Distortion of the capital structure is primarily monetary?

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    Am I right to say that Austrians view the cause of capital structure distortions, and therefore business cycle busts, as primarily monetery? Would government spending also distort the capital structure, and therefore cause busts if it drawn down (say after a war or stimulus program ends)?


    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:


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