The Economist ($) on the Austrians: “Early last century, economists such as Ludwig von Mises and Friedrich Hayek argued that, if interest rates were held below their “natural rate” (at which the supply of saving from households equals the demand for investment funds by firms), credit and investment will rise too rapidly and consumers will not save enough.
“Sound familiar? America displayed many of those features in the late 1990s. Faster productivity growth raised the natural rate of interest, but because inflation was low (and because Austrian economics had long been out of fashion) the Fed failed to lift interest rates by enough. Investment and borrowing boomed.
“Strict Austrian-school disciples would argue that, because America’s recent downturn was due to overinvestment and overborrowing, slashing interest rates to encourage yet more borrowing was wrong because it delayed the need for households to save more. Central banks can postpone a downturn only by injecting more and more credit. The inevitable downturn is then deeper or longer.” (”Another Hangover in the Making,” November 6, 2003)
