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Friday, July 2, 2010

Let me get this straight--inflation is a good thing?

I saw this on Newsweek’s Tumblr and it made me annoyed.


“Making a value judgment about deflation depends in part on which side of the balance sheet you sit on, and on what’s going on in the broader economy.

So, what you’re saying is there’s no hard-and-fast, factual way to judge deflation—like you’d say “murder” is a bad thing but you can’t make a moral call on inflation?  I’m dubious.  All that said, you’re going to go ahead and judge it anyway.

Borrowers with fixed-rate loans—like the government, many companies, and homeowners—will cheer for inflation and worry about deflation.


“Boo for our dollars being able to buy more!” they hope to never have to say.

See, when prices drop, it means businesses are getting desperate to sell more stuff. This is good for buyers because it means we get more for our dollar, but this is bad for businesses because they are making less profit.  Of course, their employees (us) get paid the same for a while, but eventually employee wages get cut to make up for lost sales (the executives have to eat, right?) so, it’s sort of a ripple effect, I guess.  Of course, if profit weren’t the concern (or the execs didn’t have to eat SO MUCH) we might have a more stable system with the wealth spread a bit more evenly throughout our society (distributed wealth? No, that’s NOT socialism!).

When wages and prices grow modestly each year, it’s easier to stay current with existing debt.

But wages aren’t literally “growing.” They just appear to be growing. Because as wages “grow” so do all other prices to make up for your pretend raise.  Inflation doesn’t mean “growing”—inflation is exactly what it sounds like—same amount of balloon material, more air.

And when there’s lots of unused economic capacity—shuttered factories, large numbers of unemployed people—a little inflation can be just what the doctor ordered. Continually falling prices act as a disincentive to investment and risk taking.

Right, because when money can buy lots of stuff the last thing you want is more money. >_<

Yeah, this logic is bass-ackwards. If your money can buy more stuff, that’s WHEN you risk because you have less to lose. At least, that’s how I think—but maybe I’m just a freak.  Think of it like stocks on the stock market—when you can afford to buy lots of stock (the price of a stock is low) you buy more, right?

“Buy low, sell high.” Right?


Moreover, many economists and most central bankers believe the ideal rate of inflation is slightly above zero.

Well, that shows why you can’t trust economists and central bankers.  So, they WANT our money to slowly lose it’s value. NICE.

“Experience shows that a rate of inflation around 2 or 3 percent helps the economy to perform at full potential with maximum sustainable employment,” says Joseph Gagnon, senior fellow at the Peterson Institute for International Economics.

Because the dollar is sufficiently losing it’s value, we’re all desperate enough to stay in our jobs and not start our own businesses or, god forbid, take it easy (you know in Europe employers give employees 6 weeks off a year!). 

Now think about how much your average savings account pays you in interest.  Yeah, putting money in a savings account doesn’t seem like such a good idea if inflation is growing by the above-mentioned rate. Essentially, your money is gaining nothing and depending on your specific interest rate, you may actually be losing money.  So, don’t bother to plan for that rainy day.

In fact, the Federal Reserve, the nation’s chief inflation fighter, actually wants prices to rise. One of the Fed’s mandates is to provide “price stability,” which means a consistent, reliable annual inflation rate.

No, sorry, that’s not what “stability” means.  Stability means just that—keeping things relatively unchanged. Inflation rising steadily, every year, is not stability (especially when financial crises hit—they make this brand of “stability” even less so).

Without saying it in so many words, the Fed designs monetary policy to target inflation of between 1.5 and 2.0 percent per year.”

Gross, on inflation v. deflation

Nice. So there’s this cabal of white guys in suits that determines how much value our dollar loses every year.  That’s lovely.

What was that thing so many loud-mouth whiners were bitching about?  Oh yeah—the “Free” Market.  What’s “free” about our system if there’s a handful of Wizards of Oz hiding behind a curtain manipulating things?

And no, I never took an economics class in high school (or anywhere else)—maybe that’s why I don’t understand why steadily devaluing a currency is a good thing.  All I see is a way to make the money the poor eventually get (via “Trickledown Economics”) worth way less than the money the rich folks get (since they get it straight from the banks, before inflation steals its value).

Seriously, what this looks like to me is a system meant to keep us desperate enough to stay in our jobs working our asses off while guys in suits get to live large.  There’s no way we can all “make it”—the folks at the top can’t live there without the rest of us holding them up.

I can see why the rich like this system.

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