Why if I have $100 right now, 10 years later that same $100 will have less purchasing power? Why can’t our money retain its value over time, I’ve earned it but why does the value of my time and effort go down over time?
In: 5591
Deliberate government policy:
>Inflation is the one form of taxation that can be imposed without legislation.
–Milton Friedman
>By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
–John Maynard Keynes
These aren’t just any random guys, they are the two most influential economists responsible for the structure of the dominant neoliberal economic regime. And they’re telling you, straight up, that inflation is a de-facto tax. And it is.
Now to be fair, one can construct a cogent argument why a moderate amount of inflation is good. The most popular one is that by making the value of money decline over time, one is encouraged to invest it in speculative endeavors, so as to protect your hard-earned cash from the bite of inflation. But this pre-supposes that people simply wouldn’t do that if the rate of inflation was zero percent. Nothing could be further from the truth. People have been starting businesses, borrowing and lending money, and otherwise looking for ways to turn a dollar into two dollars, for millennia before fiat currency was ever conceived.
I prefer a different justification, and one which I think will probably put you at peace with the phenomenon of inflation, if not in love with it: in practice, a gold standard is really a *price control* on the metal. The same goes for a silver standard, or whatever other material you want to back your ‘inflation-proof’ currency with. But what happens if someone discovers a new and abundant source of gold? Or if there is a new economic application of the metal which increases demand on it? Suddenly you’re in a situation where other market factors are manipulating your currency, and therefore causing prices to inflate or collapse.
Fine, you may answer, gold standards suck, why not keep using fiat dollars, and merely make the inflation target zero? Well, right now the inflation target is two percent, and we’ve had a couple years of inflation more than double that figure, so what makes you think they’re going to be any more successful keeping a zero inflation target instead of a two percent target? Therefore, I think the real virtue of the two percent target is that it helps central banks respond to periods of *deflation* (which is arguably worse than inflation, have a look back at 2008 for an example of why) through the means of manipulating interest rates. In fact, the previous Fed regime where interest rates had already been low for a decade arguably made the 2008 finanical crisis last far longer, because central banks couldn’t stimulate spending by dropping interest rates, because the rate was already *at zero*.
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