By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com
In an April 5 New York Times column titled “Not Enough Inflation,” economist Paul Krugman wrote, “a bit more inflation would be a good thing, not a bad thing.”
Krugman’s proposal is completely wrong, as any first-year economics student should be able to explain.
When the supply of money increases relative to the demand for money to pay for available goods and services, the result is higher consumer prices. In other words, inflation leads to a reduction of purchasing power.
Higher consumer prices damages consumers. Krugman knows that inflation is dangerous, which is why he advocates only a temporary dose of it.
However, even a little bout of inflation creates more problems. New money affects different goods and services differently. For instance, the selling prices of goods tend to rise before the wages paid to workers. This would increase business profits and could lead the owners to expand output.
To expand, manufacturers would likely hire more workers. So, short-term, what could be so bad about a little inflation?
Well, there are two major problems. First, the prices of everything, including wages, will eventually rise. Therefore the stimulus effect of inflation will be temporary. As labor and other production costs increase, businesses find that their expanded production is no longer as profitable. Unless inflation of the money supply continues, the economy will eventually face a downturn.
In fact, people experiencing inflation of the money supply start to anticipate its continuation. They demand higher wages to offset rising costs and businesses will increase prices before they are subject to higher costs. Those who guess wrong about the extent of inflation will misallocate their resources.
The second major problem with a little inflation is the moral hazard. As I said, the effects of the greater supply of money will not affect everyone equally. Those who get more money early will be able to acquire goods and services before prices rise. Those who are last to start receiving more money are almost certainly paying higher consumer prices well before their income rises. Invariably those who suffer the most from inflation are the poor and senior citizens who live on fixed incomes.
By reducing purchasing power, inflation also acts like a tax on savers and investors. This discourages investment and job creation.
Almost inevitably, the “cure” for a little bit of inflation is more inflation. This has been the policy of the US government for decades. Unfortunately, continued inflation simply makes the eventual financial crash more likely and much worse. This destruction of the value of the US dollar is a major reason why a growing number of people are getting out of paper currencies and replacing them with hard assets such as gold and silver.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.