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Originally Posted by lifeafter41
re thread (SBY): Deflation and Inflation: Which is the lesser evil?
Japan was mired in deflation in the last 2 decades, till abenomic took place and started easing. Read that inflation is rising, but disposable income is shrinking. Which is the lesser evil between the two? Or have all been misled, that deflation is better after all as compared to inflation. My understanding is that if inflation is at 2% per year, money will be smaller by 20% in ten years time or am I wrong with this assumption. |
...Such changes of prices, either inflationary or deflationary, have been major forces in history for the last six centuries at least.
Over that long period, their power to modify men's lives and human history has been increasing. This has been reflected in two ways.
On the one hand, rises in prices have generally encouraged increased economic activity, especially the production of goods, while, on the other hand, price changes have served to redistribute wealth within the economic system.
Inflation, especially a slow steady rise in prices, encourages producers, because it means that they can commit themselves to costs of production on one price level and then, later, offer the finished product for sale at a somewhat higher price level. This situation encourages production because it gives confidence of an almost certain profit margin.
On the other hand, production is discouraged in a period of falling prices, unless the producer is in the very unusual situation where his costs are falling more rapidly than the prices of his product...
...Rising prices benefit debtors and injure creditors, while falling prices do the opposite. A debtor called upon to pay a debt at a time when prices are higher than when he contracted the debt must yield up less goods and services than he obtained at the earlier date, on a lower price level when he borrowed the money.
A creditor, such as a bank, which has lent money—equivalent to a certain quantity of goods and services—on one price level, gets back the same amount of money—but a smaller quantity of goods and services—when repayment comes at a higher price level, because the money repaid is then less valuable.
This is why bankers, as creditors in money terms, have been obsessed with maintaining the value of money, although the reason they have traditionally given for this obsession—that "sound money" maintains "business confidence"—has been propagandist rather than accurate...
...Another paradox of banking practice arose from the fact that bankers, who loved deflation, often acted in an inflationary fashion from their eagerness to lend money at interest. Since they make money out of loans, they are eager to increase the amounts of bank credit on loan....
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I learned from my economics class that banks tend to like inflation because interest rates increase as we try to spend less to slow down economic growth. This makes interest rates increase and making interest sensitive goods such as cars and houses more expensive, thus letting bankers and people make more money.
Originally posted by Johnnaut:I learned from my economics class that banks tend to like inflation because interest rates increase as we try to spend less to slow down economic growth. This makes interest rates increase and making interest sensitive goods such as cars and houses more expensive, thus letting bankers and people make more money.
Think your start is right but your conclusion wrong/ less significant.
Interest rates in excess of inflationary rates means more work for bankers e.g. higher targets to hit for unit trusts, less people making risky investments (less bankers commission to earn) etc etc.
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Bankers being the 2nd most dispicible 'professionals around town (the worst are those who teach/preach FALSE religion), LOVE to have their cake and eat it too.
In short they love inflation since it creates FEAR in people who are then more likely to take loans from them/ give banks M&A jobs etc/ invest $$$ like ants running around on a hot pan: good for short term GDP numbers but fatal for the future development of a country (politicians with greased palms are too stupid to know this).
Higher interest rates make it slightly more difficult to do bank business since the cost of borrowing also increases but ultimately, inflation is best for bankers since it also means that it is easier to repay borrowed $$$ since inflation makes cash less valuable over time.
Only problem is that inflation makes the poor and retirees poorer over time and widens the wealth divide, however, by then, most bankers would have already bought their paradise islands and far from the societies that they destroyed. Fortunately, God created venenomous snakes, and bankers being human, can die of venemous snake bites too...
So main thing is high inflation: bankers LOVE inflation as a tyre repair workshop owner LOVES punctured tyres...