I have long believed that inflation is bad. I don't intend to change my opinion, but a thought question has popped-up. Is inflation necessary to sustain employment?
Currently the mindless mantra of our politicians is jobs, jobs, jobs. To "protect" jobs and encourage job "creation" quantitative easing has been implemented. Burnacke through quantativie easing is even implementing a structural inflation rate for the economy. However, the anecdotal evidence is that, despite the flood of money to encourage consumption, businesses are not creating jobs since there appears to be a lack of consumer demand.
Inflation along with credit, can have some effect on stimulating the economy since it allows people to buy stuff before they have earned the wealth to buy the products they seek. At some undefined point, a person's need to enlessly consume is satiated. We can only buy/consume so much. (Not to mention that increases in productivity make more goods available while also puting people out of work.) Is the lack of job growth, despite the wholesale availability of money, an indication that using inflation, as a tool, to stimulate economic growth has now reached some sort of limit?
That's a complicated question.
In many traditional economics system monetary inflation serves two purposes. The first is to debase the currency compared to others, the second is to reduce the total value of debt. Leaving the debt aside, how is debasing the currency helping with unemployment? Simple: people will buy less imports (because they will become more expensive) while foreigners will buy more exports (because they will become cheaper): this is bound to create more jobs as there will be increased demand from both the domestic and foreign market.
Closely linked to monetary inflation and "easy money" policy are low interest rates. We all know interest rates for loans should be set by the market to reflect real risks: for example a well established firm with a solid financial position asking for a loan to, say, buy new, high tech tooling to increase productivity would surely get lower rates than a no name asking money to open a piano shop in a strip mall. Also when interest rates are high banks tend to be more cautious with loans: money costs more to them too and they have to be a little more careful. What do low interest rates have to do with unemployment? The rationale is simple: if money is cheap more people will be more tempted to start a new activity or expand existing ones, hence hiring people. How it worked well can be gauged by European unemployment statistics (the official ones are scary, the unofficial ones are downright terrifying). Cheap money can only create jobs during a bubble: those same jobs will be lost once the bubble burst.
An intended consequence of low interest rates (again closely tied to monetary inflation) is an increase in consumption. Low interest rates mean people will get into debt more easily for things they would buy with cash only payments or refrain from buying altogether. Cars are the first thing that springs into mind: instead of buying a second hand car with cash, people now get a loan to buy a brand new car. To be completely honest this doesn't work the same everywhere: for example in Europe, where interest rates are set by a single entity, retail sales in Germany have stayed more or less the same since the introduction of the euro while they literally boomed in countries like Italy and Spain and exploded in France. It may be a cultural thing.
To sum it all up, yes the system has failed but there's no way out. Nobody is willing to take the heat of reinstating a relatively "hard money" policy to allow the situation to realign itself. As far as unemployment is concerned those jobs lost with the bubble aren't coming back. Governments and central banks around the world are frantically trying to inflate a new one or reinflate the old ones (cars and houses above all). Will they succeed? Only in creating more problems.
Inflation, the Rothbard definition of an artifical increase in the supply of money and credit, like any other intervention will benefit some interests at the expense of others. Those debtors who use the currency normally stand to gain as the increase in money makes the total volume of money worth less so in the future the interest + principal is literally less valuable than what they originally received. The opposite holds true for those lenders and savers who see interest payments and other fixed payment assets become over time less valuable. So it should be easy to see the propaganda here from government sources and their friends are very much in favor of inflation as the government is normally the largest debtor.
I will always debate the supposed benefits to exporters over importers of inflation. There is a short term benefit because they are exporting inventory in the currency that is now worth less, but raw materials and foreign parts and equipment normally rise rather quickly eliminating any benefit to an exporter. Importers on the other hand get hurt with any inflation as the number of units of local currency needed to purchase things rises even if the price in the number of units in the foreign currency stays the same.