Friday, March 14, 2008

Inflation Is a Policy that Cannot Last (Thorsten Polleit)

Thorsten Polleit on the evils of inflation:

To Austrian economists, the so-called international credit market crisis is a prima facie case of the inherent destructive tendency of government-controlled paper money: it is the consequence of an excessive expansion of credit and money, which encourages uneconomic investment and leads to unsustainable debt burdens. The inflation-provoked cluster of errors (this time in the financial sphere) eventually triggers an economic and political disaster.

Once the inflation-fueled boom (the time span in which malinvestment occurs) is about to turn into bust (the period in which malinvestment is corrected), the government-sponsored central bank steps in and lowers the interest rate, in an effort to reverse the economic downswing into a boom. This is because a policy of pushing down the interest rate via expanding credit and money supply is typically seen as the solution for, rather than the very cause of, the crisis.

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