Someone asked me whether inflation is a bad thing earlier today. Heres my response: Think of it like this: The same people who say inflation is a bad thing also accuse China of keeping its currency artificially devalued to give them an unfair trade advantage. The bottom line is this: A little bit of inflation can stimulate your economy during a recession by increasing the movement of money within the country, which stimulates production and employment, and also by increasing demand for your nations stuff domestically and abroad, while decreasing demand for exports in your country. In the early 20th-century, many Western Nations entered a currency war, wherein they were all trying to give their currency the most inflation in order to improve their own exports. When your economy is strong, you want to manage lower inflation as much as possible, because its going to try to increase naturally, which can overstretch your economic growth and trigger a severe recession. When a nation is just blatantly mismanaging their monetary policy, you end up with cases like Argentina, which had 12,000% inflation at one point. Or Zimbabwe, which, if I remember right, was 2.1 million percent inflation in 2009. Thats the kind of inflation caused when you just start printing money non-stop and spreading it around like crazy. Thats when inflation destabilizes your economy by making it impossible to use the currency for exchanges. You use wheelbarrows full of cash to buy a stick of gum. You ask to get paid at lunch so you can buy bread before the price goes up again at the end of the day. Nations wont trade with you, and no one is investing in anything. But, theres only a handful of examples of that - called hyperinflation - throughout history. Deflation doesnt really happen. It happened just a tiny bit after 2008, and a bit after the Great Depression, but generally speaking prices just dont go down. Companies are very resistant to the idea of making less money for their sales, and really only do it when they want to liquidate surplus inventories that cost more to keep in storage than theyre worth. Otherwise, when failing companies need cash, they liquidate their surplus production capacity. Theyll fire employees, shut-down plants, and sell machines and such.The problem with deflation is that it starts with wages. People get paid less money, so they cant afford anything. Its only when companies are desperate to sell stuff, that prices come down to a level that people can afford to buy stuff again. So its very uncomfortable for the majority of a nation. Deflation also causes your exports to be less competitive.
Posted on: Thu, 06 Mar 2014 22:33:57 +0000
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