Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand.
~ Ludwig von Mises, Causes of the Economic Crisis, 1931
Wednesday, August 10, 2011
Quote of the Day: Ludwig von Mises
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von Mises is of course a genius and I hesitate to debate him on this but I don't think he's exactly right. The recent credit expansion is an example. It in fact created real goods - McMansions in fact in overly abundant supply.
ReplyDeleteCredit expansion needs to increase in line with the market not by artificial means via the Fed lowering the price of money below the market equilibrium.
I think he'd argue McMansions are a classic example of the artificial rearrangement of real goods where capital was artificially diverted to those activities and away from other more productive activities as a result of the feds suppression of interest rates. But then economics is far from an exact science and everything is open to debate, which is one of the things that keeps life interesting.
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