Friday, November 25, 2011

Is Inflation Good?


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A mild inflation, a slightly larger volume of currency in the economy than the amount needed for transactions and investment, is better than deflation which is when there is less currency in the economy than what is required. A slightly inflated dollar is an optimistic statement which says that things are going to get better and that slightly more money is available for spending, borrowing and investing. Yet such inflation only works if it is a natural byproduct of bullish spending and investing.


There are three means in which the dollar can be inflated. While one of those means is good and healthy, the other two are bad and artificial. Good inflation occurs from the bottom up and is a reflection of genuine need for money in order to keep up with production and demand. Such inflation reflects both production and an optimistic projection of growth and, as such, the slightly inflated dollar soon finds an equilibrium as the economy grows.


Bad inflation occurs when the government either prints money to pay for its budget or borrows money to stimulate or prop up the economy. When the government prints money, what the Federal Reserve calls “monetizing debt” the workingman’s dollar is robbed of its value. The artificially inflated dollar thus becomes worth 90 cents, or 80 cents depending on how many fiatdollars are pumped into the economy. The cost of business and private transactions thus must go up in order to make up for the devalued dollar. Prices go up and this hurts people on fixed incomes. This form of inflation is a back-door tax that particularly comes down heavy on the middle class and the poor. The new paper dollars do not reflect an improvement in production or an increase in demand.


The other form of bad inflation is stimulus borrowing which was the approach of the Obama Administration and several other previous administrations. This involves borrowing money from the banks and private investors, money that has to be eventually paid back at interest with taxpayer dollars, and then spending that money into the economy. While this has some simulative effect, the money borrowed is controlled by the government that authorizes the borrowing and it is thus doled out to friends, those who would perpetrate the government’s power by creating beholden allies through money. This is exactly how the Obama Administration used the almost trillion dollars they borrowed in 2009, a debt known as the stimulus package.


The more natural approach to a stimulus would be to place a moratorium on taxes or to cut taxes. This approach would be better than stimulating the economy with either borrowed money, which enhances the power of the government and creates debts that will eventually become due, or turning on the printing press and devaluing the workingman’s dollar and debauching savings. Leaving more money in the hands of those who create capital, or own capital, through tax deduction would result in more available dollars and the mildly inflationary stimulation the economy needs. Business, knowing that taxes would not be going up, would be more inclined to spend and invest rather than to shelter their profits. Such spending and investment would lead to economic expansion, jobs, and greater prosperity at all levels.


Yet how could this be done while maintaining all the functions of government that we have come to expect? For starters, we should demand that Congress pass a balanced budget amendment that would then be ratified by the states. A national balanced budget, the same that presently exists in over 20 states, would force the government to make the necessary cuts. Does anyone doubt that every agency of government, including defense, could immediately cut their budget by at least 5% without affecting basic services?


The President should be given the line item veto which would mean that the executive would be in a position to cut out pork-barrel spending when it is larded into congressional bills. This would force Congress to vote on spending as a stand-alone and out in the open. This would also mean that the President would be held directly accountable for signing specific spending bills.


In order to further stimulate the economy, Congress should hold the line on approving any new taxes, cut capital gains, and offer a moratorium on overseas corporate profits. Regulations should be enacted to make it easier for businesses at all levels to offer their goods and services while regulations protecting the environment should be left in place. Public policy should be oriented toward encouraging savings as opposed to debt and toward private capital creation and accumulation as opposed to government transfer of wealth.

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