Why Inflation Is So Bad (As I Understand It)

One would initially think that inflation is no problem: if the money supply is increased, then wages increase, prices charged for goods increase, and there should be no net effect on the economy.

But the answer is that it discourages saving in favor of malinvestment.

That money that is printed goes into the economy, and when more money is out there, all of the businesses get the money, and therefore think they are doing better business.

So they invest that money into their “growing” business.

But the money didn’t come from increased business, so all of that money spent on capital goes to waste because the profits didn’t warrant the investment in the first place, and when you use the majority of your savings expecting markets to increase and profits to increase based on the false signal of inflation, you go bankrupt because you spent all your money on capital, which you have to keep up, with the expectation of making a profit. But if you don’t make a profit (the market didn’t increase: more currency was just printed), and you’re having to pay for upkeep, then you’re losing money and you’ll have to sell for a fraction of your investment if the market didn’t warrant that investment in the first place (which means that people aren’t going to pay that much for it because the market determined it wasn’t as profitable as you thought it would be, unless they falsely think the market is growing just as you did, and that’s how bubbles are created (which always crash)).

It’s the same thing that happened with the housing bubble: people bought houses with the expectation of selling them, and eventually, there were no other buyers, so people were stuck with the houses with no money to pay for them (because they used their savings and took out loans with the hopes of selling them later on for a profit) and they lost everything.

December 28, 2013.

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2 thoughts on “Why Inflation Is So Bad (As I Understand It)

  1. dysfunctional unit

    Cody-Great post. Can I, if’n ya don’t mind, add this lil’ tidbit.
    Starting in the late 80’s there was a social theory that began to surface which equated home ownership with success in life as a cause & effect kind’a thing.
    It is, like much of what the social left proposes based on faulty science. But that did not stop it becoming a new truth and a full fledged government supported (group of) program(s). By the time the Clinton’s were in office money was flowing to HUD and Fannie May, Freddie Mac and other organizations to help those who would not normally afford their own house the chance to take part in “the American Dream”.
    What they fergot is that yer supposed to work fer the AD and a sizable percentage of receivers of these benefits couldn’t afford a home prior to this because they didn’t have the drive to work to afford one.
    A real surprise then when this social science experiment blew up in their faces.
    I find you an interesting dude Cody, yer quite an independent thinker and I dig how honest you are.
    Thanks as always fer the great read.

    Reply
    1. codyalanreel Post author

      Nice contribution.

      Thankfully, I am quite an independent thinker, although depending on the issue, I’m prone to giving into various peer pressures, unfortunately lol I’m working on it, however.

      Reply

Don't make an ass of yourself for the whole internet to see. No pressure ;)

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