From: nelson_p@apollo.hp.com (Peter Nelson)
Subject: Re: Inflation (Was: Re: GM Plant Closures and Economic Problems)
Date: Wed, 16 Dec 1992 23:47:14 GMT
Organization: Hewlett-Packard Corporation, Chelmsford, MA

In article <BzD8H6.IBG@usenet.ucs.indiana.edu> mkohlhaa@silver.ucs.indiana.edu (mike) writes:
>In article <1gnkm6INN7op@spim.mti.sgi.com> mpolen@suntory.mti.sgi.com (Mike Polen) writes:

  I think you guys are confusing what's desireable and what's considered
  achievable:

>>|> Also, why in God's name would you want 0% inflation?  I could understand 
>>|> supporting a Federal Reserve policy of *constant* inflation, say a predictable
>>
>>I give up.  What are the benefits of inflation?  Why is constant
>>inflation better than any other kind?
>
>Economists, who are notorious for being in disagreement, have shown a fairly
>broad agreement of two things: The desire for 2-4 percent inflation, and 
>perhaps 3-5 percent rate of unemployment.

   The "desire" for 3-5% unemployment is simply an acknowledgement
   that you can't really get below some base rate.  There will always
   be some percentage of the population who are between jobs.

   I too, am curious why any inflation is desireable.
            

>The US is able to discontinue deficit spending, therefore leaving itself
>with $4 trillion in actual debt.  In real terms, without making a single
>payment to reduce the $4 trillion debt, the debt is shrinking just becuase
>of inflation.

   I don't follow this.  If the current 30-year rate bond rate is 7%
   (close to what it is now) and inflation is 3% then how are you
   getting ahead?  You're still paying more IN REAL TERMS in interest+
   principal than the face value of the bond.   Or by "discontinue
   deficit spending" do you mean that interest on current debt is no 
   longer, somehow, being counted in your current budget?


>In general, inflation helps all borrowers

   Again, this makes *BIG* assumptions.  The only way inflation helps 
   the borrower is if the rate of inflation EXCEEDS the rate of 
   interest on the loan,  This has seldom been the case in recent
   years!   I have an 8.00% mortgage.   People with car loans are 
   paying maybe 9 or 10% (unless they got some dealer incentive
   loan).    People with credit cards are paying maybe 12-19%.
   Inflation is about 3.2%! 
                          
   The only reason I can think of to maintain positive growth in
   the money supply relative to the economy (inflation) is to 
   provide "new" capital to fuel future growth.  And I don't know
   it there's any good theoretical basis for such a model but I
   imagine it like this:  suppose everybody's working, making stuff
   and buying stuff other people make.  Say we're in equilibrium
   so inflation is 0% -- there's just enough money to meet demand.

   Now suppose you want to make something NEW (build a new factory,
   squirrel away some engineers to design some new thing, etc).
   This takes capital, but there's a lag between investing the 
   capital and when this new enterprise produces anything.  If
   you take that capital OUT of an equilibrium economy you cut
   the money supply which ripples through everything else, reducing
   prices or sales of other things.  

   Now I can think of a whole bunch of flaws in my model.  One of
   them is that presumably a certain % of even an equilibrium
   economy is already accounted for by R&D.  Another is that if
   you took productive workers OUT of an equilibrium economy
   (to build a factory, do R&D, whatever) you are also cutting
   production, which should compensate for cutting the money supply.  
   Another is that the whole thing assumes a constant population.
   So bottom line: I'm still not convinced > 0% inflation is 
   desireable.


---peter