I have listened to many financial "experts" and economists on television (mainly on CNBC) espouse their opinions on how to "fix" the economy, and one central theme always underlines the discussions: that recession must be avoided at all costs. I do not understand this. Rather, the solution usually proposed is to inflate the currency in an effort to give the appearance that all is again well with the economy. I actually heard a talking head on CNBC state that the Fed needed to "re-inflate" in order to get the economy healthy. My question is the following: Why are recessions regarded as evil, but inflation as the saviour of all mankind? I have always viewed a recession, in a somewhat free-market (the U.S. is not free-market) as a self-correcting mechanism to malinvestment. In my mind, destroying the value of the currency is one of the most evil acts the state can impose on its citizens, due to the destruction of real wealth (defined in terms of the currency), and the loss of purchasing power. I suppose it is due to the public drinking the kool-aid of the politicians who still worship at the altar of all things Keynesian.
Thoughts on this?
I think malinvestment is confused with oversumption and government inteference. That is why many are concerned about a recession. In a free market it is self-correcting--but in the Federal Reserve's "market" what are the unintended consquences of bailing out big venture capitalist firms?
Very good point. Keynes famously stated that we are doomed to suffer from a lack of Aggregate Demand and unemployment will always linger abouve its natural rate. The "solution" to this is massive public spending which have the down side of inflation. This is a minor speed bump for Keynesians who resort to the old mantra "In the long run we are all dead". If death is the alternative then inflation seems like a sponge bath from Barbera Walters.
But to the question at hand: politicians and people like inflation because its initial effects are positive. In Friedman's Free to Choose, he points out that when an increase in the money supply (inflation) occurs, businesses construe this as an increase in real demand. They hire more workers. Unemployment falls. Then comes the moment when firms realise theyve been fooled. There is no extra real demand, and the correction begins. Unemployment rises, businesses fail. It is the latter parts of inflation that are negative. Governments attempt to "shield" us from these corrections by further inflating the currency.
Friedman uses the analogy of alcohol when discussing inflation. The alcoholic gets a lot of benefit from the first few drinks, but as he falls deeper into alcoholism he is dependent and needs more and more booze to keep himself going. When he stops drinking, the negative, undesirable consequences begin.
So the real choice we have is between drinking ourselves to death or checking into rehab before it's too late.
Irish Liberty Forum
richie2044:Why are recessions regarded as evil, but inflation as the saviour of all mankind?
Inflation allows insiders to loot and pillage everyone else. The people who print and spend the new money are the primary beneficiaries of inflation. Most of the wealth stolen by inflation goes to financial industry insiders.
The average person is holding cash, or wages and pensions not properly adjusted for inflation. Deflation would increase the purchasing power of the average person, and therefore inflation is bad. Inflation allows the bad guys to steal the savings and salaries of the average person.
The CPI understates inflation by a huge margin. If you adjust for inflation correctly, then the US economy is shrinking at an alarming rate!
Biased economic calculations mean that money supply inflation is misreported as economic growth.
I have my own blog at FSK's Guide to Reality. Let me know if you like it.
This is the third time that I'm going to post this:
The entire "inflation is good" mentality rests on the idea that prices and wages are "sticky" or "rigid" (meaning that they cannot adjust quickly). The fact of the matter is that prices are not sticky or rigid, at least not in the long run (a few months). Since Keynesians believe wages are sticky in a free market, they adjust credit expansion and other measures to push aggregate demand up. The fundamental flaw in this model is that wages are assumed to be sticky, which they never are in a free market. Wages are only sticky when government gives unions power for collective bargaining and to set wage contracts.
What you'll see in a Keynesian text book will be something like this:
or
As you can see in both of these models, as aggregate demand falls, wage stickiness precents the economy from working at potential output or full employment.
But when you remove union control over wages, you'll get a supply "curve" that looks more like this:
As you see, since wages are not rigid, when demand falls (when people choose to save more), wages fall, so we still end up with an economy working at potential output, or full employment. The benefit of removing wage stickiness is also that increased saving (decreased aggregate demand) allows for increased investment, which helps the economy grow faster than before.
Political Atheists Blog
Wages are sticky-downward because people feel offended by nominal pay cuts. Unions also cause wages to be sticky-downward.
Wages are sticky-upward because workers don't have much bargaining power, due to restrictions on the market. Unions also cause wages to be sticky-upward. If a union negotiates a pay hike of 4% per year for the next four years, then they can't demand a renogotiation when inflation is higher than expected.
Inflation allows real salaries to be decreased, without decreasing the number on your paycheck.
In a true free market, there would be upward pressue on wages due to increasing productivity. There would be downward pressure on wages due to an expanding economy. Nominal wages should be mostly stable in a free market. Real wages should increase, due to increased productivity.
In the present, real wages are decreasing substantially. Consider "salary divided by price of gasoline" or "salary divided by price of gold". How much is your salary being cut per year?
Being fired is far more offensive than getting a wage cut. The kind of wage/price stickiness that forces businesses to fire workers instead of lower their wages is the sole creation of the state.
Yes, you are right. Most people, I believe, are offended by nominal pay cuts. Thus, since wage deflation is regarded as "bad", this leads to more unemployment than would be in a free market. If businesses could adjust nominal wage prices accordingly, layoffs and firings would not be as severe.
^ No, nobody wants a wage cut, but nobody wants to be fired. Obviously, rational people will take a wage cut over losing their job. The problem is union control over employers, which prevents businessmen from cutting costs by cutting wages and instead forces them to fire workers - or in extreme cases go bankrupt.
You are exactly right. No person wants to be fired. But how many people are rational when it comes to wages? Most people believe that wages can only go up. Also, unions do not have the influence that they had in the past, so do they still have that much bargaining power over wages?
They don't have as much power as before, but they do have too much power. Unions still author contracts and employers cannot fire unionized workers or undertake any other union busting activities. My home state of Michigan has been hit especially hard by job losses due to unions, since the UAW (United Auto Workers) have a strangle on the "Big Three" auto companies stationed here in Detroit.