Tax-increasing, big-spending, redistributionist politicians love inflation, because they think it covers a multitude of economic policy sins. Even if the economy is flat, inflation’s ability to drive up asset values (e.g., in housing and the stock market) can make people feel richer, even if they aren’t.
Current Federal Reserve Bank policy is a target inflation rate of 2 percent. And the Fed might like it even higher. Fed Chairman Ben Bernanke said in July: “Low inflation is not good for the economy because very low inflation increases the risks of deflation, which can cause an economy to stagnate.”
If the Fed succeeds in hitting 2 percent (or more), that means at the end of a year each dollar you started the year with would be worth only 98 cents. You have been indirectly robbed of 2 cents. And inflation multiplies exponentially over time, just like interest, reducing the value of your money year after year.
While our elected leaders are usually pretty open about their efforts to take your money, inflation is a silent thief.
Inflation also allows politicians to pay government obligations, such as interest on the federal debt and Social Security Trust Fund IOUs, with cheaper dollars.
Who does inflation hurt the most? Savers, and especially seniors, who tend to have fixed incomes and put their assets in low risk, and therefore low return, investments.
But like Bernanke, some central bankers and economists (e.g., Harvard economist Kenneth Rogoff and The New Yorker financial writer James Surowiecki) are increasingly warming to the idea that some inflation is not just acceptable, it should be a policy goal.
Some economists have long believed that a growing economy ignites inflation. But even if that were true—which it likely isn’t—what they are trying to do is reverse: boost inflation to get a growing economy.
By contrast, economist Robert J. Shiller has shown that the public doesn’t like inflation because people know it robs them of their spending power. So the inflation-promoting politicians have to be subtle about it—like, oh, doing it through the Fed.
President Obama’s economic policies have suffocated economic growth for five years, hence a desire to make it look like the economy is growing by embracing inflation. The better approach is to implement policies that actually spur economic growth. And the very first step in that agenda is to eliminate the effort to create inflation.
November 12, 2013