Keynesians live by the philosophy that lowering interest rates will increase aggregate demand thereby increasing consumer spending and driving up employment. And while this is temporarily true(stock markets are booming, employment is up. Yet the primary indicator that all Keynesians are taught to judge the strength of the economy(GDP) is stalling.
First thing to notice is that Keynesians tend to define inflation as an increase in pricing. And as noticed in the CPI the prices haven't necessarily skyrocketed as some Austrian economists have predicted. The problem with this is that there is a flaw in the definition of inflation, and this is noted in the stark differences between traditional Keynesian and Austrian definitions of inflation. While Keynesians tend to define it as an increase in pricing, Austrians tend to define this as simply an increase in money supply. There are many reasons that prices aren't changed as much by an increase in the money supply... the one that is thrown out so often is monetary velocity. Monetary velocity is the rate at which money is exchanged from one transaction to another. So if the bills aren't in circulation at the rate that they were prior to the increase in the money supply, then the prices won't increase. Financial institutions often sit on the money, which prevents it from entering circulation. While this is the reasoning that is often talked about, there is another one that often gets hidden behind the bullshit, and to me this is the primary reason that a credit economy flat out inferior to that of a savings based economy. When Austrians speak of a mis-allocation of resources and hence a bubble, they often speak on the production side. If suddenly as a business you know that there is going to be a sustained amount of liquidity present in the market place, one does not raise prices but instead increases supply of their product. So businesses start overproducing goods in order to accommodate the increase in demand. Since the economy is running based on credit, the longer the demand is present the further individuals go into debt. Over time the economy has to make it easier and easier to get credit in order to sustain the increased supply in order to prevent it from going into recession. If the demand collapses, all these businesses are stuck with this cock hanging out and nobody left to give it a tug. And this is pretty much what's starting to happen now. The next 5 years are going to be quite painful to watch.