How Inflation Plays Out

The problem with inflation is that it has a number of mal-effects on the economy and society in general.  The following is but a short list:

  1. Inflation, properly defined, is the expansion of the money supply.  If we ask who is expanding the money supply, we see that only one entity is permitted by law to did this: the central bank (in any given country), which necessarily does the government’s bidding by buying the government’s debt.  Consider for a moment that the central bank simply prints more money out of thin air when the government wants to spend more money on war, welfare, or what not, but you and I have to earn our money.  How fair is that?  It’s certainly not equal treatment.
  2. If the government doesn’t have any cost associated with its expansion of the money supply, it can treat its citizens unequally with handouts to whichever group votes to keep the largesse coming and the politicians in office; i.e., unfairly.  This ultimately leads to resentment, envy, and jealousy, which can manifest as riots, monetary claims for past grievances, or even the dismemberment of statues.
  3. If inflation is great enough to raise goods prices, it becomes more difficult to plan for the future.  As a landlord, for example, how much should I charge for rent?  How much should I set aside to renovate an apartment?  Will my tax bill go up when all other prices rise?  Will I be able to afford my next rental unit, or will someone else outbid me?  Manufacturers face a similar dilemma.
  4. As consumers learn to expect rising prices, there is a self-fulfilling prophesy.  Saving falls by the way-side.  Spending and speculating become the order of the day.  Which prices will rise fastest?  Which commodity should I hoard today?  What is available?
  5. Long-term planning and capital accumulation fall victim to rising prices.  In the long run, society becomes poorer for a lack of production and capital investment.  Businesses requiring large amounts of capital move offshore to countries with lower inflation rates.
  6. As most people become poorer, social unrest rises.  Crime increases, especially theft of food, but also other goods that are no longer manufactured, or are too expensive to import.
  7. The division of labor breaks down and people must learn to live on a more subsistence level; i.e., on what they can produce themselves or on what they can steal.  People become generalists, rather than specialists.
  8. Debtors gain and creditors lose.  Inflation eats away at the purchasing power of the currency over time; thus, allowing debtors to repay their debts with currency units that have a lesser purchasing power than those they borrowed.  Wealth is transferred from savers to debtors.
  9. Inflation gives governments an excuse to expand its scope and impose wage and price controls on its subjects, thus intervening in all aspects of life.  Privacy and freedom disappear.  Everyone becomes a ward or subject of the state.
  10. When the state has total control, and its citizens have been stripped of their freedom, the government must look elsewhere for more capital to consume.  Foreign wars follow.

Of course, it doesn’t have to end this way.  Without a central bank to inflate the money supply, people would come to rely on the market’s money; i.e., gold, silver, Bitcoin.  The effort required to produce those things limits the supply and keeps its value intact.  It would also limit the expansion of government and the loss of peoples’ freedom.  That sounds so much better to me.  Too bad I’m in the minority.  I guess we’ll have to watch inflation play out once again.

Robert F. Sennholz

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