Paul Krugman attacks Ron Paul for his Austrian views of monetary issues in his latest column.

His main argument is that one advocate of Austrian economics, Peter Schiff, supposedly predicted hyperinflation 3 years ago, something that hasn't happened.

But Schiff's prediction error doesn't affect the validity of the Austrian view unless it could be shown that it was a necessary implication from the Austrian analysis. And it isn't.

That is because first of all, Austrian monetary analysis not only doesn't have to, but as far as I know haven't ever, said that increases in the monetary base directly create price inflation. It is only indirectly, to the extent it increases money supply, that it will have any effect. And while money supply has increased the last few years it has increased far less so than the monetary base.

And though some Austrians sometimes express themselves as if a higher money supply will necessarily raise prices that is not necessarily the case either if money demand increases. For example if money supply increased in the fictional Duckborg by $1 billion but went directly into Scrooge McDuck's money bin and he just kept it there then the effect on prices will be the same as if there had been no money supply increase, which is to say no effect. The same goes for money in the real world, even when it is many people that hold money and even if it is deposit money rather than physical cash.

And because of lower nominal interest rates as well as the European debt crisis, demand for dollars has increased, cancelling out much of the effect from the increase in money supply.

So no, the lack of hyperinflation doesn't in any way refute Austrian theory or vindicate Keynesian theory