Economists of the Austrian School of economics define inflation differently than much of the mainstream of the economics profession. The typical mainstream intermediate macroeconomics textbook defines inflation as "[a]n increase in the overall level of prices" (Mankiw, Macroeconomics 5th Edition, 530). The eminent Austrian economist, Ludwig von Mises, suggested otherwise:
What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. (Mises, Planning for Freedom, 79)
A recent exchange between Congressman Ron Paul and Ben Bernanke took place during Bernanke's testimony before the Congressional Joint Economic Committee on November 8, 2007. Congressman Paul, instead of referring to either the PPI or CPI, referred to the MZM money aggregate:
Currently, of course, we can't follow the money supply with M3 but we can follow one of your statistics, which is the MZM the ready cash available and we see that inflation is alive and well. That money supply figure is going up about 20 percent per annualized.
In a typical Austrian analysis of the business cycle, Congressman Paul attributed both the NASDAQ bubble and the more recent housing bubble to interest rate manipulation. Congressman Paul's interpretation of the Austrian Business Cycle Theory (ABCT) suggests that distorted messages transmitted via the price mechanism to consumers and to investors in particular cause malinvestment to occur within the economy. Specifically, Congressman Paul pointed out the 1% federal funds rates that followed the September 11th attacks as evidence of the Federal Reserve distorting the economy and likened the role of the Federal Reserve to that of a price fixer. After first attributing the problem of bubbles in the economy to the Federal Reserve's expansion of the money supply, Congressman Paul then questioned how a further inflation could prove helpful....
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