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Originally Posted by mcsluggo
....PLUS it keeps a little bit of a buffer from a deflationary environment, which IS painful, and has a more vicious self feeding cycle than the self feeding inflationary cycle.
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The idea that a deflationary environment is a "viscious self-feeding cycle" is something upon which we'll have to agree to disagree.
There isn't any logical, theoretical reason to believe this to be the case, and to the best of my knowledge severe economic downturns have happened in inflationary environments as often or more often than in deflationary environments (one notable downturn in a deflationary environment was our own Great Depression, the cause of which was wrongly attributed to the symptom of falling prices).
Moreover, the 19th century was basically a sustained period of deflation--it was also a period of two industrial revolutions and sustained growth in GDP/capita notwithstanding the fact that half of the country's industry and infrastructure was destroyed by a war. That is, if deflation causes an economy to spiral downward, then the 19th century should have been a long period of economic stagnation at best.
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...but the Austrian idea that all bubbles and all misalignments in the economy are caused exclusively by government or monetary authority mistakes (or more to point --- ANY action they take) is pure crap. THere have always been business cycles, ups and downs, an crashes... always.
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1. It's not quite accurate to say that Austians believe that bubbles and misalignments are caused by government or monetary authority mistakes. More accurate would be to say that Austrians believe that macro-bubbles and mislalignments are caused by inflationary credit-expansion--fractional reserve lending with smaller and smaller fractions--and that governments (especially central banks) enable or actively encourge inflationary credit expansion, and moreover that 'very bad' misallocations occur when the gubmint tries to correct cycles by encouraging more of the behavior that caused the boom in the first place.
Amongst themselves, Austrians debate whether the government should outlaw fractional reserve banking as fraud (Rothbard) or allow the market to let banks that lend money they don't have go belly-up (Von Mises). I suspect we'll have to agree to disagree on whether fractional reserve banking is necessary or good or whatever, but the point is that the Austrian position doesn't depend upon government intervention per se, but rather that government's often have a vested interest in encouraging credit expansion, and thereby cause inflationary bubbles and misalignments.
2. Sure, there have 'always' been business booms and busts, just like there has 'always' been banks loaning money that they don't have and governments who are happy to print and borrow and spend money. By this I mean it is not a refutation to cite the persistent nature of booms and busts as a refutation of the Austrian school. This is kind of like saying, "people have always gotten sick, the idea that this sickness is causd by germs is pure crap."