Thursday, July 20, 2006

back to "inflation"

I think it fair to note that the austrian school of economists don't ignore credit in their money definition. They just call it a money substitute. Overuse of credit is supposed to be part of the normal cycle.

My problem with the monetarists - the austrians - is that they pick and choose data that supports them, and for the most part ignore things that don't sustain their positions instead of modifying the theories. For what it's worth I've seen this of Keynesians as well, but I'm picking on the austrians right now.

The best example I can think of right now is to start with this article from the Capital Speculator, which could get one all excited. It shows that during the 1970s, when there was a surge in CPI, it was preceded by a surge in the 12-month growth rate of M2 - money supply. An almost classic example of the Money supply is Inflation and CPI a consequence argument. Unfortunately, this (PDF FILE) is a page from the St. Louis Fed that shows the same data since 1989. There have been surges in the M2 at least as great - without a match in CPI. In fact, the most extraordinary change in M2 comes near the END of the 2001 recession. Cause and effect go which way?

I'll keep poking at it, of course, but it's pretty obvious that the followers of Mises aren't 100% right. Unfortunately neither are the Keynesians...


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