Inflation spurs growth, at least according to the theory. Let us examine the theory in further detail.
The theory goes something like this: Since savers realize the value of their money will erode, they spend more quickly thus stimulating the economy. If we believe tomorrow brings higher prices, we buy today. Basically, we spend before the monetary authorities steal our money’s value.
The proponents of consumption-based stimuli overlook the essentiality of saving. While burying your money in the ground wastes its talents, most save via bank accounts or through the purchase of capital assets. Thus saving makes investment capital available for new businesses hiring new workers and creating new products that sustain and beautify life. The accumulation of capital drives growth.
Inflation discourages saving
Inflation buries capital into the ground as people flee toward real estate as a protective hedge. Inflation stymies growth.
Inflation decreases debt burdens
If we borrow say, $14 trillion and then cheapen our debt through dollar devaluation, the repaid lenders can’t buy as much thanks to diluted dollars being returned to them. Inflation essentially harms savers for the benefit of borrowers. Every dollar borrowed requires a dollar saved. The economy gains nothing by such mischief.
Inflation increases asset values
As the dollar falls, the price of our assets raises commensurately. Stocks, real estate, etc. surge. That sounds wonderful, but their value increases against what? Since the prices for everything else rise too all we’ve secured is a nominal gain for tax collectors to confiscate. We derive no real benefit. Governments thus rewards itself for its own reckless monetary policy. The more they inflate, the more they take.
A similar phenomenon nails your wages. As your salary increases, you pay more taxes even as you can afford less. A two percent raise increases your tax bill two percent, but if prices also rise only the IRS derives any benefit.
Inflation offsets unemployment
Since the price of labor, your wage, is less elastic than many other costs, businesses can raise prices quicker than can employees increase their salary demands. As businesses raise prices to cope with inflation, the cost of labor proportionally lowers. Thus, in Keynesian theory, more workers can be hired as inflation dilutes your pay. Inflation silently erodes living standards.
Inflation promotes exports
In theory, if the dollar falls then anything priced in dollars becomes cheaper for someone holding say, euros. But the dollar and the euro are merely measuring sticks. The underlying transaction involves trading our goods. Currency is a tool; a ticket of exchange. Currency simplifies trading relative to bartering. You may not want my output, but you definitely want my dollar so that you can acquire what you do want. Inflation wobbles the scale hindering international commerce.
Inflation is deceitful and ineffective. It swindles savers, fleeces lenders, pumps taxes higher and triggers malinvestment. It doesn’t reduce unemployment; it whittles away your wage. Nor does inflation promote exports, but it does make international trade more frightening. If inflation succeeded, it would be merely dishonest. But as history proves, it never works. There is no evidence that inflation fosters exports or employment. Now take a moment and consider this: cryptoccurencies are not affected by inflation.