Why Inflation Is Bad

Inflation has harmful effects on an economy. Inflation of our dollar raises the price of imports and other goods while outpacing Median Household Income. How can we measure inflation vs. growth in household income? By measuring our wealth in something independent of inflation. One way to measure this, is by seeing how much Gold we can buy with the Median Household Income of the US throughout the last 40 years. When we measure how much the Median Household Income of the US has been for the last 40 years, we can see that we make less income (in gold) than we did 40 years ago, on average. How can this be a good thing?

The Federal Reserve has said that it will work to fight inflation. Why would they work to fight inflation, if it was net-net even?

Here is a paper that was put out by South African Reserve Bank: http://www.reservebank.co.za/internet/Publication.nsf/LADV/C1E04C14CD41930A42257037003E1C24/$File/Factsheet2.pdf. It outlines many harmful effects of inflation. Just a few are:

- Losses to savers
- Losses to people with fixed incomes
- Losses to taxpayers
- Speculating crowding out production

There are many consequences of inflation. These are just a few.

As should be clear from these graphs, 30 years ago, given the inflation-adjusted median household income, you would have been able to buy much less gold than the average family nowadays. Gold's innate instability can in fact lead to radical deflation during periods of unrest. Deflation is ultimately a more destructive force than inflation for many reasons.

Commodity price collapse (the most severe effect of radical deflation) means though you have cheaper goods, you also have proportionally less income per good sold. This means that unless the deflation is uniform across the board (which cannot happen), industries affected by the price collapse fail. Though there will be a momentary glut of cheap goods on the market, it will be more than balanced out by the price increases which will necessarily occur later in the business cycle. Deflation causes unemployment, since you cannot sustain a workforce with the revenue generated by a price-collapsed commodity. Eventually, either the firm will fail due to lack of workers or simple insolvency brought on by drastically reduced revenues. The newly-created unemployed cannot then afford the goods produced by any companies which survive the initial deflation-driven culling of businesses within their sector. The left-over businesses will still be able to sell their goods at the increased price, but the segment of available buyers will be substantially smaller than it was before the deflationary episode. Meanwhile, since a smaller portion of the population is able to afford the goods while at the same time a large number of people are out of work, the businesses cannot grow because those people who would otherwise be inclined to invest in the leftover companies are discouraged by the weak economy as well as the possibility of inflation further down the line.

Just something to think about...

"As should be clear from these graphs, 30 years ago, given the inflation-adjusted median household income, you would have been able to buy much less gold than the average family nowadays."
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I am not sure what the gold graph is showing... but I can give stats that are much more transparent than the graph.

In 1969 gold cost $43.50/ounce. In 1969 the median household income was $33,072 (not including the earnings of the wife). In 2006, gold cost an average of $606.30/ounce. In 2006, the median household income was $48,201.00 (including all working members of household older than 15).

This means that someone could buy 760 ounces of gold with the median household income (not including the earnings of the wife) in i1969. You could only buy 79 ounces of gold with the median household income (including all working members of household older than 15) in 2006.

This means that the dollar has decreased in value in comparison with gold by nearly 10 times since 1969. Gold is now at $891/ounce. The difference has only been increased since 2006.

So, the average household 40 years ago could actually buy about 10 times more gold with their yearly income.

http://en.wikipedia.org/wiki/Household_income_in_the_United_States
http://www.censusbureau.biz/hhes/www/income/mednhhld/p23text.html

B-Ran wrote:Commodity price collapse (the most severe effect of radical deflation) means though you have cheaper goods, you also have proportionally less income per good sold. This means that unless the deflation is uniform across the board (which cannot happen), industries affected by the price collapse fail. Though there will be a momentary glut of cheap goods on the market, it will be more than balanced out by the price increases which will necessarily occur later in the business cycle. Deflation causes unemployment, since you cannot sustain a workforce with the revenue generated by a price-collapsed commodity. Eventually, either the firm will fail due to lack of workers or simple insolvency brought on by drastically reduced revenues. The newly-created unemployed cannot then afford the goods produced by any companies which survive the initial deflation-driven culling of businesses within their sector. The left-over businesses will still be able to sell their goods at the increased price, but the segment of available buyers will be substantially smaller than it was before the deflationary episode. Meanwhile, since a smaller portion of the population is able to afford the goods while at the same time a large number of people are out of work, the businesses cannot grow because those people who would otherwise be inclined to invest in the leftover companies are discouraged by the weak economy as well as the possibility of inflation further down the line.

Just something to think about...

I do not think that commodity price collapse is necessarily a good thing. But I also think it is not necessarily a bad thing. What if oil was free? Would that be a bad thing? Yes, it would put people out of work who are in the oil industry. But instead of spending their time and having people pay them for oil, they would be doing something else that consumers could pay them for. The money that would have been spent on oil can now be spent some other way.

There are definetly different types of deflation. Deflation that is caused by a severe cooling off of spending is definetly part of a economy that is experiencing a depression. Also, there are productivity increases that cause deflation. I do not understand how that could be a bad thing. If suddenly, half of the farmers can produce twice the corn that any company in America can produce, with only 10% more resources, the price of corn will go down. How would corn being less expensive hurt the economy? We can see the effects that raising prices of oil have on our economy.

The problem that we are facing is not that we are teetering on the edge and likely to have severe and universal deflation. Instead, we are out of control with our money supply and it has come back to bite us.

Check out the continuous and exponential nature of the increase in the money supply.

If this is the Federal Reserve's graph of money supply, and you have M1, M2 and M3, what is MMMF?
Also, this is a little off topic but I like to post to existent threads: unless a government desired the gold standard for their currency, what is the governments motive for confiscating gold & what was the motive for FDR?

FDR believed that "hoarding" gold is bad for the economy. He, like many people today, believe that spending is the way to heal an economy. I wouldn't accuse FDR of having a bad motive on this, because it doesn't matter whether or not he did. He said that he confiscated gold to boost the economy. The bill was called "An Act To Provide Relief In The Existing National Emergency In Banking, And For Other Purposes". Seriously.

Here are some thoughts from Greenspan (before he sold his soul):

"The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit."

Greenspan then goes on to say: "The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

If I could, I would kill this thread with fire. It's a zombie.

On a slightly related note, I started to read a book about the Great Contraction today, but I stopped after I realized that the writer had a definite and obvious ideological bent toward blind thoughtless leftist progression. If I'm reading a history, I can do without the pedantic throwing-around of unqualified value statements, thanks. It was disappointing; it was the only book at Borders on the subject.

Enron wrote:"As should be clear from these graphs, 30 years ago, given the inflation-adjusted median household income, you would have been able to buy much less gold than the average family nowadays."
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I am not sure what the gold graph is showing... but I can give stats that are much more transparent than the graph.

In 1969 gold cost $43.50/ounce. In 1969 the median household income was $33,072 (not including the earnings of the wife). In 2006, gold cost an average of $606.30/ounce. In 2006, the median household income was $48,201.00 (including all working members of household older than 15).

This means that someone could buy 760 ounces of gold with the median household income (not including the earnings of the wife) in i1969. You could only buy 79 ounces of gold with the median household income (including all working members of household older than 15) in 2006.

This means that the dollar has decreased in value in comparison with gold by nearly 10 times since 1969. Gold is now at $891/ounce. The difference has only been increased since 2006.

So, the average household 40 years ago could actually buy about 10 times more gold with their yearly income.

http://en.wikipedia.org/wiki/Household_income_in_the_United_States
http://www.censusbureau.biz/hhes/www/income/mednhhld/p23text.html

The figure of $33,000 as median income in 1969 is in constant dollars based on the value of the dollar in 2003. The median income in 1969 was about $8,400 in 1969 dollars according to InfoPlease.com: http://www.infoplease.com/year/1969.html. That said, it still bought almost 200 ounces of gold, so the point is still valid even if it is a bit distorted.

Keynes also said that inflation is the means by which governments confiscate wealth.

GT,

You are right. My bad on the mis-calc.

The Brain Train wrote:unless a government desired the gold standard for their currency, what is the governments motive for confiscating gold & what was the motive for FDR?

Here is an explanation of what makes sense to me on why they would confiscate gold. When the government bought the gold from the hoarders they paid about $20. Shortly thereafter, what do you know?, the government mandated price of gold went up to $35. Now for every ounce of gold the government owned, they made $15. Good investment (insider trading?). They now could print $15. Since they seized over 500 tons of gold, that was a crud-butt load of money they had at their disposal ($240 million - adjusted for inflation thats over $3.8 Billion) to make people think they are getting richer when in fact they were getting poorer. How else could FDR have funded the New Deal while still "adhering to the gold standard?"


I'm guessing FDR knew the consequences of pulling away from the gold standard, and I'm sure Nixon would have done the same thing FDR did if he could have.

Is this a correct analysis of what went down?

The Brain Train wrote: what is MMMF?

Acronym Definition
MMMF Money Market Mutual Fund
MMMF Man Made Mineral Fibre
MMMF Maximum Margin Matrix Factorization
MMMF McDowell Mountain Music Festival
MMMF Margaret McNamara Memorial Fund
MMMF The section in the personal ads regarding group encounters

I hope it's the first one. But I wouldn't be surprised if it is the last one, we are a perverse nation.