This notion is met with shocked eyebrow-raised faces among trained economists—but yawns among the Bitcoiner plebs. Make what you will of that (elites vs regular people, trained experts vs ignorant masses).
Josh, as always worth reading, lays it out. Tl;dr = "My general view is that it is hard to make the case that inflation is good. The traditional arguments made on behalf of a persistent, positive rate of inflation do not help up well to close scrutiny."
And then he plunges us straight into the deflation-vs-depression convo in economics literature: "the fear of deflation is predicated on a misreading of monetary history and poor economic reasoning." Say it, baby, say it!
Why Do People Say Inflation is Good?
- Deflation is really really bad, so we need some positive CPI to create a buffer zone (2-3-4% is ideal).
- Revenue generation, and policymakers should use it to optimize macro goals; more inflation when that's good and less when it's bad.
Josh delves into the depression-deflation connection and quickly ends up in the Great Depression (even though that's an outlier instance without which the connection empirically goes away) 1. The usual story of price rigidity and nominally fixed loans:
Since deflation represents a general decline in prices, on average, throughout the economy, even those in other industries are more likely to default on their loans. Thus, although the bank thought it was diversified, the deflation causes a wave of defaults and also puts the bank at risk of failure. To the extent that banks are themselves interconnected through interbank loans, this risk of failure could spread across banks.
...BUT, "there are a lot of implicit assumptions hiding in this argument."
- deflation is unexpected: this chain of arguments don't work if it's expected: "Had the farmer anticipated deflation, the terms of the loan would have been different."
- Deflation is demand-driven. If it's supply-driven—i.e., productivity improving—the borrower's revenue (P*Q) is likely to increase (cue tech sector, say computers, for 50 years, which can deliver nominally cheaper goods while still making profits over time).
Overview of some research into those questions:
So supply-driven deflation good (at least not a problem), demand possibly bad...
"Historically, demand-driven deflation seems to mostly result from bad policy."
So no, not a natural outcome of a broken, runaway capitalism.
most people took the wrong lesson from this scenario [post-WWI deflation]. Many argued that the gold standard itself caused the Great Depression. However, there was no inherent flaw in the gold standard that caused the severe deflation. In reality, it was central bank mismanagement of the gold standard (policy errors). there isn’t much to fear about deflation, unless that deflation is driven by policy errors. This makes it somewhat odd to say that we need inflation to give us some cushion to avoid deflation
Excellent summary here, so I'll just ss it:
...and the implication isn't "free money for the issuer" (#869415); it's that optimizing economic agents take action to protect themselves from extortion:
Like any other tax, this creates a distortion. When people expect inflation to eat away at the purchasing power of their currency, they will tend to economize on their currency holding to try to avoid the tax. This reduction in money balances will ultimately reduce exchange and economic activity in comparison to a world without inflation.
Such inflationary taxes are a) largely hidden until after the case, b) unreliable since once that trust breaks down, money issuers have to costly rebuild credibility before people want to hold their money again (#854062).
The amount of tax revenue generated from an inflation tax is proportional to real money balances. The general public determines the quantity of real money balances to hold. Higher rates of inflation, without a commitment to price stability, will lead to people substituting away from holding money, which will further increase inflation. Over time, this decline in the demand for money will reduce the revenue that one can get from an inflationary tax.
Still with us??
Next Josh considers the price-informational virtue of a unit of account—very what's the purpose of money? (#793537) type considerations:
The unit of account is a common reference point. This is one reason why inflation is so costly. Inflation erodes the informational value of that reference point.
The problem/cost with inflation is that it makes all economic activities harder to pursue/calculate/consider/execute. Monetary misperception; money illusion. (I've argued this extensively here and here).
Although inflation means that prices are rising, on average, all of these other things that are happening are going to affect relative prices. But money prices are also changing. It becomes much more difficult to determine whether the price change you are observing is a relative price change or simply reflects inflation.
Higher rates of inflation push us closer to that world without a unit of account in the sense that it erodes the informational content of the unit itself. When prices, on average, are relatively constant the dollar price conveys changes in relative scarcity or abundance. During periods of inflation, the dollar price becomes insufficient. One must constantly find new reference points in terms of frequently purchased items.
Hence the recent emphasis on home insurance premiums, used cars, or eggs (#868956).
So yeah, there you have it. Inflation is bad, and not directly because you "get poorer" or sticker prices in the store are higher 2.
Footnotes
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"Deflation and Depression: Is There an Empirical Link?" American Economic Review, vol. 94, no. 2, May 2004 (pp. 99–103): https://www.aeaweb.org/articles?id=10.1257/0002828041301588 ↩
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"Who Bears the Burden of Dollars’ Falling Purchasing Power?" The Daily Economy, Aug 4, 2020: https://thedailyeconomy.org/article/who-bears-the-burden-of-dollars-falling-purchasing-power/ ↩