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No inflation worries

February 1st, 2011 · No Comments

Wasn’t it that if the central bank increases money supply, inflation risks increase? Apparently not, and that from a group of economist who usually predict mayhem under these circumstances.. Interesting!

By Cullen Roche

We’ve seen an endless parade of neoclassical economists commit forecasting suicide in recent years due to sheer misconception.  No misconception has been more widely believed than the money multiplier, the expansion of the Fed’s balance sheet and the inevitable hyperinflation that would ensue.  We’ve seen this argument from many different economists, however, few have been more vocal about the impending hyperinflation than Austrian economists.  Of course, the money multiplier is a myth and the addition of reserves to the banking system never really posed any great inflation risk to begin withIn a modern banking system banks are never reserve constrained.  This idea that banks lend their reserves is a relic of the gold standard yet we still see this idea trotted out on a routine basis.  Several years after QE1 and almost 6 months after QE2 we have a whopping inflation rate of 1.4% and continuing declines in borrowing.  But the calls for hyperinflation due to the Fed’s expanding balance sheet have not ceased.

But not all Austrian economists are blind to this broken model of economic thinking and modern banking.  Vijay Boyapati recently published the following paper that turns much of Austrian economics on its head.  In fact, Mr. Boyapati shows that the money multiplier is in fact a myth and that many of his colleagues have been working under a false premise.  This doesn’t discredit the Austrian school, however.  According to Mr. Boyapati it in fact shows that the Austrian Business Cycle Model once again proves that the boom is still causing the bust and Mr. Boyapati sees the continuing risk in this environment to be deflationary – not inflationary and certainly not hyperinflationary.

Mr. Boyapati has given me permission to reprint the piece here.  While it’s controversial reading (particularly for MMTers) I think it’s an excellent read in that it acknowledges many of the foundational flaws in neoclassical economics, however, still uses the Austrian thought process to come to a rational conclusion that government intervention is steering the economy in the wrong direction.

[Click title link above for the original paper]

Tags: Public Policy