From: mkohlhaa@silver.ucs.indiana.edu (mike)
Newsgroups: sci.econ,alt.amateur-comp,talk.politics.misc,misc.misc
Subject: Re: Inflation
Date: 18 Dec 92 03:16:02 GMT
Organization: Indiana University

In article <1992Dec18.010613.16926@athena.mit.edu> cmk@athena.mit.edu (Charles M Kozierok) writes:
[Stuff deleted]
>so, why?
>what is the benefit of inflation?
>just because economists agree that it is good doesn't convince me.

First let me point, so there's no misunderstanding, that I originally said
that inflation had good points to it.  I did NOT say that having inflation
is better than not, or anything else like that.  Go check previous posts.
Anyhow, this is from Compton's Encyclopedia (I've long pitched, regretably,
my Macro textbooks):

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Inflation affects people in diverse ways.  Those who live on fixed incomes,
or those whose incomes increase very slowly, suffer most from inflation
because they are able to buy less and less.  Those who lend money when 
prices are lower may be paid back in dolloars of reduced purchasing power.
Banks and savings and loan associations generally lose from inflation.
People who borrow money, however, may profit by paying their debts in
dollars that have shrunk in purchasing power.  Inflation thus encourages 
borrowing and discourages saving.  It also leads people to buy real estate
and durable goods that will keep their value over time.  In the 
United States this tendency is reinforced by the tax system, which allows
taxpayers to deduct property taxes and interest payments from their
taxable incomes.  If inflation continues for a long time, the country as
a whole may begin to consume more and invest less as people find it
more profitable to borrow than save.  In other words, inflation causes
society to use more of its resources for today's purposes and to set
aside less for tomorrow's needs.
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>>I have to run, so I can't give an elaborate answer to the benefits of
>>inflation, so I'll give you an example:
>>
>>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.
>
>WRONG!
>you've forgotten one little thing: interest on the debt!
>as long as real interest rates (nominal rates minus inflation) are above
>zero (as they almost always are, which is why interest rates go up
>when inflation does) the US's debt will increase even without additional
>deficits. which is why we are in so much damn trouble.

No, I'm not wrong.  If you read the Compton's exerpt and learned that
inflation helps borrowers, maybe you will now realized that inflation helps
the BORROWER OF ALL BORROWERS,  The U.S. Government.  Again, the $4 trillion
debt is would be getting smaller in *real* terms.  And I did not forget
interest on the debt.  Please note that in my original explantion, I stated
that "the U.S. were able to discontinue deficit spending."  The _debt_ would
not be growing larger, because all interest payments would be part 
-- 
					-- Mike
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| If the above information is incorrect, then I don't even speak for myself.  |
|      mkohlhaa@silver.ucs.indiana.edu | mkohlhaa@amber.ucs.indiana.edu       |