From: cmk@athena.mit.edu (Charles M Kozierok)
Subject: Re: Inflation
Organization: Massachusetts Institute of Technology
Date: Sun, 27 Dec 1992 19:06:26 GMT

In article <BzFqEr.5yC@usenet.ucs.indiana.edu> mkohlhaa@silver.ucs.indiana.edu (mike) writes:
>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. 

good.

>Anyhow, this is from Compton's Encyclopedia (I've long pitched, regretably,
>my Macro textbooks):
>
>--------------------------------------------------------------------------
>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.

it may affect people in diverse ways, but overall it is very bad for
almost everyone, and it encourages unproductive behavior. the article
above supports the view that inflation is very bad. that may or may
not have been your intention.

>>>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 

that's ridiculous. it's a vicious circle: when inflation goes up,
so do interest rates. how does that solve anything? the only way that
works is if inflation happens quickly and the long-term debt is tied-in.
for example, you have a 30 year mortgage at 8% and suddenly inflation
goes to 10%.

the US government turns over its debt frequently -- each time it tries
to re-finance, interest rates would be higher and higher. and ultimately
no-one will buy US treasuries, because they will *know* what is going on.

if inflation is allowed to rise to any level high enough to benefit
the US government's debt problem, the rest of the economy will be so
greatly damaged that no-one will consider the solution valuable. the
operation may have been a success, but the patient will die.

--
charles