[andrew.bonk]

I generally avoid comments sections on blogs, articles, etc., but this one caught my attention.

The comment came from the George Selgin article critical of Salerno’s appearance on the Tom Woods Show. Salerno comments that “sticky prices” are exaggerated and gives a few explanatory examples. Salerno’s point was that all smart entrepreneurs can anticipate changes in markets and can move prices accordingly.

Now to the comment, “How do Salerno et al. respond to the criticism that I believe you (and Horwitz 2000) raise about the asymmetry some Austrians have regarding monetary induced inflation/deflation: If ‘price stickiness’ isn’t much of an obstacle for market actors during a (monetary-induced) deflation, why aren’t prices just as able to quickly and costlessly respond to increases in the money supply by the central bank, eroding the foundation of ABCT?”

To which Selgin responds, “So far as I’m aware, Scott, none have ever offered any response to it. Perhaps they are too busy trying to paint us as a couple of would-be central bankers!”

Below is how I would answer to the comment, am I on the right track? How would you respond to this comment?

This criticism downplays the impact of changes in a “monetary induced deflation”. A deflation of this nature would either be (1) a deliberate policy that pointlessly reduced the money supply and altered the productive structure or (2) a credit tightening that stops a previous monetary expansion which liquidates the unsound investments, bringing in a recessionary (yet necessary) adjustment period similar to scenario one. So yes, as the commenter mentioned, prices would adjust quickly, but in either case there would be a recession brought upon by monetary forces that alter the structure of production.

Likewise, prices are responding to an central bank increase in the monetary supply. Examples of this are the housing market between 2000-2006 and the tech stock bubble of the 1990’s. Bubble formation and artificial lengthening of the productive structure are inevitable responses to artificial increases of the money supply. However, the process is not “costless” because of the malinvestments to the productive structure that must eventually be eliminated.

Selgins article: http://www.freebanking.org/2015/03/20/where-was-the-tom-woods-show-when-hayek-needed-it/

[jmherbener]

The asymmetry of the boom compared to the bust has little to do with the difference in upward and downward flexibility of prices. The boom begins with monetary inflation and credit expansion which generates capital funding to be invested. The additional money can be allocated into any production process in the economy since money is completely liquid. The capital funding, then, gets converted into capital goods which results in the building up and lengthening out of the capital structure. The bust begins with the malinvested capital structure. Since capital goods are somewhat specific, they cannot as easily as money be shifted into other production processes with their full monetary value intact. As long as the government does not interfere with the liquidation and reallocation process, however, it can proceed apace (even in the face of the necessity to convert the uses of specific capital goods) as it did in the downturn of 1920-1921.

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