Will cheap credit & loose money bring high & rising price levels?

Most economists that now or once considered themselves to be “Austrian” economists expect high & rising price levels from the effect of recent “stimulus” policies. The combination of loose monetary & credit policy along with massive fiscal deficits is seen as a lethal cocktail that only delays an inevitable “bust” after an illusory recovery.

Yet questions arise as to the tame increases in price levels during the “boom” over the early 2000s that set the stage for the Great Correction that is still before us. Central bankers have heralded that period as evidence that their taming “inflation” was one of their great triumphs.

It is hard for me to find much about central bank policy that deserves congratulatory remarks. So, let’s look elsewhere to see what might be behind the global record on price rises. Ignoring, of course, the ruinous experiences in Zimbabwe & Venezuela.

Part of the answer is that increasingly-dynamic competition brought by globalization along with rapid technological change should be deflationary. This means that price indices understate or mask the real extent of price increases.

Another factor might be seen in changing demographics that the way in which time preference relates to market interest rates & how price levels change.

For example, many industrialized economies are experiencing a rising average age in their populations. As such, a question arises over the impacts that this demographic shift might have on intertemporal decisions of firms & households concerning consumption, saving & investment.

If young people are “high discounters” requiring higher compensation to forego current consumption, lower average age would lead to increased scarcity of loanable funds. In turn, this lower propensity to save would bring higher market rates of interest, ceteris paribus.

Contrariwise, “graying” populations might reduce the sensitivity of consumer price indices to actions by central banks to inflate the money supply. If this is the case, the rising price levels that are being predicted might be more muted than expected.

Anyway, it was ust a thought off the top of my head…comments welcome….

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

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