Boy, it sounds like inflation is a wonder drug that can fix all of our ills!
If you are fooled by what they portray as an easy fix, here are the pieces that they entirely left out of the equation:
- Inflation steals from savers and gives to debtors. If you were frugal and saved money in the past, it will be worth less in the future unless you can find an asset to invest in that keeps pace with inflation. Likewise, debtors with large amounts of nominal debts are given a free pass because they can pay off their past, fixed dollar debts with money that is less valuable. Punish the prudent and reward the reckless.
- Since debtors are rewarded, lenders are punished. As a bank or fixed income investor (insurance company, pension fund, retiree) who were willing to lend out money, your are paid back in dollars that are worth less which serves as a punishment for lending for capital investments.
- Inflation puts the business cycle into overdrive by driving the “boom” phase. Factories buy input materials in larger quantities, sell the finished goods at unexpectedly high prices and are fooled by the “money illusion”. They think their profits are great, but are really caught in rising prices due to inflation. The factories expand operations until they go bust.
- Inflation also increases the cost of holding money. If you sit on a pile of cash you lose real value over time. Therefore it incentivizes individuals and businesses to invest in projects that might be inherently risky. This can put even more fuel on an ever expanding bubble.
- The poor get poorer. The prices of all goods rise and unless wages rise at the same pace as inflation (which they usually do not) the middle and lower classes get squeezed.
- Inflation is a massive scheme to redistribute wealth. From the government’s perspective, it is a tax in which they print money and are able to buy goods and services before prices rise. Likewise, banks who are closest to the money source are able to pay employees and/or invest in assets before the asset prices rise from the newly printed money.
