Inflationism: Difference between revisions

In [[economics]], an '''inflationistInflationism''' oris '''inflationary'''a [[heterodox economics|heterodox]] [[economic policy|economic]], [[fiscal policy|fiscal]], or [[monetary policy]], isthat onepredicts that is predicted to lead to a substantial level of [[inflation]]. Similarly, an '''inflationist''' economist is oneharmless, thatdesirable advocatesor aneven inflationist policyadvantageous. "Inflationism"Similarly, isinflationist generallyeconomists aadvocate termfor ofan abuseinflationist in [[heterodox economics]]policy.

Mainstream economics holds that inflation is a [[lesser of two evils principle|necessary evil]], and advocates a low, stable level of inflation, and thus is largely opposed to inflationist policies – some inflation is necessary, but inflation beyond a low level is not desirable. However, [[deflation]] is often seen as a worse or equal danger, particularly within [[Keynesian economics]], andas inwell the theory ofas [[debtMonetarism|Monetarist deflationeconomics]], and thusin the policiestheory advocated by Keynesian economists such asof [[Paul Krugman]] to preventdebt deflation in cases of [[economic crisis]] are labeled as inflationist policies by others.{{By whom|date=April 2011}}

<ref>John Maynard Keynes, ''The Economic Consequences of the Peace'', 1919. pp. 235-248235–248. [httphttps://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_inflation.html PBS.org -– Keynes on Inflation]</ref>

The contemporary [[Post-Keynesian]] monetary economic school of [[Neo-Chartalism]], which advocates government [[deficit spending]] to yield full employment, is attacked as inflationist, with critics arguing that such deficit spending inevitably leads to [[hyperinflation]]. Neo-Chartalists reject this charge, such as in the title of the Neo-Chartalist organization the [httphttps://wwwedi.cfepsbard.orgedu/research/cfeps-archive/ Center for Full Employment and Price Stability].

A high inflation rate with a low ''nominal'' interest rate result in a [[negative interest rate|negative real interest rate]]; for example, a nominal interest rate of 1% and an inflation rate of 4% yields a real interest rate of (approximately)<ref group="note">Properly, the real interest rate in this case is <math>1.01/1.04 - 1 \approx -2.88\%,</math> but the [[linear approximation]] <math>1\%-4\%=-3\%</math> is widely used; see [[Fisher equation]] for details.</ref> &minus;3%. As lower (real) interest rates are associated with stimulating the economy under [[monetary policy]], the higher inflation is, the more flexibility a central bank has in setting (nominal) interest rates while still keeping them nonnegative; negative (nominal) interest rates are considered [[unconventional monetary policy]] and have very rarely been practiced.

Inflation decreases the real value of wages, in the absence of corresponding wage rises. In the theory of [[wage stickiness]], a cause of unemployment in recessions and depressions is the failure of workers to take pay cuts, to decrease real labor costs. It is observed that wages are nominally sticky downwards, even in the long term (it is difficult to cutreduce realnominal wagespay rates), and thus that inflation provides useful erosion of real costs wages without requiring nominal wage cuts.<ref name="krug" /><ref>[http://elsa.berkeley.edu/~akerlof/docs/inflatn-employm.pdf Near-Rational Wage and Price Setting and the Optimal Rates of Inflation and Unemployment], George A. Akerlof, William T. Dickens, and George L. Perry, May 15, 2000</ref>

In this context it is worth noting that [[collectiveCollective bargaining]] in the [[Netherlands]] and [[Japan]] has at times yielded nominal wage cuts, though this has not generally occurred in the United States, andbelief that this argument ascribes high real labor costs aswere a cause ofcausing unemployment,. and argues that labor should have a lower share of national income – workers should be paid less.

In the theory of [[debt-deflation]], a key cause of economic crises is a high level of debt, and a key cause of recovery from crises is when this debt level has decreased. Other than repayment (paying down debt) and default (not paying it), a key mechanism of debt reduction is inflation – because debts are general in nominal terms, inflation reduces the real level of debt. This effect is more pronounced the higher the level of debt, in proportion to the level of debt. For example, if the [[debt to GDP ratio]] of a country is 300% and it experiences one year of 10% inflation, the debt level will be reduced by approximately <math>300\% \times 10\% = 30\%,</math> to 270%. By contrast, if the debt to GDP ratio is 20%, then one year of 10% inflation will reduce the debt level by 2%, to 18%. Thus several years of sustained high inflation significantly reduce a high level of initial debt. This is argued by [[Steve Keen]], among others.

In this context, the direct result of inflation is a transfer of wealth from creditors to debtors – the creditors receive less in real terms than they would have before, while the debtors pay less, assuming that the debts would in fact have been repaid, and not defaulted on. Formally, this is a de facto [[debt restructuring]], with [[principal reduction|reduction of the real value of principle]]principal, and may benefit creditors if it results in the debts being serviced (paid in part), rather than defaulted on.

* [http://www.popmodal.com/video/2066/Vintage-pro-inflation-propaganda Inflation] {{Webarchive|url=https://web.archive.org/web/20100620171910/http://www.popmodal.com/video/2066/Vintage-pro-inflation-propaganda |date=2010-06-20 }}, explained by [[Pete Smith (film producer)|Pete Smith]], directed by [[Zion Myers]] (1933), pro-inflation movie ([httphttps://www.imdb.com/title/tt0194041/combined IMDb])