Would inflation help with depression?

Discussion in 'Economics' started by Pekelo, Sep 27, 2008.

  1. Pekelo


    Here is my theory, I thought I would run it by the board:

    Let's say in the next 3 years we would have a 40% drop from the high in the Dow. But inflation inflates everything, including stockprices. So let's say if we have a real inflation of 8-10%, that would soften the blow of the drop and in nominal value, the market's drop would be just around 20%, before it starts to recover.

    I looked up inflation data from the great depression, and guess what? They had negative inflation, they had deflation!:


    Between 1927 -33 the inflation was negative in every year, in 32-33 it was -9 and -10% respectively.The 12 years's cumulative inflation between 1925-36 is -25%....

    So in short, would a high inflation rate help with the nominal value of the markets???


  2. I suspect governments use inflation to increase employment. It can be dangerous to have lots of poor unemployed people in a country. If conditions become bad enough then revolution is possible, extreme political parties can become powerful, and politicians can be led to the guillotine.

    Stock market valuations might be a distant concern when there is no food on the table, no heat in the house, and possibly no house.