Wednesday 17 February 2010

Why inflation is bad

Mike Shedlock:

7Q. Who benefits from inflation?

7A. Inflation benefits those with first access to money, the banks and the already wealthy. It is a stealth tax on the middle class and poor whose wages never keep up with inflation. That problem is compounded by rising property taxes, sales taxes, etc, that eats consumers alive. Those at the bottom end of the totem pole get hit even harder. Their wages do not rise and they have no assets to inflate.

Absolutely spot-on. The theorists who say increasing the money supply doesn't matter because the effects spread throughout the system, overlook the point I've highlighted above. It's a grab.

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The Arthurian said...

I've heard it said before that "Inflation benefits those with first access to money, the banks and the already wealthy." But two Zinfandel into the evening, it suddenly makes sense to me:

Those with "first access" to money -- now read this slowly, sipping at your leisure -- those with first access to money are those who use future money today: the borrowers. People like me.

Inflation benefits debtors.

To be sure, my first priority would be a stable dollar, because that makes the issuing nation strong in the eyes of the world. But given that our leaders lack the will -- no, not the will, the clarity of thought -- Given that our leaders lack the clarity of thought required to stabilize the dollar, my second-best is to be accurate rather than clever in the analysis of questions such as Who does inflation benefit?

Time for a refill.

Sackerson said...

Hi, Arthurian. Inflation benefits borrowers who don't go bust...

But the bankers get big fees and bonuses, and these can be invested in property and stocks before the rest trickles down to the working stiffs.

The Arthurian said...

Excellent, Sackerson! I bought a house back in '77 and just a few years later the mortgage payment seemed ridiculously small because of inflation. That made sense to me when I heard the phrase "inflation benefits borrowers." But that was long ago, and now your update -- "borrowers who don't go bust" -- reflects changes that occurred since.

But I will have to think for some time about the examples you provide.