to refute.

Interference with free markets simply causes their prices to no longer reflect with accuracy this worth. As a result, society is harmed by the interference.

According to Austrians, actions by the Federal Reserve regarding the money supply constitute NOTHING BUT market interference. Thus, the sooner the Federal Reserve stops intervening, the sooner will interest rates reflect the true social worth of future versus present consumption in the economy.

Therefore, suggesting to an Austrian that the Federal Reserve should fight deflation by increasing the money supply is to suggest that the Federal Reserve should further interfere with free market prices, and thus interfere with society’s freely-determined valuation of the relative worth of its present and future consumption.

It is akin to prescribing more poison as an antidote to having ingested poison. In other words, it is an absurd suggestion.