Please help me to understand, why inflation is bad?

Discussion in 'Economics' started by freewilly, Dec 7, 2008.

  1. Why is inflation so bad?

    Somehow I feel inflation is actually the only solution to pull us out of the mess.

    From 1930 to now, what is the inflation? I am going to make it up here, so 10X (or 1000%). Just imagine if you lived in 1930, and fast forward to 2008. When you wake up in the morning, you were stunned that inflation went to to roof, 1000%. However, you also realize that have much better living standard, 2 or 3 cars in each family, and every car is much better than those made in 1930s, you heard about PC, internet, cell phone, many many more. Do you still care that you just had a 1000% inflation. Why does it r eally matter to you?

    I mean, why everybody is so afraid of inflation? Sure everything will be more expensive, but do not forget you will get much fatter pay check as well. You will not lose your buying power.

    We are having a huge housing bubble, and that housing bubble should create a big inflation, but we haven't seen it yet because people artificially keep it down. This is not healthy. A big housing bubble need a big infaltion.

    Now, we have a big housing bubble. How are we going to solve the problem? One way is to let the housing price go down, but you know what that means, foreclosure goes to teh roof, and banks go bankuptcy, teh financial system collapsed.

    Anther way is to create a big inflation. Everything goes up, including your pay check, but the housing prices remains the same. Then bank can still keep the money moving. Nobody is going to lose anything.
  2. What if gasoline prices went to 0.0001 per gallon. And price of Lamborghini Reventon went to $5.
  3. epetrov


    Hi Freewilly,
    very interesting question from your side. :)
    In the last 19 years I lived in several periods with high inflation and I'd mention several features. You will decide if it is good or bad. There is no one and simple alswer. So;
    - Inflation is very good for people who has debts. Yor can "pay" all of your debts (for house, cars, etc) for a year. It's vegy good but rarely happens like that. Banks adjust the interest rates, too - for ex. till 100%, or 1000% or more per year. Anyway a friend of mine paid the mortrage of his two bedrooms appartment for just ... 300 USD.
    - Inflation is terrible for people who has savings - they lose their money month after month. My father had one account of app. 6 months salary and after some time he cached the amount which was at app. one day payment. Interest adjustments does not help much.
    - You are pushed to spend your money as quichly as possible - at the moment you get them. The result? You buy things you do not need.
    - Inflation is not a quick process. Ifflation is a long process, unfolding on waves as the finance markets. Some people try to speculate. But it is like to speculate on finance markets - so most of them lose money.
    - Economy starts using foreign currecny for payment - ex. Euro. Then you have to change your money for Euro and back and you lose part of it in spread and commitions;
    - Your salary will not be updated to the inflation rate. It may be updated up to 70% or 80% automatically let's say. Also the offitial data may be manipulated (less than a real one). So over time you get slowly poorer and poorer. The countries with high inflation are not the most prosperous on the world.

    This is some consideration from my side over the inflation.
  4. Prices would rise faster than most people's salaries.

    For example, earlier this year gas prices went up 50%. Did your salary do that?

    What if everything jumped even 20% per year while your salary went up just 3%?

    Unless you get paid in gold. I know a guy that used to pay his employees in gold during the late '70's.
  5. Cheap money creates bad investments and thus interferes with natural market forces who have a way of showing up on the surface anyway in the end.

    It's like a new shot on a heroine addict so he feels better again for some time but .......

    You need to go to rehab at some time in the future....

    Or you die.
  6. Inflation is the "Destroyer of Worlds"... all through world history.
  7. harkm


    A little inflation over many years is not that harmful. However, when inflation accelerates, it becomes devastating.

    Here is an Excerpt from Paper Money by "Adam Smith," that illustrates that devastation.

    "My father was a lawyer," says Walter Levy, an internationally known German-born oil consultant in New York, "and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread."
  8. Lucky he could afford a single loaf of bread. At a certain point, it was better for kindling.

    Price stability is the key with a slight uptick in inflation. Inflation keeps capital investment going. If the value of future goods is more than today, then it makes sense to invest and *work*.

    Thus mild inflation is the lifeblood of our economy.

    Problem is this: economic activity in some sectors (ie shipping) is zero. Imagine what happens when that money starts moving. velocity * money = gdp. velocity is economic activity, thus a psychological bias alone. Deflationary view is self reinforcing just as inflationary view is. So, once the inflationary view catches on, companies will do capex (instead of pull it back), shippers will ship, banks will do business, and all of the sudden velocity is back up and money supply is still amped up. We will see strong inflation before we see the fed take care of that problem sufficiently.

    The real question is how long the self reinforcing trend of deflation outlook will continue. I don't think for long with all of this fiscal stimulus coming.

    Remember, oil went to 147 (gold 1000, silver 20, copper 3), partially because investors and consumers believed that inflation was continually self reinforcing as well. If you knew inflation was going to continue, you would buy all of these things and prepare. (soros reflexivity, eh?) Now the shock is in, and the current trend is opposite. Now we all worrying like this: what if oil goes to 20? Russia blows up? If we lose tax revenues, do we have to cut services and more jobs (thus even less economic activity)? Debt holders blow up? Conclusion: Lets hold cash to be safe... I think this is a deflation fear bubble just as we were dealing with the opposite in June of this year. Look at baltic dry index. Looks like a nuclear bomb hit. That baltic dry is not sustainable here. A bubble in the opposite direction.

    If the government weren't intervening so agressively, I would think deflation and continued credit destruction is a viable bet... But that ain't the game... Fade the bubbles is the game, since we're not standing still, and are professionals at money printing and stimulus (unlike the Japanese). We as Americans don't like to hoard cash because we are more entrepreneurial (investors) and impulsive (spenders). Entrepreneurs are risk takers, which means money multiplier effect (resulting from investment). It is our defining character.
  9. On the other hand, it's much cheaper for us Europeans to buy stuff from the USA. So you get our euros and things will be ok provided you produce anything of value. As for me personally, I only buy books and DVDs from the USA. Everything else is from China, Europe and Japan, sorry :)

  10. human advance in technology didn't come as a result of inflation
    #10     Dec 7, 2008