Which is Better: High or Low Inflation?

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.

Deflation benefits low debt consumers and those on fixed incomes, because they receive a fixed number of dollars but can buy more with each dollar 

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. 


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 with loans on their books benefit. They loaned money and are getting paid back with dollars that have a greater purchasing power. But in the long run they will not make as many loans, because people tend to avoid debt if they feel it is in their best interests to save.  So banks actually prefer a low inflationary environment.

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 .

Historically, 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.

If you were uncertain about the value of the money you put in 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).

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.

The deflationary period that began in late 2008 was the direct result of a collapsing stock market which destroyed trillions of dollars of paper “wealth”.  This caused millions of people to cut back on expenditures and banks to refuse to loan to questionable borrowers.  This type of deflation is not the same as a productivity induced deflation.


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