Inflation

[01503]

Justice does exist in the world, whether people choose to practice it or not. The men of ability are being avenged. The avenger is reality. Its weapon is slow, silent, invisible, and men perceive it only by its consequences - by the gutted ruins and the moans of agony it leaves in its wake. The name of the weapon is: *inflation*.--Ayn Rand

I read this quote on the main page a few minutes ago. What does Rand mean when she said that the "men of ability are being avenged" by inflation?

Also, please clarify what inflation is, exactly, and what causes it. I'm not sure I have the definition clear.

[softwareNerd]

I'll have to look up the context of that quote.

Meanwhile, on the concept of inflation....

As used in that quote, "inflation" refers to the expansion of the total amount of nominal money in an economy. For instance, in the days of metal coins, kings would instruct their treasury to issue new coins with less gold (or silver, etc.) than the old version, but the same face value. The treasury takes in old coins, issues new coins of the same denomination, but less gold; and, it uses the purloined gold to issue new coins. If there were previously (say) 10 million francs in circulation, one could take 1/10 of the gold out and create 1 million more francs. Money for nothing!

Doing this does not increase production. So, all one has is more money "chasing" the same goods. Prices rise. Evreyone pays more. The king -- by this subterfuge -- has ended up with $1 million more francs, but has not raised taxes; instead, everyone pays more in prices. Inflation is like a stealth tax.

The same principle holds with "fiat" currencies.

[zenybear]

hello.

inflation means a rise in the general level of prices in an economy. in this case, we can say that the money supply in the economy increases without increasing its real value. inflation is comparable to exchange rate. if the previous exchange rate is 40 pesos to one dollar and the exchange today is 43 pesos to a dollar, many will say that the value of the dollar appreciated with that of the peso depreciated. However, the real exchange rate might not change if the nominal exchange rate increases.

why does inflation become an avenger to some/many?

let us consider the assumption that the participants in the economy are not rational(in economic context), meaning they might not have perfect information and they cannot fully utilize the information available. if the inflation is unexpected, the participants in the economy cannot adjust their expectations. given that the inflation is unexpected, a firm might interpret that the price of their good increase making the firm increase it s production, without realizing that most of their input's prices also increased.

also, it is given that there can be two type of firms. one that can easily lay-off its workers and one that cannot. if the firms(those who cannot lay-off) realized that their input increased, they cannot lay-off their workers. also, there are unions in the labor market. whatever the inflation in the economy(can also be deflation), they neither can lay-off their workers nor decrease their wages. since they cannot do these things, they cannot fully minimize their cost.

there are also other answers in your inquiry, ill add them later.

[softwareNerd]

What does Rand mean when she said that the "men of ability are being avenged" by inflation?

I looked up the quote. The source is the essay "Egalitarianism and Inflation" published in "The Ayn Rand Letter", Vol-3, Nos. 18-20, 1974.

I think Rand means that parasites -- via government -- try to take wealth away from men of ability, but in the long run they suffer too, because of the effects of inflation. An integral part of the mechanism of inflation is the diversion of investment expenditures into consumption. Other than rising prices, there is the vengeance of reality: lesser wealth in the long run.

[JASKN]

Other than rising prices, there is the vengeance of reality: lesser wealth in the long run.

That's what I took it to mean, also.

Some vengeance, though. In the long run, yes, the thieves' general standard of living will be less good because they have caused prices everywhere to go up by broadening the total money-to-stuff ratio, and because they have prevented businesses from investing in further wealth-creating ventures. But, in the short run, and probably even altogether, the thieves will suffer less than everyone else, including the actual producers, because they had more (actually worthless) money to spend before everyone else had a chance to up their own prices. They got a discount on whatever they first spent the money on, that people later down the chain of information did not also have.

To stress it, the thieves had no good way to use the wealth they stole, whereas the wealth stolen from big businessmen would have been used to actually make more wealth! Totally evil.

EDIT:

I forgot to add that the better option, in my book, is government reform, and then a proper government. Who wants to wait to let reality screw a thief over via laws of economics when you might not even live see the justice happen? Stop them before they start.

Edited September 5, 2008 by JASKN

[agrippa1]

I read this quote on the main page a few minutes ago. What does Rand mean when she said that the "men of ability are being avenged" by inflation?

Also, please clarify what inflation is, exactly, and what causes it. I'm not sure I have the definition clear.

I agree with SN's take. This piece was also in Philosophy, Who Needs It?. This was a difficult read (listen) for me, and I had to listen several times before I got the full meaning. (It also helped to have read Atlas Shrugged)

There are a lot of good discussions on this topic in the Economics forum. I would recommend reading some of the threads to get a better feel for inflation.

[D'kian]

I agree with SN's take. This piece was also in Philosophy, Who Needs It?. This was a difficult read (listen) for me, and I had to listen several times before I got the full meaning. (It also helped to have read Atlas Shrugged)

You probably would understand it better had you experienced massive inflation first hand. I think the worse America has ever seen was 10% + inflation in the Carter era. I've lived through 4 devaluations and one hyperinflationary era. At its peak in the mid-80s, inflation reached just over a 150% yearly rate.

How does that look and feel like? You see banks offering 110% yearly returns, credit cards at 200% yearly rates. The government raises the minnimum wage each month, and every business, large or small, indexes its prices at least to the minnimum wage increase. Many do raise prices more than that, especially those who engage in international trade of any sort. There is growth, but saving money is nearly impossible, even at the ridiculous rates paid by the banks. At that time, too, the banks were property of the government and did not allow savings in foreign currencies, which did hold their value. The government also went from receiving quarterly tax payments to monthly ones.

And that's still not as bad as what happened in South America, where inflation reached rates over 1,000%, or Zimbabwe these days, which might have already beaten Weimar Germany in that department.

Anyway, as to the looters, in Mexico it's commonly known how much each outgoing president raked in during his single 6 year term in office. The president at the time was Miguel de la Madrid Hurtado. He's remembered a bit fondly as an honest man who dind't steal too much money. he was more honest that his two predecesors, true, and he favored some adminsitrative and free market reforms. But if Mickey dind't rake in too much, it was because there wasn't too much to rake in.

[agrippa1]

You probably would understand it better had you experienced massive inflation first hand. I think the worse America has ever seen was 10% + inflation in the Carter era.

The worst we've seen officially is just under 20% in 1946-7 and just under 15% 1979-80, but no, nothing like hyperinflation in Mexico...

Then again, current yr/yr producer price index rate of change (so-called "wholesale inflation") hit 17.4% in July - a 33-year high.

[D'kian]

Then again, current yr/yr producer price index rate of change (so-called "wholesale inflation") hit 17.4% in July - a 33-year high.

The thing is states tend to measure inflation by rising prices, instead of the unwarranted increase of the money supply. Lots fo raw materials, notably oil, have gone way up these past year and a half. That could account for the wholesale inflation.

[agrippa1]

The thing is states tend to measure inflation by rising prices, instead of the unwarranted increase of the money supply. Lots fo raw materials, notably oil, have gone way up these past year and a half. That could account for the wholesale inflation.

This is where inflation gets hard to keep track of. The price of oil has gone from $25 to $116 since 2000. The $/euro exchange rate has dropped from 0.9 to 1.6 during the same time. That means that if not for the fall of the dollar (against the euro, at least), oil would be at $65 today. That's still a rise of 12.7%/yr, but how much of that is due to Euro inflation (which isn't counted into the dollars devaluation), and how much to oil-specific supply and demand? Then again, how much of a deflationary impact does the rising oil price have, due to decreased demand on all other goods? It gets very difficult, very quickly, to get a handle on solid ground when talking about inflation, especially when goods are being bought and sold into and out of the economy under evaluation.

(edit: typo)

Edited September 5, 2008 by agrippa1

[Soth]

I have 2 questions regarding inflation that's been on my mind:

1) How much of inflation is usually caused (in a typical western country in a typical year) by the government printing money, and how much (if any) by the nation's purchasing power decreasing? I imagine if a large quantity of factories closed in a country, then that country's purchasing / producing power would decrease causing inflation of national currency by itself. Am I right?

2) Regardless of whether or not inflation is generally caused by government printing money, is there ever ANY rational economic sense in a government printing money? I figure in this forum everyone probably share my view that - 'no, government should mind it's own business and stay out of the economy', but is there some good case for money printing I'm unaware of? Is it ANYTHING at all besides a stealth tax?

Thanks in advance.

[JASKN]

The answer to question number two is, "No." Money is a way to more easily and accurately trade values between all sorts of different value-producing people. Ideally, money would be as objectively linked to the values as possible, so that trade is easiest. All that printing more money will do is force everyone to adjust their prices for everything. Even assuming the new printed money is known about by all, ahead of time, how would the extra hassle of price-adjusting be better than not?

For question number one, assuming an objective, accurate currency, all that decreased production would do is decrease a country's net wealth. It would not affect prices, it would just affect how much of everything everyone can buy. Certain industries would experience price fluctuations as their business decreased, since people would have less wealth to trade for more luxurious things, but overall, prices would still reflect the actual amount of wealth, and overall inflation would not occur.

EDIT: On second thought, I think I'm missing something with that second paragraph. I'll have to think about it.

Edited September 6, 2008 by JASKN

[John McVey]

1) How much of inflation is usually caused (in a typical western country in a typical year) by the government printing money, and and how much (if any) by the nation's purchasing power decreasing?

All inflation is caused by government. Inflation is inflation of the money supply with something whose true economic value bears no relation to the face value stamped on the units of that something, which can only happen when that face value is given weight of law (that is the meaning of the word 'fiat'). (Usually the face value is waaaaay above the value of the commodity, such as in paper notes whose actual economic value is less than that of a sheet of toilet paper, but for low value coins the reverse can be true for a short while).

The associated decline in purchasing power - which happens at a rate distinct from that of the rate of inflation - is a consequence of inflation, not the inflation itself. There are other causes of a decline in purchasing power besides inflation, which includes for example all those things that reduce the total productive output, but these are not properly called inflationary just because general prices rise. Inflation can take place even when prices are falling, which happens when the rate of expansion of the fiat money supply is so low that it is outstripped by increase in output. This is improperly labelled an example of deflation, as in the case of Japan recently.

2) Regardless of whether or not inflation is generally caused by government printing money, is there ever ANY rational economic sense in a government printing money? ... is there some good case for money printing I'm unaware of?

Nope and nope. There's not even any justification for the government merely defining the monetary unit, never mind having a hand in producing those units. This means not only that the government should not print notes but shouldn't mint coins either, including real gold and silver to be traded at their proper metallic value. The only thing the government should be doing specifically in relation to the money supply is upholding contract law and prosecuting fraud.

Is it ANYTHING at all besides a stealth tax?

Yes, there are other motives and intended goals for it besides stealth taxation. A common one is manipulation of the exchange ratio of the currency to foreign currencies (sometimes to change that ratio and sometimes to maintain it at a fixed point), usually intended to "promote international competitiveness". Another is to attempt to keep or push interest rates down by injecting the new money into debt capital markets - this is the most common reason and mechanism for inflation in western countries. Another again is to reduce the real value of hourly-wage incomes so as to "reintroduce wage-flexibility" while allowing labour bodies to keep up the pretense they're increasing the well-being of their members. And so on.

JJM

[D'kian]

I have 2 questions regarding inflation that's been on my mind:

1) How much of inflation is usually caused (in a typical western country in a typical year) by the government printing money, and how much (if any) by the nation's purchasing power decreasing? I imagine if a large quantity of factories closed in a country, then that country's purchasing / producing power would decrease causing inflation of national currency by itself. Am I right?

Since the Industrial Revolution purchasing power has always increased. There may be occasional price variations that make some things more expensive, but absent government controls and inflation, such things are temporary.

Take oil, for example. Some of its recent increase in price is due to more demand from countries like India and China. If there were no restrictions to drilling off shore in the US, you can be sure a dzen oil companies would be drilling there now to take advantage of the rise in demand.