“ No economic crisis and consequent recession hit when the lengthening of the stages in the productive structure, a process we studied in the last chapter, results from a prior increase in voluntary saving, rather than from credit expansion banks bring about without the backing of any growth in real saving. Indeed if a sustained rise in voluntary saving triggers the process, this saving prevents all of the six microeconomic phenomena which spontaneously arise in reaction to credit expansion and which reverse the artificial boom that credit expansion initially creates. In fact in such a case there is no increase in the price of the original means of production.The fatal problem underlying this analysis is that capitalist systems have historically had many periods when they are mired in underemployment equilibria where there are significant idle resources, like labour, raw materials, capital goods and other factor inputs.
On the contrary, if the loans originate from an upsurge in real saving, the relative decrease in immediate consumption which this saving invariably entails frees a large volume of productive resources in the market of original means of production. These resources become available for use in the stages furthest from consumption and there is no need to pay higher prices for them. In the case of credit expansion we saw that prices rose precisely because such expansion did not arise from a prior increase in saving, and therefore original productive resources were not freed in the stages close to consumption, and the only way entrepreneurs from the stages furthest from consumption could obtain such resources was by offering relatively higher prices for them” (Huerta de Soto 2006: 397–398).
If an economy with significant idle resources has investment via fractional reserve banking or central bank creation of excess reserves (without prior saving in loanable funds), how will these inflationary pressures happen if productive resources simply do not need to be freed in the stages close to consumption? Such factor inputs will be available or quickly made available through increasing capacity utilization in the relevant industries.
To see how ridiculously irrelevant ABCT is we only have to consider how the US economy and many other Western economies over the past 20 years have had significant idle resources and labour. In fact, the US has not really had full employment since the late 1980s, and much of the factor inputs can be bought overseas anyway.
This is another unrealistic assumption underlying ABCT: it assumes an economy with full employment, no unused capacity and no significant idle resources.
Huerta de Soto, J. 2006. Money, Bank Credit and Economic Cycles (trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala