A nice thoughtful piece by our man, Robert Blumen, on the the inflation and deflation debate. He takes a good look at some deflationist arguments in a fair and even-handed manner from an Austrian viewpoint. An excerpt:
The inflation-deflation issue is indeed quite puzzling due to the myriad of interacting factors, both correlated and cantilevered. I do not mean to suggest that the inflationary response that engendered by a deflationary crisis is in any sense a sustainable solution to the excesses of the preceding boom. Such a program would surely result in a hyperinflationary recession, rather than a deflationary one.
The Austrian view is that that resource mis-allocations of a credit-driven boom require a recession to be cleansed. This tells us that distortions in the real economy cannot be erased by changes in monetary policy (conventional or un-). As a policy recommendation, to allow the deflationary bust to do its work would be the best path. But as financial writer James Grant has written, if there is one thing that governments excel at, it is debasing their own currency. I would not bet on the sudden onset of incompetence.
