Wednesday, December 3, 2008

Why Economists Favor Inflation Over Deflation

Talking to a friend today I tried to explain this deflation/inflation business. Not being the brightest bulb on the block, I went in search of an explanation - one she could understand and hopefully one that had some credibility. Got this from the Daily Reckoning:

"Wonder why government economists favor inflation over deflation? We’ll give you a hint. Everybody always wants to get something for nothing. In that regard, paper money is one of the greatest inventions of all time. You can get an almost unlimited amount of something for about as little nothing as you can get. Want more something? Just add more zeros. Here’s another explanation from Jorg Guido Hulsman at the Mises Institute..."

“Fiat money [the kind of money you get from trees]... allows the owners of the printing press and their political and economic allies to enrich themselves far quicker and at much lower cost than any other producer in any other field. This explains why governments have for centuries sought to establish a paper currency. And it explains why, after they had achieved this goal in the 20th century, governments and their business allies set off on an exponential growth path. The welfare state has exploded in the 20th century, and Wall Street and the banking sector grew quicker than almost any other sector of the economy.

“The deflation-phobia of our elites is therefore the rational reaction of those who profit from the privileges that our present inflationist regime bestows on them, and who stand to lose more than any other group if this regime is ever reversed in a deflationary coup. Perennial inflation is based on monopoly. Deflation brings in the fresh winds of the free market. True elites would welcome deflation for precisely this reason, because they owe their leadership positions exclusively to the voluntary support of other members of society. They have nothing to fear from deflation – a shrinking money supply – because their leadership is grounded on the useful entrepreneurial services they provide to their fellow citizens – services that would subsist through any changes in the money supply or in the price level.

“But large parts of our present-day elites are ‘false elites’ or ‘political entrepreneurs.’ These men and women owe a more or less great amount of their income and decision-making power to legal privileges that protect them from competition and which enrich them at the expense of all other people. The fortunes of many political entrepreneurs are directly or indirectly attributable to the money monopoly of the Federal Reserve System. It is only because of this monopoly that the Fed could create a near boundless expansion of the money supply. Political entrepreneurs are thus right to fear deflation. For deflation takes away the source of their illegitimate income and puts them finally back on equal footing with all other members of society, whose incomes are based on efforts and services provided in a competitive environment.”

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