Inflation Destroys More Than Money

Everyone knows that inflation hurts consumers by raising the cost of their purchases and that it hurts those on fixed incomes the most because although their costs are rising, their income isn’t. In addition to impoverishing individuals, inflation has several less obvious ramifications. Perhaps the most insidious and detrimental consequence of inflation is the facilitation of more wars.

How Inflation Promotes War

Prior to the advent of fiat currencies, if a Monarch wanted to wage war, he had to figure out a way to pay for it. If his treasury wasn’t large enough to pay for the means of war, the king would have to either raise taxes, or borrow the money, either way there were limits to how much could be raised. And once the money ran out, the king would be forced to sue for peace, whether he liked it or not. But if he could print all the money he wanted, war could be waged for much longer, causing considerably more damage and loss of life. This is exactly what happened in both WWI and WWII. France, Germany, Italy, Russia, and the United Kingdom covered a large part of their War expenses through inflation.

Inflation Normalizes Theft

Another problem with inflation is that it is essentially theft. It has been called a hidden tax, but by diluting the value of money, the government is is essentially stealing a fraction of the purchasing power of every dollar. Whether consciously or unconsciously, this institutionalized dishonesty normalizes the idea of theft and encourages citizens to steal as well. One of the largest proponents of inflation, Economist John Maynard Keynes said, “By this means [inflation] the government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft.”

Inflation Facilitates Financial Instability

When bankers are loaning their own (or their depositor’s) money they are generally risk averse, and will only lend when there is a reasonable expectation that they will get their money back with interest.

But when inflationary fractional reserve banking and government guarantees are introduced, banks can take bigger risks because the money isn’t really theirs and they will be bailed out if they get in over their heads. So, the profit is theirs but the loss is passed on to others. This added risk promotes the boom and bust cycle and causes much more pain in the down turns.

In addition to promoting higher risk for businesses, inflation also promotes more risk for individuals. Since inflation allows borrowers to pay back loans with less valuable money people are encouraged to borrow when they otherwise would not. Higher levels of inflation penalize savings and encourages borrowing, so people more easily get into debt and thus end up on the economic treadmill unable to get off. At the same time saving is discouraged because its value will evaporate over time.

Inflation encourages a mindset of selfishness and immediate gratification rather than long-term investment for the benefit of future generations. Instead, in order to maintain purchasing power individuals are forced into riskier investments that will grow quickly enough to outpace inflation. It also forces individuals to work longer than they would normally have because they need to cover the cost of inflation for the remainder of their lives. So rather than simply having enough to cover expenses, they have to have enough to cover expenses plus inflation.

Inflation Tends to Deteriorate Product Quality

Since it is difficult to raise prices, instead businesses will reduce package quantity or substitute cheaper (lower quality) components in an effort to maintain the same price level. This lower quality under the guise of being the same as the previous higher quality is a form of a lie. So once again, inflation is encouraging dishonesty. Since nothing is as it seems, dishonesty tends to creep into all aspects of life undermining a strong work ethic, honesty, and integrity.

Conclusion:

So we can see that monetary inflation has many far flung ramifications in addition to just a loss of purchasing power. For a more in depth look at this phenomenon you can download How Inflation Destroys Civilization by Jörg Guido Hülsmann.

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