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

[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).

[Jcrew]

There are two main purposes to inflation:
1.) To make sure there is enough liquidity to facilitate the transactions for a growing supply of goods and services. Ideally, money supply would be pegged exactly to the growth of the underlying goods and services, but it would be too hard to guess exactly right so it is better to overshoot by a 1-3% to avoid unnecessary growth constraints.

2.) It slightly encourages risk taking. Since inflation destroys currency value, people would rather put their money in banks which in turn will loan out for investment reasons. If there was no inflation, a lot of people would horde cash and thereby introduce an unfriendly investment environment. If the economy falls into a deflationary scenario, this behavior would provide a positive feedback to deflation, and growth would slow to a crawl.

[scotchnrocks]

Thanks for the responses,

Looks like there are several different opinions on this, with the conclusion that it is the shaft for ordinary people. I look forward to going to work tomorrow.

[RikaKazak]

Hidden tax is BY FAR the #1 reason.