Could Inflation Be a Good Thing?
Richard Young ·
May 2, 2011 at 12:31pm
Conservatives and even some on the left are rightly concerned by the Treasury’s unprecedented printing of money. The fear is that the dollar will be devalued and that eventually hyper-inflation will set in. Those are real concerns but it seems to me there might be a couple of mitigating side-effects:
- Almost 50% of Americans pay no income tax and have no skin in the game when it comes to supporting government largesse. Inflation is perhaps the most regressive tax possible, affecting the poor even more than the rich. Inflation will result in all Americans sharing the pain of the left’s socialist policies. Gas prices are a great example of this.
- The world sees America as the only effective world’s policeman (e.g. Libya). Despite foreign criticism of American intervention, without us the world would be worse off. Yet this is a tremendous drain in both U.S. blood and treasure. As the dollar weakens and foreign holders of U.S. debt see the value of their investment dwindle it is an indirect way of taxing them to support our activities.
I’m no economist and I’m sure there are probably lots of holes in my reasoning but I’d love to hear from more knowledgeable Ricochet readers on this subject.
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Comments :
Oct '10
Re: Could Inflation Be a Good Thing?
Inflation, more than any other action of government, punishes the responsible citizen. Seniors have their life savings diminished or destroyed. People on fixed incomes struggle. Welfare payments, by the way, are mostly indexed for inflation, so the losers become the winners.
There are no good consequences for citizens, but the government gets to relax and keep spending as every other responsible party suffers from the governments profligacy. And the politicians keep promising and spending.
Dec '10
Re: Could Inflation Be a Good Thing?
Not an economist either, however inflation is destructive to assets anyone holds. If you're holding a bunch of debt, as the government does, then great! But for the rest of us with 401(k)s, savings accounts or real estate assets and no ability to print money, we're scr... not as fortunate.
Apr '11
Re: Could Inflation Be a Good Thing?
Inflation is a disaster as we saw in the 70s and early 80s...not only does it hurt the purchasing power of the dollar...it creates a boom and bust cycle while the fed attempts to get it under control that leads to recurring recessions...it introduces all kinds of uncertainties for consumers and businesses and kills all those living on a fixed income.....the 30 year boom we enjoyed beginning in the early 80s was in large part due to reagans battle against inflation along with volker....to allow the cointry to return to those days would be an absolute horror
May '10
Re: Could Inflation Be a Good Thing?
Nah, price inflation caused by monetary inflation is never a good thing.
Apr '11
Re: Could Inflation Be a Good Thing?
There's nothing good in this. This sort of resource-price inflation is the same stuff that burned us in the 1970s. Resource-price (supply-side) inflation hurts the economy's ability to produce and leads to a recession trap that is very hard to get out of. The government's only policy lever becomes more inflationary monetary and fiscal policy, burning savers. Also, since our resources are mostly imported (I'm thinking of oil), the cycle can self-perpetuate if policymakers follow the "standard" policy.
Mar '11
Re: Could Inflation Be a Good Thing?
There is no silver lining to this cloud.
Feb '11
Re: Could Inflation Be a Good Thing?
"As the dollar weakens and foreign holders of U.S. debt see the value of their investment dwindle it is an indirect way of taxing them to support our activities"
That might be the case if all the debt was in the form of 30-year Treasuries, but much of it is short-term which soon matures and needs to be recycled thru issuance of new debt. A clear trend of inflation/devaluation obviously will significantly raise the interest rate that buyers--wherever they may be located--will expect on these new purchases of debt.
Feb '11
Re: Could Inflation Be a Good Thing?
raycon.."Inflation, more than any other action of government, punishes the responsible citizen"
Sebastian Haffner, in his memoir of growing up in Germany between the wars, described this effect as he saw it in the early 1920s:
The old and unworldy had the worst of it. Many were driven to begging, many to suicide. The young and quick-witted did well. Overnight they became free, rich, and independent. It was a situation in which mental inertia and reliance on past experience was punished by starvation and death, but rapid appraisal of new situations and speed of reaction was rewarded with sudden, vast riches. The twenty-one-year-old bank director appeared on the scene, and also the sixth-former who earned his living from the stock-market tips of his slighty older friends. He wore Oscar Wilde ties, organized champagne parties, and supported his embarrassed father.
Haffner saw the destruction of the balance between generations as one of the key ways in which hyperinflation paved the way for Naziim.
I don't think we're in serious danger of Weimar-level hyperinflation...but even Carter-level inflation, coupled with prolonged economic stagnation, would do great social damage.
Aug '10
Re: Could Inflation Be a Good Thing?
Most economists will agree that modest inflation (1-3% maybe) is a good thing, because it keeps money flowing and forces people to invest and put their money in productive assets. But once you get past that level of inflation, bad things happen.
For example, inflation destroys price information, which makes the economy less efficient. It's hard to tell whether prices are going up because of increases in demand signalling a need for higher production, or whether it's just inflationary pressure due to a devalued dollar. Uncertainty grows.
If inflation is due to a devaluing dollar because of loose monetary policy, it's harder to float debt, which means interest rates have to be increased to find buyers for the debt. This drives up debt service costs and overall interest rates in the economy, which hurts everyone.
If inflation gets out of hand now, the Fed is going to have fewer options for getting it under control than it once did, because every point of interest rate increase will cost billions in debt servicing.. And if it can't raise rates, it will have a hard time finding buyers for the debt, which could trigger a major crisis.
Mar '11
Re: Could Inflation Be a Good Thing?
My brother sent me this interesting quote from Keynes: Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. ... they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. ...As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Jun '10
Re: Could Inflation Be a Good Thing?
If you have a fixed-rate mortgage and you're invested in commodities like oil, gas, and precious metals, you'll be fine.
Feb '11
Re: Could Inflation Be a Good Thing?
People put time and capital that could be put to productive use towards dealing or coping with inflation. You have to shop early and often because you can be almost certain that the products you want will be much more expensive later in the week or even the day. Investment becomes skewed towards certain asset classes. And there are whole special inflation accounting rules that are a pain to deal with.
Now if you had a swap agreement in which you pay a fixed amount of interest and receive a floating amount (that resets according to the prevailing market rate say quarterly or biannually) you could potentially do ok or even great.
A good picture of inflation: imagine your money as ice cubes in an ice tray that has been placed on the kitchen counter. Slowly (and sometimes not even slowly) but surely your wealth is melting away.
Dec '10
Re: Could Inflation Be a Good Thing?
Although I agree with most of the commenters, I would note that U.S. manufacturing numbers are up, which is a false silver lining. Manufacturing is up, I believe, because our dollar is cheaper, but that's not good enough for me.
However, watch as people push the manufacturing numbers as the only numbers they have to push.
Re: Could Inflation Be a Good Thing?
Inflation has arrived but no one is admitting it. It has not hit wages yet because so many are unemployed. But it has hit commodities and food, and it is already very hard on those who are not well-to-do. Its only good effect is to increase their dissatisfaction with the administration that has engineered the inflation. Thanks to Ben Bernanke, there may be a Republican landslide in 2012.
May '10
Re: Could Inflation Be a Good Thing?
Mr. Young, I respect your posting as a little mental exercise. I've enjoyed reading the responses above too. Your query reminded me of a college session in '92 or '93 when my prof was drawing some silver lining to the Carter years regarding interest rates. Some of us young undergrads had asked him how bad things were financially back then (I was 8-9 years old during Pres Carter's time). He rambled on and on about high inflation but 1% students loans, meaning that money was cheaper to borrow and students had it better than we did. He sensed the honestly dumbfounded looks on our faces and seemed to stumble on his words. He was a prof that I liked, so I was not out to cause a fight or make him look foolish. I asked almost without thinking, "So it would be better for students to have inflation near 20% with all of their expenses and parents' difficulties, etc. and the rest of society having trouble?" "Well, no of course not. I was just saying that if you consider percentages..." Like then, I have to agree with those smarter folks above. No thank you.