[Oakley]

Because this tool usually ends up being used for transferring money, from those who cannot defend themselves, to those who dont deserve it.

No doubt stuffing cash in your mattress will result in losing value to inflation. The whole point of having a low but positive inflation target is to encourage investment instead of burying cash in the back yard or buying gold and sticking it in a safety deposit box.

But tell me again who gains that lost value?

As smiley points out, there is a theft aspect of inflation. Someone loses and someone gains. The losers are those who depend on money holding its value like retirees, lenders, and those in industries where wages cannot keep pace with inflation. The winners are those first in line to receive the newly printed money, borrowers, and those who have the wealth and knowledge to move that wealth into what is currently being driven most powerfully by the spending of the newly created money (like those who entered dot.com, real estate, gold/silver before the boom began and exited shortly before the boom ended).

The point is that inflation is a dishonest stealth way to transfer wealth, usually from the least powerful members of society to those who have the power to control the system.

Another negative of inflation is that it sends false signals to economic participants. First increases in the money supply create boom as the new money is spent leading suppliers to over expand. When the effect of the increase in the money supply loses its momentum, the economy cannot support all these mal-investments and economic contractions follows. It creates a vicious cycle of boom and bust where in order to end the bust progressively more monetary expansion is necessary to stimulate yet another boom. It is like taking heroin. Eventually no amount of monetary stimulation is adequate to prevent the contraction and depression follows. The depression is in size in proportion to the accumulated monetary expansion since the last depression, and in length in proportion to how much effort government expends to prevent it.

[Pops]

You are all concentrating on what I conceded in the OP (inflation=bad) and none are commenting on the idea that without inflation there is less incentive to invest.

This ties into the other thread on gold vs fiat currency in that unemployment during gold based currency periods was 20% higher that during fiat periods and business volatility was likewise much higher.

The article is here and more about gold based currency but it explains that inflation is not the only boogeyman.

[nobodypanic]

-I think the ones who benefit most from inflation are corporations. They see their debts and pension obligations erode away while they can protect their revenues by increasing the prices.

one more thing to note: since wages are factored into the cost of commodities, and commodity prices are set after wages are settled (keeping in mind that profits must obviously be above cost), therefore, wage inflation will, in general, always lag behind comodity inflation, and, hence, controled inflation will reduce labor cost and allow for a greater rate of capital expansion.

they key proviso here being controled inflation. inflation must be fast enough to allow 'arbitrage' of labor costs while not being so fast that the capitalist cannot realize his inflation enhanced profit in the market, which is to say that the rate must not be so fast that the profits he holds get devalued before he can spend them in the market.

in short, inflation is a way of making capital accumulation more profitable.

[MD]

if you're rich in commodities, there is nothing wrong with inflation.

[MD]

if you're rich in commodities, deflation is ok too.

*shrug*

simple relationships rule during hard times.

[smiley]

none are commenting on the idea that without inflation there is less incentive to invest.

Then I'm afraid that I have to bore you with some other boring graphs.


So we're looking at a period of 12 US presidents 15 consecutive cabinets and 8 chairmen of the federal reserve. I think it is safe to say that monetary policy in the USA has hardly had any influence on the level of investment.

Moreover the investment rates in Japan are consistently higher than in most countries, despite its lack of inflation.


What you say about inflation seems logical, and intuitively I would concur. But over the years I've learned to trust numbers over my intuition. And the numbers tell another story. A Japanese collegue once told me: "when you give a westerner some money, he will buy some nice apples. When you give a Japanese some money he will buy an apple tree". Perhaps he is right, and whereas consumption can be steered by (monetary) policy, investment is culturally defined.

[Pops]

So we're looking at a period of 12 US presidents 15 consecutive cabinets and 8 chairmen of the federal reserve. I think it is safe to say that monetary policy in the USA has hardly had any influence on the level of investment.

Thanks Smiley I can always count on you to follow my convoluted logic.

Here is a chart I mashed together from your chart and an inflation plot showing some possible correlation - even if not causation...




... at least up until the era of non-productive productivity in the post-industrial period that is.

[rangerone314]

So we're looking at a period of 12 US presidents 15 consecutive cabinets and 8 chairmen of the federal reserve. I think it is safe to say that monetary policy in the USA has hardly had any influence on the level of investment.

Thanks Smiley I can always count on you to follow my convoluted logic.

Here is a chart I mashed together from your chart and an inflation plot showing some possible correlation - even if not causation...




... at least up until the era of non-productive productivity in the post-industrial period that is.

Actually I don't think its the non-productive productivity that is the issue... I think that is the era when they began to adjust inflation statistics to seem more favorable. Maybe superimpose shadowstats.com inflation statistics onto it.

[smiley]

Here is a chart I mashed together from your chart and an inflation plot showing some possible correlation - even if not causation.

Thanks. If I would do a correlation analysis on these data I would think that the correlation is not very strong, but lets assume that this is true and we look at the strongest and most correllated move in the graph.

Then between 1978 and 1980 CPI change increased from 5.5% to 16% annually
Investment went from 10% to 14%

So a threefold increase in CPI led to a 4% move in investment. If inflation is indeed a knob to steer investment it is a very ineffective one and IMHO one should wonder whether to use it at all.

[evilgenius]

One thing you can easily see is where the impetus to fight inflation at the Fed came from, right in the middle of your inflation graph. That was where Milton Friedman began to denounce Keynes, and people listened to him. If you read Peter Drucker's take on that time you understand that the denunciation of Keynes was off target. What Friedman should have had his eyes on was how government, under Keynes's thinking, was not supposed to deficit spend into perpetuity, instead only when stimulus was required. Chalk it up to the Cold War, or people's lack of vigilance, or politician's neglect of their duty to future generations that is where we began to go off of the rails, right in the heart of 1950's rah, rah America nostalgia land. Even with no end in sight to cheap energy we have not been able to face reality.