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An idea about risk and growth

phattonez

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One of the main arguments about Austrian Business Cycle Theory is concerning growth. Austrians claim that demand falls because of inflation, and since demand falls, capital investments will not be successful. However, Say's Law tells us that increased production increases demand (but not all production is desirable!).

So, there's some kind of balance. I mean, creating $.01 out of thin air probably will not cause a crash, but creating trillions will. This is because the increase in production from the trillions in new money will not be enough to curb the drop in demand because of the inflation that will occur. So there comes an idea of risk. At some point, the increase in capital will not be worth it. Basically, once you are into the realm of forced savings, you enter into risk. The more forced savings you have, the more risk you have. This is achieved though government inflation in which to give those bills they print value, you necessarily have to have a lower command of goods (control you think you have minus control you actually have is forced savings, roughly). This is also achievable through fractional reserve banking, in which you get multiple claims to the same dollar.

And this is the crash, when people finally realize that they have a lower command of goods than they previously thought. So yes, inflation and fractional reserve banking may be worth it, but to a certain extent. Obviously we have been inflating too much because we keep getting crashes.

I think that this would resolve some of the debates that we have over stimulus. Yes, to some extent they will work, but only to the point at which the induced demand from capital investments can outstrip the fall in demand from inflation.
 
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