As I was educated in the Keynesian/inflationist school of economics, I have (until recently) always been a believer that moderate inflation is good for the economy, and inflation in general is generally favorable to borrowers. I have always believed in the Fed system because I thought it was better than a purely state-controlled monetary authority, and I thought the Fed and its member banks had an incentive to keep inflation low, since inflation (in my mind) worked to the detriment of lenders -- i.e. borrowers repay loans in dollars worth less than the dollars they borrowed.
Ron Paul's campaign has been very educational and informative for me. I have shed virtually all of my statist notions, including the former belief in government anti-discrimination laws and fiat-money central banking. However, I'm still unsure as to how inflation works in favor of bankers, lenders, and "the rich," and to the detriment of borrowers, the poor, and the middle class. If someone could explain this to me, I would be eternally grateful, and it would help me in debates with my inflationist father-in-law.
Thank you in advance...
I don't think inflation is necessarily favorable to borrowers - the inflation rate is just added to what the interest rate would be without inflation. Though, the Fed system adds extra uncertainty to inflation, and a surprise increase or decrease in inflation would benefit either the borrower or the lender, respectively.
So let's say the lender would normally charge 4%, and he expects 4% inflation, he would charge 8% interest, and hoist the cost of inflation onto the borrower, who would expect that his salary would increase at least the amount of inflation, and pay the loan with his inflated future salary.
Jason,
If inflation is caused by the Fed adding currency to the money supply, then it's clear that banks and lenders and others at the top of the financial system will get the money first, before inflation sets in. The top dogs can then do what they want with the money, but the rest of us--the poor and middle class--have to wait for it to trickle down. By then, however, inflation has kicked in an our investments aren't worth so much anymore. Given the general effects of Fed counterfeiting on borrowing and spending, then the effects of Fed policy would then be widely felt across society, to our detriment.
As you correctly point out
"inflation worked to the detriment of lenders -- i.e. borrowers repay loans in dollars worth less than the dollars they borrowed."
So inflation is 'good' for borrowers.
"I'm still unsure as to how inflation works in favor of bankers, lenders, and "the rich,"
Banks lend money that doesn't really exist. They are not lending their own real savings. They are lending 'fiat money' wich's been created out of thin air. And they collect interest payments on those 'magical' loans. Inflation is not good for real lenders, ie. people with real savings, but that not the case of the banks.
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
>So inflation is 'good' for borrowers.
Well, owing a shrinking debt, measured in dollars, is nice. However, because everyone has come to expect the continual inflation of the money supply, borrowers have greater demand for the loans, and lenders need to charge more interest. The two kinds of partcipants come to a compromise, and in effect, the constant, expected rate of inflation is added into the interest rate that would be chosen otherwise. It is only unexpected changes in the inflation rate that can benefit borrowers (or lenders).
>"I'm still unsure as to how inflation works in favor of bankers, lenders, and "the rich,"
Well, new money typically enters the money supply in the form of Fed's open market operations. This puts brand new money in the hands of the banks. These banks are now more wealthy, although the total amount of wealth in the system is constant (creating green pieces of linen isn't producing wealth). Wealth has been stolen from holders of dollars and dollar-denominated assets. The theft isn't revealed until the newly created money circulates through the system, decreasing the market value of the money. So the earliest recipients have been enriched at the expense of everyone else.
"Well, owing a shrinking debt, measured in dollars, is nice. However, because everyone has come to expect the continual inflation of the money supply, borrowers have greater demand for the loans, and lenders need to charge more interest. The two kinds of partcipants come to a compromise, and in effect, the constant, expected rate of inflation is added into the interest rate that would be chosen otherwise. It is only unexpected changes in the inflation rate that can benefit borrowers (or lenders)."
I would agree if the Fed allowed market interest rates to prevail. But the Fed artificially controls interest rates.
Here's another aspect of it that perhaps some others could shed some light on...it seems to me that credit has much to do with it. Credit seems to me to be "imaginary" money, or "projected" money. Those with more money (rich/upper middle class) are granted more credit than those with less (poor/lower middle class). Bad credit means higher debt, and when inflation occurs, those with the most debt lose the most because the value of the dollars they borrowed are higher than those with which they pay back the debt. If the value of the dollar decreases due but wages stay the same, the working class is hit especially hard because the value of their labor has essentially gone down. I'm not an economics major, so I don't know if this makes sense. Perhaps someone else can illuminate?
measles: Bad credit means higher debt, and when inflation occurs, those with the most debt lose the most because the value of the dollars they borrowed are higher than those with which they pay back the debt.
Bad credit means higher debt, and when inflation occurs, those with the most debt lose the most because the value of the dollars they borrowed are higher than those with which they pay back the debt.
That is actually backwards. In truth, when inflation occurs, those with the most debt lose the least (or gain the most) becaause the value of the dollars they borrowed are higher than those with which they pay back the debt.
Think it through. You borrow $1,000, which is worth 1,000 chairs at the time you borrow it. Inflation makes the $1,000 worth only 500 chairs. If you're a chair-maker, you borrowed 1,000 chairs (in dollars), but only have to pay back 500. Inflation works for borrowers.
This fact is why I have asked the question: How is inflation bad for the poor? I have gotten some good answers, but the fact remains that inflation is "good" for debtors, and bad for lenders -- unless those lenders created the money from thin air in the first place.
Inflation is bad for people (poor?) who keep most of their assets in bank savings accounts.
Little do they know that their hard earned money they're salting away at a passbook account is constantly being looted by the central bank's policy of "price stability."