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


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: