Tuesday, August 18, 2009

The Consequences of Inflation

"Inflation has both moral and economic consequences. It discredits whatever economic system it is part of because it removes any perception of justice that might otherwise be present. Instead of rewarding enterprise and punishing indolence, it "bestows affluence here and embarrassment there," as Keynes put it, "and redistributes Fortune's favors so as to frustrate design and disappoint expectations." Since it permits the accumulation of profit without the need for productive effort, inflation discredits enterprise. Wealth is obtained by plunging into debt, using borrowed money to buy commodities of real value that tend to rise in value at a rate faster than the currency is depreciating. People thus receive wealth without producing anything of value." page 99

"Thus saving and investing are proved to be foolish in an inflationary environment. Gambling and speculating seem more sensible. And spending before prices rise, preferably on credit, is a way to beat inflation. Observing all this during the massive Chinese inflation, Theodore White called it "the haunting pestilence of the middle classes," ruining those "who try to plan, to save, to be prudent," obliterating all loyalties, "denying all effort except to survive." page 101

"A society that inflates its currency tampers with a moral value. If the economic system lacks the basic honesty that permits economic transactions to reward both seller and buyer, lender and borrower, there can be no sense of justice. It seems right then to seek advantage at the expense of others. Henry Wallich, a member of the Federal Reserve Board, which has proved itself incapable of providing honest money, recently said that prices expressed in dollars no longer mean what they say. "Inflation is like a country where nobody speaks the truth." He compared the use of the inflating dollar with the making of contracts in which the measures of quantity frequently shrink. The Hebrew prophets denounced those changeable weights and measures as a form of oppression that merited judgment. Yet the Federal Reserve Act reads, in part, "to furnish an elastic currency." page 101

"Inflation is both a cause and effect of moral decline. The citizens like it because they perceive that it gives them something for nothing. Like many of the policies of the modern social democracies, it transfers wealth from some people to others. People will tolerate increasing prices because their paychecks seem to increase apace. The value of their houses and other hard assets goes up, while their load of debt becomes less burdensome. The benefits they receive are visible--the state makes certain of that, since if they were not visible nobody in the state apparatus could profit by providing them--while the costs are as invisible as political and bureaucratic genius can make them. As long as people think they are advancing economically, the pressure to continue inflating outweigh those for stopping. When a society becomes pragmatic, the moral considerations seem less important than the economic ones. page 102

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