Hi guys,
Is inflation good in moderation? Is no inflation at all bad?
Am I to believe this basic answer provided to a BBC reader? http://news.bbc.co.uk/1/hi/business/7842801.stm#question%20six
Regardless of whether he is right or wrong; what logic did he use to make this conclusion? I don't see it. Am I missing something?
Thanks,
Mr Jones
We're told deflation is a problem, and yet we're also told that if the government printed money it would create inflation which is also be a problem. So what is it to be? Ken Pascoe, Bournemouth
Tim Weber: Inflation is good - but only in moderation. It's like a temperature control for the economy and helps to adjust imbalances in supply and demand for goods and services. However, too much inflation or no inflation at all (i.e. deflation) are seriously bad, because they spook both consumers and investors and can stop them from shopping and saving and investing, with devastating consequences for the economy. When inflation and growth are just right, economists speak jokingly of a "Goldilocks economy" - neither too hot nor too cold.
The logic he uses is (regardless whether he is right or wrong):
when prices are falling consumers prefer to hold money instead of purchasing goods and services, as the purchasing power of money is increasing. This causes layoffs in industries which in turn has to cut staff. This is based on the Keynesian circular flow model of the economy, and according to this theory results in a deflationary spiral.
Similarly businesses will not want to invest, for the same reasons consumers dont spend. As such investment falls.
Of course none of this is theoretically sound, and is disproven by historical fact. In the late 19th c. the US experienced a 30 year period of falling prices. Output however grew steadily at about 3.6% pa. I'm actually researching The Great Deflation right now.
Irish Liberty Forum
You might also want to read this, then email it to the BBC
Whether inflation is good or bad will always be a matter of opinion. Given enough starting capital, you can make a fortune off investing properly in the inflationary/deflationary cycle. You can also lose everything out of sheer ignorance or just being financially short-sighted.
What is not good, IMO, is forcing entire populations to work in inflationary economies without giving them the option to opt out, and without educating them as to consequences, alternatives, etc.
I'd like to think that in a completely free market, there would be a place for inflationary currency. Specifically, banks who so chose, could use fractional-reserve money as a special, albeit risky investment. Of course they should also not misrepresent what they are doing and give full disclosure to potential investors as well.
Best to consider the topic of inflation itself value-free.
i guess its value free.
if money supply, say gold, is expanded through expenditure (use and exhaustion) of existing capital and commodities perhaps social benefit occurs.
but if inflation when defined as money receipts in excess of actual money, the the gold stock, iow (a hayekian definition that i have read) is the case, that may be non beneficial to many who are getting money through exchange rather than mere creation of inflated claims on money.
modern currencies arent representaions of a commodity amount.
so in one sense i guess they function like the expansion of commodity money - it just seems that the govt has a lot more sole control and over money creation than they ever should have had and that my not be value free.
i am still trying to figure out the social harms done by despots and central banks manipulating money supplies myself.
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