Why is inflation a "bad thing"?

To gauge the economic effects of inflation, let us see what happens when a group of counterfeiters set about their work. Suppose the economy has a supply of 10,000 gold ounces, and counterfeiters, so cunning that they cannot be detected, pump in 2000 "ounces" more. What will be the consequences? First, there will be a clear gain to the counterfeiters. They take the newly-created money and use it to buy goods and services. In the words of the famous New Yorker cartoon, showing a group of counterfeiters in sober contemplation of their handiwork: "Retail spending is about to get a needed shot in the arm." Precisely. Local spending, indeed, does get a shot in the arm. The new money works its way, step by step, throughout the economic system. As the new money spreads, it bids prices up--as we have seen, new money can only dilute the effectiveness of each dollar. But this dilution takes time and is therefore uneven; in the meantime, some people gain and other people lose. In short, the counterfeiters and their local retailers have found their incomes increased before any rise in the prices of the things they buy. But, on the other hand, people in remote areas of the economy, who have not yet received the new money, find their buying prices rising before their incomes. Retailers at the other end of the country, for example, will suffer losses. The first receivers of the new money gain most, and at the expense of the latest receivers.

Inflation, then, confers no general social benefit; instead, it redistributes the wealth in favor of the first-comers and at the expense of the laggards in the race. And inflation is, in effect, a race--to see who can get the new money earliest. The latecomers--the ones stuck with the loss--are often called the "fixed income groups." Ministers, teachers, people on salaries, lag notoriously behind other groups in acquiring the new money. Particular sufferers will be those depending on fixed money contracts--contracts made in the days before the inflationary rise in prices. Life insurance beneficiaries and annuitants, retired persons living off pensions, landlords with long term leases, bondholders and other creditors, those holding cash, all will bear the brunt of the inflation. They will be the ones who are "taxed." [2]

Inflation has other disastrous effects. It distorts that keystone of our economy: business calculation. Since prices do not all change uniformly and at the same speed, it becomes very difficult for business to separate the lasting from the transitional, and gauge truly the demands of consumers or the cost of their operations. For example, accounting practice enters the "cost" of an asset at the amount the business has paid for it. But if inflation intervenes, the cost of replacing the asset when it wears out will be far greater than that recorded on the books. As a result, business accounting will seriously overstate their profits during inflation--and may even consume capital while presumably increasing their investments. [3] Similarly, stock holders and real estate holders will acquire capital gains during an inflation that are not really "gains" at all. But they may spend part of these gains without realizing that they are thereby consuming their original capital.

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality. [4] The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity."

Fortunately, inflation cannot go on forever. For eventually people wake up to this form of taxation; they wake up to the continual shrinkage in the purchasing power of their dollar.

At first, when prices rise, people say: "Well, this is abnormal, the product of some emergency. I will postpone my purchases and wait until prices go back down." This is the common attitude during the first phase of an inflation. This notion moderates the price rise itself, and conceals the inflation further, since the demand for money is thereby increased. But, as inflation proceeds, people begin to realize that prices are going up perpetually as a result of perpetual inflation. Now people will say: "I will buy now, though prices are `high,' because if I wait, prices will go up still further." As a result, the demand for money now falls and prices go up more, proportionately, than the increase in the money supply. At this point, the government is often called upon to "relieve the money shortage" caused by the accelerated price rise, and it inflates even faster. Soon, the country reaches the stage of the "crack-up boom," when people say: "I must buy anything now--anything to get rid of money which depreciates on my hands." The supply of money skyrockets, the demand plummets, and prices rise astronomically. Production falls sharply, as people spend more and more of their time finding ways to get rid of their money. The monetary system has, in effect, broken down completely, and the economy reverts to other moneys, if they are attainable--other metal, foreign currencies if this is a one-country inflation, or even a return to barter conditions. The monetary system has broken down under the impact of inflation.

This condition of hyper-inflation is familiar historically in the assignats of the French Revolution, the Continentals of the American Revolution, and especially the German crisis of 1923, and the Chinese and other currencies after World War II. [5]

A final indictment of inflation is that whenever the newly issued money is first used as loans to business, inflation causes the dread "business cycle." This silent but deadly process, undetected for generations, works as follows: new money is issued by the banking system, under the aegis of government, and loaned to business. To businessmen, the new funds seem to be genuine investments, but these funds do not, like free market investments, arise from voluntary savings. The new money is invested by businessmen in various projects, and paid out to workers and other factors as higher wages and prices. As the new money filters down to the whole economy, and the people tend to reestablish their old voluntary consumption/saving proportions. In short, if people wish to save and invest about 20% of their incomes and consume the rest, new bank money loaned to business at first makes the saving proportion look higher. When the new money seeps down to the public, it reestablishes its old 20-80 proportion, and many investments are now revealed to be wasteful. Liquidation of the wasteful investments of the inflationary boom constitutes the depression phase of the business cycle.
(Taken from "What has government done to our money")

Iirc I stated n the thread that I'd also accept payment in gold but I'm not sure and wasn't even able to find the thread on a quick search. I'm pretty sure I at least made some sort of joke that my money won will not be worth much anyways.
But I'll still gladly accept one cent pieces to settle in $

I own that book.

But I only got beyond chapter 3 or 4.

I'd still recommend it though I do have a feeling that their approach to the subject matter could be a little more interesting, but thats just a theory.

i think they might explain why Lincoln is a good guy in that book, Clown.

I'm hoping that this thread will help iron out a few principles which will allow the pog-commune to come into reality, somewhere in nowheresville dakota.

Returning to answer this.

Specifics on Energy (Nuclear and Ethanol) - I'm dissatisfied with both candidates on energy. I ultimately trust and agree with Obama more on the issue than McCain, but two areas where I agree with McCain are nuclear and ethanol.

Obama has largely equivocated on nuclear energy, saying that he is "not a nuclear proponent" and that it's not an energy panacea, but also indicating that he would consider it if it were "clean and safe." He's also taken a frustrating stance on ethanol (specifically, corn ethanol).

Any energy solution is, by necessity, going to involve multiple energy sources. It's also going to, by necessity, involve upgrades in our crumbling energy grid and a switch to electric or hybrid cars. All three of those things (increase in non-carbon energy, rebuilding the energy grid, and the change to electric/hybrids) are necessary for us to become energy independent: we need to have energy sources that are renewable (or effectively limitless, arguably the case with nuclear), we need to have a transportation system that is powered by that energy rather than oil, and we need the infrastructure to support those two shifts. This will also take much longer than the timelines that both campaigns are throwing out (no matter what energy sources they propose), but that's not particularly relevant.

Now, nuclear energy is not an energy panacea; nuclear power is a base power method of production, which would largely replace coal power; fluctuations in power demand during the day are usually served by hydro or natural gas. However, nuclear energy already is safe, and has a far smaller impact environmentally than carbon energy sources. The primary issue with nuclear is that it is overwhelmingly unpopular due to ATOMZ and Not In My Backyard mentality when it comes to waste storage (Yucca Mountain).

Corn ethanol is an abomination, energy-wise. Period. I support further research and use of cellulosic biofuels, but corn ethanol as it currently exists is worthless beyond winning the Iowa caucus. I can also rant about how corn ethanol connects to a ****load of other issues like food prices, farm subsidies, obesity, health care.

Gun Control - Not a gun enthusiast, although I do own three guns (from hunting when I was younger -- they're still back home) and will inherit dozens more at some point. This isn't a significant issue for me, personally or ideologically; I also don't see much changing on the issue no matter who wins. I also find the common rhetoric of the far-right and the far-left on the issue to both be abhorrent. Based purely on rhetoric, I'd side with Obama and the current 2008 Democratic party platform:

"... [W]e will preserve Americans’ Second Amendment right to own and use firearms. We believe that the right to own firearms is subject to reasonable regulation, but we know that what works in Chicago may not work in Cheyenne. We can work together to enact and enforce common-sense laws and improvements – like closing the gun show loophole, improving our background check system, and reinstating the assault weapons ban ..."

I agree with everything up until the named changes. I believe that the 2nd Amendment is a fundamental right that still is subject to reasonable regulation. The problem is that, particularly regarding the AWB, Democrats have illustrated little understanding of what would be common sense regulation. The AWB was silly, is silly, and will probably always be silly. It doesn't address the problem, and its primary accomplishment was pissing off gun enthusiasts.

I can go on further about gun control if you'd like, although like I said it's not an issue I'm significantly invested in. Ultimately though, I'd say preventing gun violence is not fundamentally a regulatory issue -- it's a social one. It requires improved education and job opportunities in inner-cities to deter youth from gangs, and it requires improved personal responsibility by gun owners to secure their guns from theft or use by minors. The federal legislation and regulation in place is already fairly reasonable philosophically.

Free Trade Rhetoric - This was an issue more in the primary than it is now, and I've talked about it already. Judging by his enunciated policies and his economic advisors, I'd actually agree with his policies here (pro-free trade, with stronger environmental and labor standards). I was just disappointed that he used populist rhetoric on this particular issue. It's an uncharacteristic pander.

FISA Vote - Insufficient court oversight. Telecom immunity. This got hashed over pretty hard over the summer.

Teacher Tenure - As with a lot of things, my opinion on education gets complicated quickly. I believe in public schools -- I do not believe in fully a privatized, free market approach to education. In fact, I think that would be disastrous. I do not believe in vouchers, although I do believe that private schools have a right to exist and that parents have a right to choose to send their children to them.

In light of that, I view education as a public service that must compete with -- and thus behave like -- the private sector. Thus I believe that the only way that public schools can be successful going forward is through both merit pay and by holding teachers more accountable. And that means loosening the grip of the teachers union on teacher tenure, which I haven't seen Obama talk about.

They both raise additional issues -- who judges teacher performance, and using what criteria? -- but I don't think those are justifiable arguments to avoid implementing merit pay or to avoid challenging teacher tenure.



I'm sure I could think of some others, particularly if I drilled down deeper into specifics of other positions or policies I agree with. These are just the ones that I've actively thought about over the last year of the campaign.

Madtown,

Excellent response. Much thanks.

I think thats what we're striving towards, yes.

Dakota would just be a temporary solution though. South America otoh....

I definitely agree with Madtown about the corn ethanol stuff, free trade, and FISA. I would probably add to that list some of the other more liberal economic/social policy ideas where I think the economic incentives may not work out the way they intend: i.e things like the minimum wage, some of the equal pay bills, the patriotic employer act, etc. etc. Not that I don't agree with the intentions behind them but I'm not convinced that the kind of legislation proposed is the best way to address the issues. I'm not convinced that it's not either, I just don't have enough info or understanding.

I know a great place in MT we could buy some acreage cheap

I'm going to Hell for just thinking of the joke I just did.

Just wanted to share. Not the joke, though. It's horrible.

There isn't anything intrinsically wrong with fiat money afaik.

Just as long as individuals aren't profiting from its issuance- which isn't the case when you have banks loaning the money to the government

Mets,

Did you finishing watching that? What were your thoughts?

What's this?

Sorry, Patriot Employer Act

Essentially, a tax credit for companies that keep HQ in the US and meet some other criteria with regard to health care plans, retirement, minimum wages, and off-shoring.

It's not so much that the bill would have horrible consequences, I expect the net effect of it would be very little, given that it's a tax credit and there is no penalty for companies which choose to ignore it, but it's a rather heavy-handed kind of government interventionism and unlikely to be very useful. I think the idea of adding provisions to trade agreements is better than using the tax policy, although even there caution should be a rule.

Protectionism in any form is terrible for the US. More importantly, US protectionism ****s Canada pretty hard, which we'll remember when you want our oil.

Unless the Liberals are in charge, in which case they'll give you whatever you ask for for pennies, then blame it on someone else in the next election.

Personally I'd be all for invading Canada for oil.

You can have Quebec & Alberta. We want to keep the rest.

Although, that should really say "we'll let you have Alberta, but only if you take Quebec, too"

http://www.telegraph.co.uk/money/mai...-mostviewedbox

http://www.bloomberg.com/apps/news?p...d=abVpg8xJDMWk

http://biz.yahoo.com/ap/080916/bank_...ts_safety.html

http://www.globalresearch.ca/index.p...t=va&aid=10232

http://www.globalresearch.ca/index.p...t=va&aid=10229

Here are a couple articles on the economic happenings of late- both from conventional sources and from my preferred globalresearch

Apparently AIG is close to going under as well.

RGE - noel roubini is good, and Marc Faber (boomgloomdoom (in some order) .com, although i don't think anything is free there) is very good, imo

No problem. Were you curious because you're undecided like kyro, or just curious?

Quebec - DO NOT WANT

I disagree because it can pretty much only work if the authority to print money is granted by some higher authority which prevents free competition between banks.

I am convinced that if there was no higher authority to grant the right to print money banks freely competing for customers would automatically gravitate towards a gold standard because if I could chose between a bank that just tells me that my money will be all right or a bank that allows me to exchange my notes for gold/X at anytime I'd know where I'd put my money (and I'd expect most people to do the same)