Compared to the last cycle, it will now take an even easier monetary policy to arrest the liquidation of the now larger misallocations and to generate another money-induced boom.

As this pattern is repeated, dislocations will necessarily accumulate, making the economy on trend ever more vulnerable to higher rates and making an ever more aggressive policy intervention necessary to keep the money supply on an expansionary course.

The results of this policy are obvious: a lasting and persistent shift of resources to forms of employment that reflect a low time preference although the true preferences of the population are different. Resources are being allocated to the provision of future consumption goods, either by the accumulation of productive capital or the provision of long-lasting consumption goods (housing).

The size and structure of this part of the economy are out of synch with voluntary savings but are being supported by an ever-expanding supply of money, which depresses interest rates and allows growth in investment and simultaneously sustained high levels of present-day consumption.


A policy of ongoing inflationism leads to a disproportionate growth of the financial industry and bloated and ultimately poorly capitalized fractional-reserve banks. The level of indebtedness in the economy increases. At a later stage of the inflationary process it will be the debt of the state that grows most. One reason is that the expenditures of the modern welfare state are largely nondiscretionary, and that they not only cannot easily be cut in a recession, but even tend to rise, while tax receipts inevitably shrink. Another reason is that, given today’s mainstream consensus elaborated here, the efforts to stimulate the economy usually include forms of Keynesian deficit spending, and as ever more policy intervention is required to avoid the necessary correction, the state’s debt load will expand, made possible by the again and again revitalized credit expansion.

Paper Money Collapse