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.