The Evils of Inflation
Inflation is the expansion of the supply of money and credit. So what’s so bad about inflation?
- In time, expansion of the supply of money and credit leads to price inflation; i.e., rising prices of goods and services. As things become more expensive to purchase, people need to work longer to purchase the same quantity of goods/services because wages are usually some of the last things to rise. In short, people become poorer, unless they work more.
- As prices rise, businesses start making more money and feeling more prosperous. They expand as long as the inflation continues. If/when the inflation stops, the expanders may find that their expansion was unwarranted and that they really misallocated their scarce resources.
- The inflation becomes addictive. If it is removed, businesses go through a withdrawal period (recession or depression). Some businesses may fail if they aren’t bailed out.
- The money printers (central banks/governments) are the first to benefit from the newly-printed money. Their priorities, such as military escapades, wars on drugs/alcohol, poverty, terror, etc., become primary and the economy servicing consumers to earn a profit becomes less important. Vendors and workers who receive the money later in the inflationary process receive money with less purchasing power.
- As people anticipate declining purchasing power, they prefer to spend their money rather than to save it for the future. As savings decline, the capital needed to build productive (long-term) assets is not accumulated and the society becomes poorer for lack of capital investment.
- As the money’s purchasing power decreases, people realize that it is better to be a debtor who repays his loans with money of lesser value than it is to be a creditor or saver who is repaid with money of lesser value. Because debtors gain and creditors lose during inflationary times, societies practicing inflationomicsTM accumulate more debt, not savings.
- At some point, when prices start moving up more quickly, investors become hoarders and speculators waiting for the next higher price from which to profit. Productivity becomes less important and capital is consumed.
- With a progressive income tax in place, governments benefit from higher prices (and eventually wages), as well. They receive more tax revenue. Government priorities become yet more important.
- At first, the government covers up how much price inflation the country is experiencing by manipulating the data. Later, they blame everyone but the true culprit for the price inflation. Eventually, when the money fails to function as a medium of exchange, martial law is imposed and everyone waits for the next government edict.
- Government must then decide who receives food and health care...who lives and who dies. The wealthier people leave for a land with a stable currency, leaving the poor in a destitute country, fighting for survival for several generations, and with no capital to rebuild the economy.
And some people think inflation is good!
Robert Jackson Smith