Needless to say, those who benefit from bubble activities are not going to like this, since the diversion of real wealth to them from wealth generators will slow down or cease all together. A fall in economic activity in this case would in fact be the demise of various bubble activities.
A rate of interest is established in the loan market which corresponds to a longer period of production; and so, although it is inadmissible and impracticable from an overall point of view, a lengthening of the period of production becomes at first profitable. But there cannot be the slightest doubt as to where this will lead.
What is, then, the best monetary policy? Mises argues that “A metallic money, the augmentation or diminution of the quantity of metal available for which is independent of deliberate human intervention, is becoming
the modern monetary ideal.” He adds: “The significance of adherence to a metallic-money system lies in the freedom of the
value of money from state influence that such a system guarantees.”
The publication of Ludwig von Mises’s Theorie des Geldes und der Umlaufsmittel in 1912 marks a turning point in the history of economics, and of the Austrian School in particular. Mises contributed a great many original and penetrating arguments, each of which he articulated at its proper place within the edifice of an encompassing monetary treatise.
If the economy improves, the banking sector will increasingly loan out its reserves and bring inflationary pressure to prices. If the economy does not
improve, the Fed will not be able to unload the low-quality assets on its balance sheet, and thus the inflationary pressures will remain. The so-called
win-win solution to the crisis has become a lose-lose scenario.
If sanctity of contracts should rule in the world of private debt, shouldn’t they be equally as sacrosanct in public debt? The answer is no.
Milton Friedman and all monetarists after him claimed that the Gold Standard had a fatal flow.
Some experts are of the opinion that in the “new world,” because of Fed policies, there is little room left for the money supply to help explain the state of the economy.
What has the profession learned about the financial cycle and macroeconomics?
