Loose monetary policy can get people to use idle resources. But this new economic activity will likely be in the service of bubble industries that don't create real wealth. Moreover, these bubbles create many idle resources of their own when the bust comes.
The world doesn't follow predictable patterns based on averages of long-term probability. Ordinary people apparently know this better than statisticians do.
When governments devalue the currency to push more exports, the country is getting rich in terms of foreign currency, but it is getting poor in terms of real wealth.
The diversion of real funding from the private sector toward government projects — no matter how important these projects appear to be — in fact, disrupts the process of real wealth generation.
Many advocates claim government intervention is necessary because markets are too unstable. The real instability, however, comes from the immense uncertainty over what government will do next with its vast and arbitrary power.
The fact that central bank policies become ineffective in reviving the economy is not due to the liquidity trap, but because of the decline in the pool of real savings. This decline emerges due to loose monetary and fiscal policies.
A common view is the bust is caused by various mysterious factors that have nothing to do with the previous boom. But that the main problem with Friedman’s model is the lack of a coherent definition of what a boom-bust cycle really is.
