Purpose of Monetary Inflation

[scotchnrocks]

What is the purpose of monetary inflation or why is it necessary? A brief google search turned up nothing.

[Brainwalter]

So the government can spend money they don't have, and the tax is invisible so it doesn't upset their constituents.

[Mr. Now]

Here you go. The purpose of monetary inflation is:

The legalized plunder of ordinary people.

Read on:

Thomas Jefferson's Warning To America : "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Written by Jefferson in a letter to the Secretary of the Treasury Albert Gallatin (1802).

"The advantages given banks and other financial institutions by our fiat monetary system, which is built on a foundation of legal tender laws, allow them to realize revenues that would not be available to these institutions in a free market. This represents legalized plunder of ordinary people. Legal tender laws thus enable the redistribution of wealth from those who produce it, mostly ordinary working people, to those who create and move around our irredeemable paper-ticket electronic money." -Rep. Ron Paul

[Riddick]

I think I'll step into the fray here...

The first few responses (Brain, MrNow) were dead on.

However I'd like to bring up the consequences of monetary inflation, central bank style.

First, you should be aware of what economist JB Say wrote of consumption and production. (the real theory, not the butchered, fallacious Keynes strawman). You can read it at econlib.org under books, Jean Baptiste Say's Treatise, Book I Chapter 15. In layman's terms, you must produce wealth before you can consume wealth, or in other words, you must supply before you can demand (and hence the butchered interpretation "supply creates its own demand" on which Lord Keynes' legacy rests).

Naturally someone like Tom Hanks' character in Castaway, living alone on an island, cannot consume more than he produces (he can't eat 5 fishes if he only caught 3 that day), but a society that has accumulated wealth over centuries can consume more than they produce. Of course they didn't become an advanced, wealthy society this way but rather the opposite, by producing more wealth than they consumed, yet the other option is there, and of course it is a one way path to destruction (on a side note, society's that discouraged accumulations of wealth, through means such as burying a man not without all of his earthly possessions for example, tended to not go very far)

Year after year increases in the money supply through money printing and the government reinforced and secured system of fractional reserve banking, which would surely die in a free market, initiates and strongly encourages this - essentially capital consumption, wastes of scarce resources, malinvestment, a continual destruction of wealth above and beyond the creation of wealth, and of course the boom and bust cycle of the economy which can and has resulted in depression.

Again, in a layman's analogy, imagine eating 300 calories a day but working out intensely and burning off 6000 calories a day. Pretty soon your body will be eating itself from the inside and you will die. Not good.

So when the Fed instigates a flurry of loans and investments from money created out of thin air by lowering interest rates, at the expense of money-holders (inflation), most people think this is a good thing, when in fact it is the opposite. Increasing consumption of wealth (or increasing aggregate demand) before any increase in production of wealth has occurred, and then having this increase multiplied X times over, turns society into my workout analogy - a bodybuilder burning 6000 calories a day and only eating 300 calories.

In short, the federal reserve is not needed to stimulate the economy, and in fact, it is impossible for the federal reserve to stimulate the economy in any real sense of the word. The growth in wealth of the economy is stimulated by the shear fact that human beings always desire more/better economic goods. The actual consumption of these goods is naturally limited by their (ever increasing) production, and there is no inherent boom-bust cycle in this market phenomena.

Ludwig Von Mises, mentioned earlier in the thread, arguably the greatest economist that ever lived, had this to say, in 1942, about the consequences of inflation - "Inflation and You"

[econophile]

[ QUOTE ]
there is no inherent boom-bust cycle in this market phenomena.

[/ QUOTE ]

of all of the questionable things you have said, this seems the most far-fetched.

edit: i realize there is no point in arguing with devotees of the austrian school of economics, but i would urge the undecided to look at a graph of GDP growth rates over time.

[Riddick]

[ QUOTE ]
edit: i realize there is no point in arguing with devotees of the austrian school of economics

[/ QUOTE ]

All of the Austrian economics I've read has thoroughly refuted college textbook (macro)economics. I have an open mind and will anxiously await the textbooks' rebuttal. But somehow I don't think Brad DeLong will bother.

[MrBlue]

Part of Bernanke's argument:

[ QUOTE ]
First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.6 Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero. Of course, this benefit of having a buffer zone for inflation must be weighed against the costs associated with allowing a higher inflation rate in normal times.

[/ QUOTE ]

http://www.federalreserve.gov/boardD...21/default.htm

[econophile]

to add a little more to the quote from Bernanke, the reason having a nominal interest rate of zero is bad is that the central bank can no longer lower interest rates to stimulate the economy. that takes away one of the tools used to smooth the business cycle and could result in prolonged recessions.

[notluck]

Inflation helps in contract negoetions as well. Most poeple would rather have 10% raise in a period of inflation of 8% than a 2% raise with no inflation. Just a thought.

-Alex

[Brainwalter]

[ QUOTE ]
Inflation helps in contract negoetions as well. Most poeple would rather have 10% raise in a period of inflation of 8% than a 2% raise with no inflation. Just a thought.

-Alex

[/ QUOTE ]

Inflation hurts workers in this regard. It's a lot easier to give people 2% raises in 5% inflation than to issue pay cuts (with a stable currency).