According to Austrian theory, systematically liquidating the unsound investments and errors made under the influence of monetary illusion is an unavoidable correction. To blindly blame the bust for exposing the economy’s excesses is akin to blaming the hangover rather than the intoxication. The distortions of the boom must be purged and the errors corrected.
Seeking to prevent the bust via renewed inflationary stimulus is much like avoiding sobriety after an unrestrained bender. The necessary correction will only grow more severe if continually postponed and amplified by additional distortions that keep fundamentally unsound ventures artificially alive. The recession serves as the natural corrective phase, aimed at reestablishing a foundation of sound economic principles following the prior era of misguided optimism induced by artificial credit expansion.
The bust plays an essential role in eliminating monetary distortions by realigning prices, closing unprofitable enterprises, and redirecting wasted resources into sectors genuinely aligned with consumer demands rather than allocated based on temporary monetary inflation. This painful but necessary process clears the way for balanced, sustainable growth founded on a framework of reality rather than fiscal intoxication and inflationary misallocation.
Policymakers often deride recessions as the source of economic problems and attempt to artificially resuscitate the economy via renewed inflation. Yet, according to Austrian theory, the bust is in fact the solution, not the problem itself. The true problem was the extensive distortions and malinvestment induced by the artificial boom. Efforts to continuously reinflate bubbles through monetary intervention only worsen matters enormously and plant the seeds for far more chaotic crises in the future when the correction is finally allowed to fully run its course.