Benefits and Trials of Inflation
March 23, 2009 – 11:24 am
On Friday I wrote about the fear of inflation but also stated that maybe a little inflation is not all bad, and indeed it is preferable to deflation.
Rising prices are always hard on us consumers as many times our incomes do not keep up. So why would inflation be preferable to the alternative which is deflation where prices fall? One very strong reason is that in a deflationary cycle, consumers stop spending. They postpone purchases in an effort to wait to buy lower priced items as they fall month after month. This happened in Japan in the lost decade from 1990 to 2000 where their entire economy shrank.
Also, and just as is important, is as the government takes on trillions of dollars in debt, and that is a lot of money that no one can really visualize, it is much easier to pay that debt off in inflated dollars down the road. With deflation it is much harder to pay off.
If dollars become less valuable, the cost of paying off debt is less. If you buy a house and make a $3,000 a month payment with a 30 year fixed mortgage, in 20 years with inflation that $3,000 dollars will feel much less burdensome. That is inflation at work. The government has the same issue except their mountain of debt is a much bigger problem.
A little inflation is a good thing. A lot of inflation destroys wealth.
Good Trading
Steve Peasley
