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3 Libertarian Papers 1 (2011)
The Causes of Price Inflation & Deflation: Fundamental Economic Principles the Deflationists Have Ignored

handle is hein.journals/libpa3 and id is 221 raw text is: VOL. 3, ARi. No. 13 (2011) THE CAUSES OF PRICE INFLATION & DEFLATION: FUNDAMENTAL ECONOMIC PRINCIPLES THE DEFLATIONISTS HAVE IGNORED LAuKN F. DANVIDSON 1. Introduction IN OCTOBER 2008, IN RLSPONSL TO THE FINANCL CRiSIS, the Federal Reserve began a massive expansion of the monetary base. In a period of only two months commercial bank reserves leaped from $45B to over $600B, an astounding increase of over 1200%. Despite the fact the money supply has steadily grown since then, a number of commentators, purportedly sympathetic to the Austrian school, have doggedly clung to a prediction that prices-in-general will continue to fall. According to these authors, price deflation in the wake of the financial crisis was caused by an immense credit contraction, and prices cannot rise again unless credit expands, a prospect they see as unlikely. In the deflationists' view, credit is the all important factor that affects prices-in-general. Even though commercial bank reserves have expanded exponentially, the deflationists see little possibility of either monetary or price inflation, because credit has remained scarce, and is likely to remain so. Boyapati (2010) even calls into question the notion that an expanding monetary base encourages banks to issue additional quantities of fiduciary media. According to that author, for many years banks have had the ability to issue credit virtually at will, using a variety of methods to lower the reserve requirement close to zero, and thus an increase in bank reserves does not pose any particular threat of credit expansion-and hence monetary Laura Davidson (davisnlaurlhotmail.com) is an independent scholar and a student of Austrian Economics. CITE TIIIS ARTICLE As: Laura Davidson, The Causes of Price Inflation & Deflation: Fundamental Economic Principles the Deflationists Have Ignored, Libertarian Papers 3, 13 (2011). ONLINE AT: libertarianpapers.org. TIiIs ARTICLE Is subject to a Creative Commons Attribution 3.0 License (creativecommons ora/1icenses). Published by the Ludwig von Mises Institute. 1 LIBERTARIAN PAPERS

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