Inflation - why do we need it?

[Smiling Buddha]

Not only simplistic but completely wrong.

 

[treefingers]

Not only simplistic but completely wrong.

Probably. I didn't think about it for very long

 

[Showbags]

I'm probably completely wrong about this, so feel free anyone to dispute my thoughts on what inflation is.

My laymans interpretation of inflation is not that it is an increase in prices (that is the symptom of inflation). It is an increase in the money supply (due to banks lending/creating new bank credit money), without a relative increase in goods and services, which leads to the devaluation of the money's value and purchasing power.

Inflation only helps the people that have first use of the new money before it enters circulation (banks) and hurts people that don't have the first use but have money currently in circulation which is devalued once the new money enters circulation (which is basically everyone else). Think of the money supply as a jug of cordial that starts off strong but is devalued and watered down when more water is poured into it (or money is created).

To me inflation wouldn't occur if banks extinguished the money that was paid back to them once it has circulated throughout the economy, rather than reinvest/loan/create more of it again and again for private profit.

I'm not sure how this would work but isn't it a little counterproductive (for society, not banks) to allow private banking corporations a monopoly on money creation (who's sole design is to create private profit, not to do what is in the best interests of society). Banks would be better off being run as a public service rather than the current private model which has put the world into such financial chaos in the last 5-6 years.

 

[Mofra]

Inflation in practical terms is a measure, not a cause or reason for increase in aggregate supply or pricing itself.

How it is measured is a subject of endless debate - the RBA have a basket of consumerable goods regularly purchased by most households in Australia they use to benchmark inflation in terms of prices paid by the consumer for those good, hence the 'Consumer Price Index' to which the RBA, by single blunt instrument (federal government cash rates), attempt to keep this measure within a 2-3% band, save for seasonal impacts and some crystal ball gazing.

A myriad of factors impact on inflation as have already been alluded to in this thread

 

[Smiling Buddha]

Good bump.

 

[Showbags]

Fractional Reserve Banking and money created through the banking system could be of great benefit to the public if it was run as a public service not as a private corporate monopoly to fill the pockets of an elite financial few.

The banks should only lend/create money to fund public works projects and things that benefit society (and not to speculators in the property and financial markets, which then fuels bubbles in the market), and then as the loan gets repaid the money is then extinguished to ensure that it does not dilute the current value of the money in circulation. This would make banks actually have a worth that benefits society rather than what they currently do (which is to leech off the productivity of society).

 

[Mofra]

Fractional Reserve Banking and money created through the banking system could be of great benefit to the public if it was run as a public service not as a private corporate monopoly to fill the pockets of an elite financial few.

The banks should only lend/create money to fund public works projects and things that benefit society (and not to speculators in the property and financial markets, which then fuels bubbles in the market), and then as the loan gets repaid the money is then extinguished to ensure that it does not dilute the current value of the money in circulation. This would make banks actually have a worth that benefits society rather than what they currently do (which is to leech off the productivity of society).

That's good in theory - and is some respects I agree - but how do you incentivise effort '"for the public good" without a reward commensurate to the business risk?

 

[Showbags]

That's good in theory - and is some respects I agree - but how do you incentivise effort '"for the public good" without a reward commensurate to the business risk?

Maybe nationalization of banks would be the best way to go? Or at least remove the ability for banks to create money through credit and only allow governments the ability to create new money into the economy?

Banks were originally intended to be an intermediary between people that have money (and deposited it at interest in a bank) and people that needed money (who borrowed money at interest from a bank). The current Frankenstein model in place at the moment barely resembles that and does not serve the best interests of the public only it's shareholders. The Fractional Reserve Rate should slowly be raised until it eventually becomes 100%

 

[Taylor]

Any interests on loans means that there is not enough money to repay the current debt the world carries, unless more money is created, inflation follows.

 

[Showbags]

Any interests on loans means that there is not enough money to repay the current debt the world carries, unless more money is created, inflation follows.

Yes there is more debt in the world than money to pay it back. When money is created at the bank, only the principal is created, not the interest component. There is enough money to pay back principal, but when interest comes into the equation people must then go back into the economy to compete against each other for the money created, which then diminishes the pool of money available to pay back the principal. This means that mass foreclosures and exchange of wealth from poor to rich within this system are guaranteed unless new money is created constantly. This means we must be in continuous unsustainable growth as new money (or loans from banks) needs to constantly created to cover the spread between interest owed and the lack of money in the economy to pay it back. This is why our politicians are constantly talking about growth (not prosperity or happiness which should be the measure of success by government). They know that they must keep the economy growing to stave off economic collapse (which is what happened during the GFC).

 

[Power Raid]

Inflation is good as it is a "use it or lose it" mechanism. The wealthy must invest it (circulate it) or it diminishes.

In short it stops people from putting it under the bed!

 

[Run n Spread]

Inflation is good as it is a "use it or lose it" mechanism. The wealthy must invest it (circulate it) or it diminishes.

In short it stops people from putting it under the bed!

Yet if the wealthy stick it under the mattress and remove it from circulation they are in essence removing part of active cash from the market. This potentially deflates prices across a range of markets. Those presumably with the same cash level and still spending could stand to benefit. You then have the problem of job losses for people whose market is affected by the drop off.

Really that or a government taxing and not spending (running a surplus that removes currency from circulation is the only way to do it).