By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com
In an April 5 New York Times column titled “Not Enough Inflation,” economist Paul Krugman wrote, “a bit more inflation would be a good thing, not a bad thing.”
Krugman’s proposal is completely wrong, as any first-year economics student should be able to explain.
When the supply of money increases relative to the demand for money to pay for available goods and services, the result is higher consumer prices. In other words, inflation leads to a reduction of purchasing power.
Higher consumer prices damages consumers. Krugman knows that inflation is dangerous, which is why he advocates only a temporary dose of it.
However, even a little bout of inflation creates more problems. New money affects different goods and services differently. For instance, the selling prices of goods tend to rise before the wages paid to workers. This would increase business profits and could lead the owners to expand output.
To expand, manufacturers would likely hire more workers. So, short-term, what could be so bad about a little inflation?
Well, there are two major problems. First, the prices of everything, including wages, will eventually rise. Therefore the stimulus effect of inflation will be temporary. As labor and other production costs increase, businesses find that their expanded production is no longer as profitable. Unless inflation of the money supply continues, the economy will eventually face a downturn.
In fact, people experiencing inflation of the money supply start to anticipate its continuation. They demand higher wages to offset rising costs and businesses will increase prices before they are subject to higher costs. Those who guess wrong about the extent of inflation will misallocate their resources.
The second major problem with a little inflation is the moral hazard. As I said, the effects of the greater supply of money will not affect everyone equally. Those who get more money early will be able to acquire goods and services before prices rise. Those who are last to start receiving more money are almost certainly paying higher consumer prices well before their income rises. Invariably those who suffer the most from inflation are the poor and senior citizens who live on fixed incomes.
By reducing purchasing power, inflation also acts like a tax on savers and investors. This discourages investment and job creation.
Almost inevitably, the “cure” for a little bit of inflation is more inflation. This has been the policy of the US government for decades. Unfortunately, continued inflation simply makes the eventual financial crash more likely and much worse. This destruction of the value of the US dollar is a major reason why a growing number of people are getting out of paper currencies and replacing them with hard assets such as gold and silver.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.
move to Japan and experience deflation and its demoralizing impact upon society and prices. Inflation has undoubtedly helped your business as poeple have experienced higher wage rates.
“For instance, the selling prices of goods tend to rise before the wages paid to workers.”
I agree we have seen this. My question is why do we tolerate it? What is it about an increasing money supply that justifies businesses raising prices? Monetary inflation LOWERS borrowing costs. And the increase in prices of core commodity prices should be BLAMED on commodity traders, not used as an excuse.
Monetary inflation hurts business by making its operating costs rise. We thought most understood that! “What is it about an increasing money supply that justifies business raising prices” SURE sounds like a Benito Mussolini/Franklin Roosevelt call for PRICE CONTROLS! The FDR years saw rent controls for 7 years that ruined thousands of small landlords. This was done intentionally so that his Network pals could scarf up assets of small operators at fire sale prices. Business also is forced in this sorry, thieving environment to raise prices by lessening quantity contained in standard items (11.5oz vs 12oz) and by cheapening ingredients used. Too bad the Senate is so tightly in the grasp of The Pilgrims Society, the bastards who were back of the 17th Amendment and the bastards who own the FED, allowing for the direct election of Senators, so THEY could control MOST of them, like MY Senator John Cornyn, who gets money from JPMorganChase (Pilgrims Society member Jamie Dimon) and ExxonMobil (Pilgrims Society member Rex Tillerson), this influence results in the Senate NOT going along with the House to AUDIT the Federal Reserve, the source of inflation. No matter Obama or Romney next spring, The Queen (Pilgrims Society) and Prince Philip (Pilgrims Society) will visit the White House again, giving “our” President his marching orders. V. Kurt, GYRATE!!