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.
The Achilles heel of all statist attempts at central economic planning is the problem of economic calculation.
Ludwig von Mises, who first formulated the theory of economic calculation, reasoned that socialist planning was theoretically impossible because of its inability to rationally allocate resources due to the absence of information provided by prices determined in the marketplace. Mises's reasoning holds true for artificial manipulation of the "time market" (Rothbard, , 375) for interest rates:
Artificially low interest rates result in an impairment of the economy's ability to perform economic calculation.
"We see that inflation is alive and well."– Ron Paul
In 1974, the year following the death of Ludwig von Mises, Frederich August von Hayek won the Nobel Prize in Economics for his "pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena."
Hayek's Nobel Prize–winning theories drew directly from Mises's work on the business cycle. Hayek showed, in his book Prices and Production, how monetary distortions caused by inflation and credit expansion cause the capital structure of the economy to become maladjusted.
New money that enters the economy does not affect all economic actors equally nor does new money influence all economic actors at the same time. Newly created money must enter into the economy at a specific point. Generally this monetary injection comes via credit expansion through the banking sector. Those who receive this new money first benefit at the expense of those who receive the money only after it has snaked through the economy and prices have had a chance to adjust.
