Understanding Inflation Advocates

Understanding Inflation Advocates by Alex Merced

 There are two fundamental questions that come up people discuss monetary policy, and peoples views on these two questions which shape what they think policy should be. These questions are:

- Do you expect inflation or deflation as tomorrows problem?

- Do you prefer inflation or deflation?

 In terms of these two questions I expect price inflation down the line from the inflation of the money supply which we've seen primarily in bank reserves which I believe has grown beyond the ability for the fed to absorb later on so it's essentially racecar that's revving it's engine before a big race. While I think all manipulations of the money supply have an effect of causing mal-investments in the economy by creating shortages and surpluses of money, if I had to say which is the lesser of two evils I would say deflation. Jorg Guido Hulsmann makes a great case for deflation in his book, Deflation and Liberty.

 Although how about the people who prefer inflation, to Austrians such as myself it may seem bizzarre that someone may genuinely think that devaluing peoples savings, and destroying the purchasing power of people on fixed incomes can somehow be good policy. So I thought I'd take a moment to explain some of the inflationists thought process as I understand it.

Why does Price Stability really mean predictable inflation?

 Last I checked stability meant constant, so price stability to me would initially mean constant nominal prices but in the world of monetary policy it really means low predictable inflation, generally from 2-4%. Why someone would think this is good policy is primarily psycological. The idea is to create an environment where people feel wealthy cause they think their assets are constantly increasing in value, but really the value generally is constant but it just appears different priced relative to a larger money supply. This approach has some merit to it, but it's based on manipulating the misinformation of peoples views on price increases. As people learn and understand inflation on a larger scale, this should quickly lose any effectiveness as we've seen as people have become more knowledgable in economics the last few years.

 This psycological factor is really just a function of the accuracy of peoples education, the 1870s were arguably the most robust period of growth in US history yet it was a period of deflation and generally referred to as the Long Depression. The problem is if people see their assets dropping in nominal prices but don't equate that with increasing purchasing power this can have negative psycological effect, but this only makes the argument for better economic education because growth occured in the 1870s even though people felt negative about their asset values in this era.

 There are different ways for deflation and inflation of prices or money supply to occur (depending on which definition your using) which lead to different phenomena. Although the best way to refute someones views on an issue and open them up to yours is to show you understand and empathize with their view more than they do. Knowledge is power, Creativity is power manifest.