Inflation is important because economics is all about creating incentives. We have property rights because it gives people an incentive to work hard and takes risks. We have patents because they give people an incentive to explain how their invention works. We have a market economy because it means that if a company wants to gain market share, it has to create value for the consumer. In the same way, central banks try to maintain low levels of inflation (~3%) because it encourages people to invest their money in profitable ventures, rather than just leaving it under the mattress. Investment is the way wealth is created, so it should be pretty obvious that deflation is bad for the economy.
Notice that I'm talking about the economic health of the country, not the individual citizen. If you're only concerned about immediate short term benefits, you should push for zero taxes, high deflation, and the gold standard. But that's penny wise and pound foolish. You're shooting yourself in the foot. Better by far is to support actions which improve the economy, because a rising tide lifts all boats.
If people hide their money under mattresses, all that means is that they aren't competing to buy the available goods. Inputs for other ventures are cheaper.
If the government weren't trying to re-inflate the asset bubble with cheap money, ventures that make more sense would be flourishing instead.
Resources are not infinite. When someone accepts a piece of paper and just holds on to it instead of immediately consuming what he could buy, the resources are available for other things.
And when there are more people deferring their consumption, its cheaper to borrow money/resources and cheaper to grow new industries.
Countries don't become rich and powerful by consuming everything as soon as they get it. They do it by growing their industries.
That is called "deflation." They tried it in Japan, it didn't work.
> If the government weren't trying to re-inflate the asset bubble with cheap money, ventures that make more sense would be flourishing instead.
Inflation and cheap money/asset bubbles are completely orthogonal. If anything, inflation should increase interest rates, not lower them.
> Resources are not infinite. When someone accepts a piece of paper and just holds on to it instead of immediately consuming what he could buy, the resources are available for other things.
Resources are also for the most part either perishable or they depreciate. At the very least, resources must be expended (warehousing) while unused resources are stored for later use. Ideally, resources are used closed to when they are produced. Otherwise, value is lost in some manner.
> And when there are more people deferring their consumption, its cheaper to borrow money/resources and cheaper to grow new industries.
Why grow your industry when the consumers have deferred their consumption? Once more people have deferred consumption, the economy and industry will shrink, not grow.
> Countries don't become rich and powerful by consuming everything as soon as they get it. They do it by growing their industries.
They do it by doing both. I live in a country with high industrial output (aimed at export) but little consumption in comparison (people save too much + high income disparity), its a trap that the Chinese government is desperately trying to get out of. If Chinese don't consume, the gov has little choice but to buy treasuries (as upposed to investing in more unused infrastructure/ghost cities/industrial output), and they are losing money on those t-bills.
There's a big difference between "trying to make it happen" and "happened despite of them trying to not happen".
Deflation/Inflation works fine when governments aren't involved. Point being that if market can predict the inflation and deflation then every contract will account for that. No business will fail because of deflation, because they will purposefully account for the deflation in their economic calculation when they pay the workers and raw materials.
In simple words, when government isn't causing deflation, at the start of deflation the wages always falls faster than the prices of consumer goods which always clears the market(which is when the rate of fall of consumer goods prices equals the rate of fall of wages).
When government is trying to meddle with the money supply, it disrupts the economic calculation of the market which prevents the market from clearing in time and from real wages to rise up.
Why on earth you would buy an unknown inflationary currency? I mean, it would NEVER take off, except for illegal markets where use the privacy offered by a crypto-currency.
But look where we are now? Silk Road gone (well almost) but BTC unaffected and sky-rocketed. You would never have attracted that capital if you haven't a deflationary currency. Actually, by all means it's an asset.
With that aside, let me give cover my complex thoughts on inflation:
Sometimes it is possible to alter a function in such a way that the output is later maximized. Sometimes this is possible by essentially lying to people. When someone doesn't get a raise each month to make up for the expansion of the monetary supply he is effectively getting a pay cut, but he's been manipulated into not really noticing this. But markets are not fixed. Technology expands, populations expand, priorities shift (from religious worship to drugs or science, for example). At some point it is possible for a portion of the system to understand the manipulation and to maximize it for that portion's gain. Just as Keynes talked about priming a pump, imaging those that sell the primer. It is in their interest for the system to stutter so they make efforts to have it so fairly frequently. The secondary effects of this manipulation are malinvestments by those not party to the information about the cycle.
But even that has a secondary effect: The effect of some informed people taking actions to minimize the harm done to their own fortunes. They sidestep property and stock bubbles, but they still need to beat inflation.
Those informed people start talking about a replacement for the inflationary monetary system. They argue on the internet about crypto-currencies and they refine their ideas, and ultimately Bitcoin gets created. We are living in aftermath of centuries of Keynesian policy, this is PART of the long run to which Keynes is dead in. The part where something by design is (essentially) non-inflationary. Even gold had its risks (Fusion, for example) but while Bitcoin is free as in liberty it is also unforgiving of mistakes. That is why the uninformed shouldn't access it. Or at least not it directly. They should trust banks or become informed, because as it stands now they are not equipped to handle it.
Lastly, I reject the notion that inflation has proved useful for stabilizing the economy.
Fractional banking by its nature monetizes all assets (since most loans are secured, the 10x multiplication window is just a fancy way of "printing" money from the value of your house or factory). But the relative value between the underlying assets and the currency is in flux (or the futures market for the good would be 0, and the information already priced into the market) and in exchange for this freeing of capital and acceleration of gains to wise economic asset allocators, this temporal variance in asset value causes an increase of volatility in the financial system ESPECIALLY when the majority of its deposits are demand deposits since there is also system wide uncertainty in cash-on-hand.
It may be that the increase volatility and subsequent government action maximize technological, ecological, and industrial advancement by allocating assets into the hands of todays best and brightest; or it may be that the cost of management (inflation, regulation, deposit insurance, super insurance, asset backed derivatives, to big to fail bailouts) exceed the gains of a fractional reserve banking + inflationary monetary supply system, but we will not be able to tell by examining the data on inflation in economies where fractional reserve is a GIVEN.
You do realize that pretty much everyone understands this in some way? What do you think OWS was, in part, about? The middle-class of the US is well aware that their wages have decreased relative to productivity.
If deflation becomes the order of the day, every business lobby group will immediately switch their narrative to the importance of indexed-wages for all! (which they currently oppose) while all labor unions will switch to arguing a contract is a contract (which they definitely oppose - you can't sign away your rights, contract fairness etc.)
It's true only if you are buying the exact same things today, that you were buying, say a decade ago. This is true for some things such as food, housing etc.
However for other things such as computers, gadgets, medicines, cars, etc. are much better today than they were before. For these things, you get much more for the same price(taking inflation into account).
For example, phones used to be only communication devices; but now they are also a camera, entertainment device and even a computer. Others, such as medicines, they have become cheaper and much more effective. In short, improvements in science and technology beat the effects of inflation.
In some markets it can actually cause a deflation. For example, computers used to cost thousands of dollars, but now you can buy a much better one for a few hundred bucks.
Inflation is bad, only when stuff that you buy doesn't improve over time.
Perhaps one could even show that inflation is somehow related to the introduction of newer and better products in the market. For example a new car, with a more fuel efficient engine, will likely cost more than the old ones. However I don't have enough evidence to justify this claim.
I don't know whether to laugh, or cry. Keynes was many things, but he was not a Time Lord.
We've been living with Keynesian policies for a tick under 70 years, which also has happened to correlate to the greatest wealth expansion in recorded history. It's a bit premature to point fingers as to why (or what has happened since the 1980's, which has caused middle class wages to stagnate).
Do keep in mind that Keynes was revolutionary because his ideas worked, even though they upended much of classical economics - they had (and continue to have) predictive power for how economies work, especially when interest rates are near-zero.
