Why is inflation so bad ?

Totally_Baffled · Post by **Totally_Baffled** » 02 Jul 2007, 21:21

Hi All

Now I am not talking hyperinflation - the impact of which is obvious.

However , why the obsession with 2% inflation ?

Why would 5% be so bad? Or Even 7-10%?

Why the drastic, "low inflation at all costs" approach?

I think I know the answer(s) - but I would be interested in others views to check my understanding ?

dr_doom · Post by **dr_doom** » 03 Jul 2007, 00:30

Inflation is bad because it is a very effective way for governments & banks
to surreptiously transfer / steal wealth from the people.

It is an extra "invisible" tax on your wealth.

Personally I think I can spend my money more effectively
than the government can, on my behalf.

PowerSwitchJames · Post by **PowerSwitchJames** » 03 Jul 2007, 09:48

I'm no economist but...

I understand inflation can be good for the average person as long as wages match inflation, because it helps wipe out debt.

I recommend reading 'The Growth Illusion' by Richaes Douthwaite for a much more detailed explanation!!!

SILVERHARP2 · Post by **SILVERHARP2** » 03 Jul 2007, 11:13

The early effects of inflation can seem beneficial, but on the downside you have a transfer of wealth from people on fixed incomes, savers, and it creeps up the middle classes as it gets into the system. The rich are insulated as they are better able to manage their assets. Another aspect is that it creates distortions in the economy for example property booms, ask any teacher or nurse in London if it?s fun living there.

Bandidoz · Post by **Bandidoz** » 03 Jul 2007, 12:24

Inflation is bad because everyone goes on strike demanding a pay increase

I vaguely remember the 70's, the Queen, the Sex Pistols, and the "rubbish mountains" during the Winter of Discontent.

(Saatchi's finest work)

brasso · Post by **brasso** » 03 Jul 2007, 13:47

Inflation is bad because it is a very effective way for governments & banks
to surreptiously transfer / steal wealth from the people.

Couldn't agree more! Inflation is effectively caused by the government printing more money! If there's only a million pounds in circulation, and the government prints another million, the value of your money just halved. It is administration-free tax. This is why gold is popular as a store of wealth - it may not go up by a %age each year, but at least the government can't print more of it!!

J. R. Ewing · Post by **J. R. Ewing** » 03 Jul 2007, 18:28

Inflation! Urrrrgggghhhh!!!!
Gold! Urrrrggghhhhh!!!!

One thing I like about Nomadic desert people is that they truly understand the riches of life such as drinking water.

alternative-energy · Post by **alternative-energy** » 03 Jul 2007, 19:18

One thing I like about Nomadic desert people is that they truly understand the riches of life such as drinking water.

That may be true and for the many tribal peoples of the world who rely on the basics food, water, shelter and bartering.
However if you are dealing with a surplus of a resource, be it a type of food or tool etc then the value of this thing will inflate due to its scarcity.

In the western system at present there is a fair bit of cash sloshing around this makes other resources relatively scarce and the price of these items will rise ( if demanded).

The trick could be to live a little more like the nomadic peoples and engineer a system for yourself and your family so that inflation will not affect you too much.

So
Grow your own energy
Pay off your debts
Grow your own food
Buy things only when absolutely needed
Be satisfied with simplicity
Build up skill sharing / bartering in your community
and yes protecting any spare money you have or earn from inflation (this can take a variety of forms which all come with associated risks)

One thing you cannot really affect is the inflation of taxes such as council tax unless you decide to live in a campervan but then growing food could be difficult.

High inflation with low interest rates is a problem because people will borrow money to buy assets which inflate the prices of the assets and so on... a large amount of people get into huge debt then the bankers react to the easy money supply. Up come the rates then 'pop' the assets deflate and people are saddled with negative equity on their assets...
sound similar?

Totally_Baffled · Post by **Totally_Baffled** » 03 Jul 2007, 21:29

Thanks for the replies everyone.

I am still confused a little by the obsessive commitment to sub 2% inflation.

If for example inflation rose to 5% (say because the government didnt want rates to rise beyond 6-7% because of the implications for the housing market) then what would be the downside? (Lets assume that wage rises matched inflation to keep real wages the same)

Now 5% isnt comparible to the 1970's, since I believe it reached 15-20% + in the 1970's which led to a wage inflation death spiral which crippled British competitiveness.

The interest rates that followed in the 1970's were the bitter medicine we had to take to get inflation back down again. This worked by in effect reducing the money supply via fewer affordable loans. Also I believe there was further impacts due to mortgage queues? (I think I remember my mum and dad saying that had to queue for a mortgage in 1981/82?)

Would higher inflation erode our competitiveness? Is that what they worry about? Would there be less inwared investment due to a smaller gap between inflation and interest rates (in other words "real" interest rates?)

Whats the answers??

Post by **clv101** » 03 Jul 2007, 21:43

Wikipedia says this:

If inflation is high in an economy there are three main problems it can cause:

1. People on a fixed income (e.g. pensioners, students) will be worse off in real terms due to higher prices and equal income as before; this will lead to a reduction in the purchasing power of their income.
2. Rising inflation can encourage trade unions to demand higher wages. This can cause a wage spiral. Also if strikes occur in an important industry which has a comparative advantage the nation may see a decrease in productivity and suffer.
3. If inflation is relatively higher in one country, and that country maintains fixed exchange rates with other countries, then the country's exports will become more expensive for other countries to purchase, creating a deficit on its current account.

biffvernon · Post by **biffvernon** » 03 Jul 2007, 23:13

And it's a problem for folk who keep their savings under the mattress.

Andy Hunt · Post by **Andy Hunt** » 03 Jul 2007, 23:24

When I was young, you never used to have to pay to put air in your tyres.

That's inflation for you.

dr_doom · Post by **dr_doom** » 04 Jul 2007, 01:34

A few good links here, where Ron Paul talks about monetary policy and the inflation tax:

http://www.youtube.com/watch?v=jn2Gzfk6 ... ed&search=

http://www.youtube.com/watch?v=W56PMOvs ... ed&search=

The two points which resounded with me:

1. Historically all paper money systems have come to an end, and the purchasing power of the currency goes to zero.

2. Ships are still being dragged up from the bottom of the ocean which have been there for 500 years filled with gold, and guess what, it still has purchasing power. I doubt the same thing could be said for ships going down full of paper money.

Cycloloco · Post by **Cycloloco** » 04 Jul 2007, 02:13

dr_doom wrote: (cut)
The two points which resounded with me:

1.
2. Ships are still being dragged up from the bottom of the ocean which have been there for 500 years filled with gold, and guess what, it still has purchasing power. I doubt the same thing could be said for ships going down full of paper money.

And bringing all that gold back to Spain in the 16th Century created inflation in Spain (so said Milton Friedman I vaguely remember.)
Enough gold from the bottom of the sea would still do the same today.

Another reason to keep inflation low is that it distorts managers' knowledge of where the problems are in their organisations. Price rises in particular goods or services should be the signal for checking efficiency and alternative actions. In times of high inflation all the real price rises are simply overlooked as part of inflation and a country with inflation of the currency loses competitiveness against other countries.

Think about this in terms of peak oil. When the price starts a fast rise it will affect all goods and services. Cue efficiency gains and substitutions for oil. With high inflation those changes appear less obvious so we move to hyperinflation and the economy collapses faster.

dr_doom · Post by **dr_doom** » 04 Jul 2007, 02:32

Interesting point, although I believe this was back in an age where gold was the main thing used as money. So yes, discovering loads of gold, and then bringing it back to spend on a fixed amount of goods and services would probably cause inflation.

Nowadays it probably wouldn't have this effect, seeing as there are very few if any national currencies left backed by gold.

Even though Ron Paul talks a lot about gold, he doesn't necessarily advocate a gold-standard as the solution to our current problems, it is increased competition. So people should be free to decide for themselves what they want to use as money. I'm inclined to agree with him.