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It would seem obvious that low inflation
is good for consumers, because costs
are not rising faster than their
paychecks. But
recently commentators have been saying
that "Low inflation introduces
uncertainty". This is nonsense.
During the high inflation
"Eighties" I remember
commentators saying "High Inflation
introduces uncertainty". This is not
quite true either. The truth is that steady
inflation, if it can be relied upon to
remain steady, does not introduce
uncertainty. Changing (fluctuating)
inflation rates is what introduces
uncertainty.
Eliminate Uncertainty
But there is no guarantee that if
inflation is high it will not go higher...
or lower. So there is the uncertainty. The
only sure way to eliminate uncertainty is to
have no inflation at all and that can only
be accomplished by a "Gold
Standard".
Under a Gold Standard, the government
owns a set number of ounces of Gold and
issues currency for that amount of money.
The only way to increase the money supply is
to increase their holdings of Gold. This
forces fiscal responsibility on the
Government.
Disinflation
But disinflation (decreasing levels
of inflation) also encourages people
to reduce high debt loads and become
financially responsible. As inflation
comes down it becomes less advantageous to
carry high debt loads. This is
probably the reason for the current
"hue and cry" among the popular
press. The writers are probably up to their
ears in debt and hoping to pay it off with
ever cheaper dollars.
Have you ever considered that inflation
is a form of consumer
"dishonesty"? You agree to borrow
"X" number of dollars and pay it
back with interest. But you hope that the
value of those dollars evaporates so you can
pay your debts with worthless paper?
In Rom 13:7 the bible
says, Pay all that you owe...
Inflation actually encourages debt
because you can pay it off with
"cheaper dollars". At first glance
this appears to benefit the debtor but if
you think of Debt as voluntary servitude, it
shouldn't be encouraged.
Deflation (prices falling below zero) on
the other hand can be downright disastrous
for those with high debt, because their debt
is in a fixed number of dollars but each
dollar is more valuable than when the debt
was first incurred.
Who benefits from Deflation?
Obviously creditors benefit. They loaned
money and are getting paid back with dollars
that have a greater purchasing power. This
scenario is distasteful to those with a
"Robin Hood" mentality i.e. steal
from the rich and give to the poor.
But Deflation (falling prices) also
benefits low debt consumers and those on
fixed incomes, because they receive a fixed
number of dollars but can buy more with each
dollar .
The periods in our history with the
lowest inflation have also been when our
Gross Domestic Product has grown the fastest
in terms of "Real Dollars".
(Real Dollars are measured after prices
are adjusted for inflation or
deflation).
In addition to encouraging fiscal
responsibility on the part of consumers, low
but stable inflation (or even deflation) is
also good for the long term economy, because
it allows producers to know their costs.
This predictability allows producers to
generate reliable profits which will
eventually result in a strong healthy
economy.
Inflation is bad for the economy because
economies built upon debt and encouraging
consumers to go further into debt eventually
crumble of their own weight. As more and
more consumers get over burdened by
debt, they declare bankruptcy, introducing
uncertainty to the creditors and robbing
them of their rightful income.
Somehow it is difficult to feel
compassion for the "rich
creditors" but everyone with a bank
account is a creditor. How would you like it
if someone who owed you money failed to pay
you back? Or you were never sure if you
would be able to take your money out of the
bank? What would this uncertainty do? You
would probably be less likely to put money
in. Banks feel the same way, if the chances
of being repaid decrease they are less
likely to make loans and that decreases the
health of the overall economy.
Rapidly falling or rising inflation is
usually a sign of a suffering economy with
high unemployment and a lack of spending
power (i.e. recession/ depression). But it
is the change that is the problem not the
altitude (or lack of it).
The Historical
Inflation Rates show that even
when we have had price deflation (falling
prices) the country has been prosperous if the reason
for the falling prices is that goods are
being produced so economically that prices
can fall and producers can still make a
profit. This generally occurs after major
productivity enhancements like the invention
of the assembly line or the completion of
the transcontinental railroad.
Disinflationary pressures in the late 1990s and early 2000s were most
likely the result of cheap productive
capacity in China and other former communist
countries coupled with the deflationary
forces of the 9/11 attack and the stock
market crash.
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