One of the frustrating aspects of being on the other side of the silly attacks by the likes of Ben Bernanke and Paul Krugman is the constant misrepresentation of our actual views. Among these views that is distorted most often is the relationship that the Austrian economists and their proponents (Ron Paul) have with the predictors of hyperinflation. Don’t get me wrong; the hyperinflationists are out there. But not only are Ron Paul and his influences not to be confused with these folks, but the hyperinflationists don’t even reach their conclusions via Austrian monetary theory in the first place. Sure, these folks –some well intentioned others more devious– name drop Austrian economics because it is both against the present Fed system and because it is becoming increasingly popular; but the point is that their vision is not Austrian in nature.
In the WSJ earlier this month Ben Bernanke mocked the “Fed’s critics, who repeatedly predicted that the Fed’s policies would lead to high inflation (if not hyperinflation), a collapsing dollar and surging commodity prices.” This is a highly selective summary of the “Fed’s critics” and is intended to, in one fell swoop, dismiss all those who are not On Board with the Fed’s messiah complex, from which it is determined that the Fed will sail the US economy onward toward Paradise. Unfortunately, Bernanke misunderstands the school of thought that is most worthy of being categorized as a “Fed critic.”
Matt McCaffrey writes today at the Mises blog:
Critics of Austrian macroeconomics often resort to strawmen when trying to challenge arguments against central banking, fiat money, and expansionary monetary policy. For example, it’s common to paint Austrians as doom-and-gloom prophets of economic collapse, with little to offer besides paranoid predictions of hyperinflations and monetary collapses lurking around every corner.
Unfortunately, even readers of Austrian economics fall into the trap of believing that the central problem with government money monopolies is that they’re always on the slippery slope to immediate catastrophe. This kind of thinking can be harmful because it encourages us to think only about obvious and extreme consequences of public policy, while ignoring more urgent, underlying issues.
The fear of hyperinflation is a good example. Hyperinflations do occur, and when they do, they give us a good look at the ultimate consequences of monetary central planning. However, hyperinflation is only one possible outcome of bad macroeconomic policy, and a rare one at that. Poor monetary institutions produce many other subtler and more pressing problems worthy of our attention.
For instance, the destruction wrought by monetary expansion is great even when inflation is slow, consistent, or numerically small. We should therefore be careful to see the damage caused by expansion for what it is: an ongoing and systemic problem that consistently produces distortions in the economy. However, as bad as it might be, it won’t necessarily result in complete economic collapse tomorrow.
The point is this: the Austrian objection to central banking is not that Hyperinflation is Just Around the Corner. Rather, the Austrian objection to central banking is that, via the expansion of the money supply, various distortions throughout the economy are initiated and the capital structure of the economy begins to become warped. There is an over investment in long term projects (interest rate sensitive) while at the same time there is no increased savings by the consumers at large to prepare for these projects. It is distortions, not rising consumer prices, that is the real threat to the future of prosperity.
Of course, rising prices can indeed take place (in various ways and locations– no boom is exactly like the previous one), but this is merely a symptom of the more dangerous underlying distortions that ultimately result in an economy wide bust. While these rising prices have historically taken place in some of the Fed-induced booms, they have not taken place in all of them. A good example of this, of course, is the 1920’s boom that preceded the Great Depression.
But the fact of the matter is that rising prices are not the chief object of our blame. Sure, rising prices are painful and should not occur. Sure, rising prices hurt fixed income households and savers the most. But these are symptoms of the problem. Thus, when today’s central bankers set up a massive straw man in order to happily announce that “we’ve avoided inflation!” they are missing the point. Rising prices or not, their efforts to stimulate the economy by keeping the money expansion going are merely causing foundational problems that, while currently unseen will eventually be revealed.
McCaffrey ends with a note on Austrian strategy (that is, spreading our economic views to the masses).
Austrians are not in the business of predicting inflation, and constant warnings of impending disaster run contrary to both good theory and effective strategy. That is, economics teaches us to be humble when making predictions, if we make any at all. And strategically, we undermine the reputations of economists like Mises when we invoke them to predict disasters that never materialize. We’re better off carefully studying their ideas and using them to think about the very real problems that already lie beneath the surface of our economy and its institutions. The end of the world can wait.