The argument that I hear the most is that if money will increase in value then people are going to save as much as they can and spend far less, which will decrease economic growth. But wouldn’t it be far better if everyone only buys the things they really need and save the rest?
In: 1
Every time you spend a dollar, somebody else makes a dollar. If that dollar changes hands many times, it can be part of a lot of people’s income. Every time it changes hands somebody gets something they want and somebody else gets richer, everyone wins. As a general rule, you want money to change hands as often as possible to promote a thriving economy. But if money sits around in savings, it doesn’t do any of that.
One way to achieve this is inflation. If your dollar is able to buy more stuff now than it will be able to in the future, people are going to want to spend their money now. If on the other hand money deflates, people are encouraged to horde it and spend as little as possible in the hopes that it’ll be worth more later. We want people spending money to make the economy thrive, so inflation is better for the economy while deflation can lead to economic crashes.
But this must be balanced out with a second factor: if money inflates too fast nobody is going to want to accept it at their business. If that happens everyone will start selling their stashes of money for some different currency, but as demand goes down and supply goes up that only inflates the currency even higher. This can result in a runaway hyperinflation effect in the worst of cases.
Most economists tend to agree that about 3% inflation per year is a pretty ideal middle ground between these two things.
Latest Answers