Mainstream economics holds that inflation is a necessary evil
, and advocates a low, stable level of inflation, and thus is largely opposed to inflationist policies – some inflation is necessary, but inflation beyond a low level is not desirable. However, deflation
is often seen as a worse or equal danger, particularly within Keynesian economics
, as well as Monetarist economics
and in the theory of debt deflation
Inflationism is not accepted within the economics community, and is often conflated with Modern Monetary Theory
, which uses similar arguments, especially in relation to chartalism
An 1896 cartoon showing a Free Silver
farmer and a Democratic donkey whose wagon has been destroyed by the locomotive of sound money
In political debate, inflationism is opposed to hard currency
, which believes that the real value of currency should be maintained.
In late 19th century United States, the Free Silver
movement advocated the inflationary policy of free coinage of silver. This was a contentious political issue in the 40-year period 1873–1913, consistently defeated. Later, economist John Maynard Keynes
described the effects of inflationism:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. 
Schools of economic thought
has often argued a deflationist
policy; during the Great Depression
, many mainstream economists argued that nominal wages should fall,
as they had in 19th century economic crises, thus returning prices and employment to equilibrium. This was opposed by Keynesian economics, which argued that a general cut in wages reduced demand, worsening the crisis, without improving employment.
While few, if any, economists argue that inflation is a good thing in itself, some argue for a generally higher level of inflation, either in general or in the context of economic crises
, and deflation
is widely agreed to be very harmful.
Added flexibility in monetary policy
A high inflation rate with a low nominal
interest rate result in a negative real interest rate
; for example, a nominal interest rate of 1% and an inflation rate of 4% yields a real interest rate of (approximately)[note 1]
−3%. As lower (real) interest rates are associated with stimulating the economy under monetary policy
, the higher inflation is, the more flexibility a central bank has in setting (nominal) interest rates while still keeping them nonnegative; negative (nominal) interest rates are considered unconventional monetary policy
and have very rarely been practiced.
Inflation decreases the real value of wages, in the absence of corresponding wage rises. In the theory of wage stickiness
, a cause of unemployment in recessions and depressions is the failure of workers to take pay cuts, to decrease real labor costs. It is observed that wages are nominally sticky downwards, even in the long term (it is difficult to reduce nominal pay rates), and thus that inflation provides useful erosion of real costs wages without requiring nominal wage cuts.
Decreasing real burden of debt
In the theory of debt-deflation
, a key cause of economic crises is a high level of debt, and a key cause of recovery from crises is when this debt level has decreased. Other than repayment (paying down debt) and default (not paying it), a key mechanism of debt reduction is inflation – because debts are general in nominal terms, inflation reduces the real level of debt. This effect is more pronounced the higher the debt level. For example, if the debt to GDP ratio
of a country is 300% and it experiences one year of 10% inflation, the debt level will be reduced by approximately
to 270%. By contrast, if the debt to GDP ratio is 20%, then one year of 10% inflation will reduce the debt level by 2%, to 18%. Thus several years of sustained high inflation significantly reduce a high level of initial debt. This is argued by Steve Keen
, among others.
In this context, the direct result of inflation is a transfer of wealth from creditors to debtors – the creditors receive less in real terms than they would have before, while the debtors pay less, assuming that the debts would in fact have been repaid, and not defaulted on. Formally, this is a de facto debt restructuring
, with reduction of the real value of principal, and may benefit creditors if it results in the debts being serviced (paid in part), rather than defaulted on.
A related argument is by Chartalists
, who argue that nations who issue debt denominated in their own fiat currency
need never default, because they can print money to pay off the debt. Chartalists note, however, that printing money without matching it with taxation (to recover money and prevent the money supply from growing) can result in inflation if pursued beyond the point of full employment, and Chartalists generally do not argue for inflation.
- ^ John Maynard Keynes, The Economic Consequences of the Peace, 1919. pp. 235-248. PBS.org - Keynes on Inflation
- ^ a b c Krugman, Paul (February 13, 2010), "The Case For Higher Inflation", The New York Times
- ^ Interview with Olivier Blanchard: IMF Explores Contours of Future Macroeconomic Policy, by Jeremy Clift, IMF Survey online, February 12, 2010
- ^ Rethinking Macroeconomic Policy, IMF, February 12, 2010
- ^ Near-Rational Wage and Price Setting and the Optimal Rates of Inflation and Unemployment, George A. Akerlof, William T. Dickens, and George L. Perry, May 15, 2000
Last edited on 7 April 2021, at 17:47
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