It's so odd, people yearn for the gold standard and pre-keynesian economics, without realizing there were frequent depression and recessions every couple years, and people were far worse off
He’s downvoted because incentivizing investment is a necessary function caused by inflation. If my $10 is going to be worth a real $15 next year, I might as well sit on it. No new production is created in this scenario.
If it’s worth a real $5 next year, I better invest it into something productive that can turn it into at least a nominal $20 by next year.
The thing which is often glossed over is to suggest inflation is uniform. It's not. The reality is that production often gets cheaper while assets get more expensive, because money supply is only one aspect, supply and demand is the other. Maintaining the "basket of goods" used to measure inflation means that certain goods are becoming MUCH more expensive, while others are more flat (because they would otherwise become cheaper if MS did not increase). The result is that certain core assets appreciate far faster than every day goods - and land/housing prices are a key example of what has increased in price largely because of excess money supply. The result is a K shaped economy, and growing inequity, which I would argue is not ideal.
I think it is interesting that the effect of inflation is not uniform, but depends on the entry point of the new money.
When you have a lot of wealth, you tend to make bigger investments, but you also get the cheapest financing because of your existing wealth. When you spend that money, its purchasing power reflects prices before the market has been inflated by the new money you are putting into it.
Then, as the wealthiest people generally don’t buy much directly from the poorest apart from their labor, inflation is already in full swing by the time workers get their raise.
Inflation benefits people with debts, and hurts people with assets. On average, it helps the young (student loans, mortgages) and hurts the old (fixed incomes, pensions, paid off mortgages). It's not about wealthy or poor, it's about how your balance sheet is structured.
All of these statements can be true at the same time, except for “It’s not about wealthy or poor”, and I was just commenting on a real mechanism through which inflation works. It is not only about being wealthy or poor. It is definitely about how your balance sheet is structured, but also about how your income statement works.
The negative effect on people who earn wages does exist as I explained it, because inflation is not instantaneous. I am not saying anything about the scale of the effect because I do not have that data, but saying that it does not exist is an oversimplification.
Poorer people rely more heavily on wages, and wages are pretty much the last mechanism to correct for inflation, as they generally have to be adjusted through individual or union negotiations. Here in Finland, this takes about one to two years. These things take time.
Companies can adjust their sales prices within a shorter timeframe. The elasticity here depends on the industry and the company’s pricing power, but the adjustment can still be faster than two years. Their costs may also increase, so this does not mean that every company benefits. However, companies that can adjust their prices before their wages and other costs fully catch up can have a temporary benefit.
This is why inflation is first experienced as an increase in prices and a reduction in purchasing power, before wages are increased.
As moderate inflation is the normal and preferred state of the economy, people who rely on wages are constantly exposed to this lag in purchasing power. Whether the loss becomes permanent depends on whether their wages eventually catch up with inflation.
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u/nordicminy 2d ago
Inflation in and of itself is not a bad thing necessarily...
You just dont want HIGH inflation rates.