Reply To: Distortion of the capital structure is primarily monetary?

[jmherbener]

Both fiscal and monetary policy cause malinvestments in the capital structure. The difference is distortions from fiscal policy can be permanent but distortions from monetary policy are self-reversing.

Reduced government spending, as in winding down after war, does not cause a bust. Instead it frees entrepreneurs to reallocate investment into profitable lines and therefore, leads to an improvement in consumer satisfaction.

Take a look at Robert Higgs’s great article on the economy after the Second World War:

http://www.independent.org/newsroom/article.asp?id=138