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Monday, April 9, 2007

Krassimir Petrov - Effects of inflation

An interesting list of the effects of inflation from this writer:

No positive social or economic effect
Increases the level of prices
Distorts relative prices
Creates risk and uncertainty
Income diffusion effect – early comers gain at the expense of late comers
Benefits inflators (inflators=recipients of the inflation tax)
Hurts fixed income groups
Hurts existing creditors
Hurts all holders of money [through] Inflation Tax
Increases the consumption-investment ratio
Lowers national savings
Reduces economic growth & standards of living
Creates illusion of increased business profits
Consumes capital
Imposes “menu costs”
Imposes “shoeleather costs”
Causes a bracket creep
Creates Malinvestments
Causes Business Cycles
Causes currency debasement = currency devaluation
Causes more expensive imports
Strengthens industrial cartelization (predominantly for inputs/resources)
Causes speculation and bubbles

The list appears on PrudentBear.com and there is a link to a videocast talk on the subject.

This weekend I pulled an old paperback copy of Galbraith's The Great Crash 1929 off the bookshelf and have been engrossed with it since. Galbraith's account of the Crash does not give credence to the common interpretation that it was the result of the onset of a recession that was already occurring but the inverse of this explanation. More later but I am struck by the way in which the work leads to the idea that the credit bubble in the Real Estate market is very like a situation where the stock market is running on no margin.

The book is certainly a gripping read and of course Galbraith was that exception in being an economist who could weave an entertaining story while still adhering to impeccable scientific standards. Haven't looked to see if it's still in print; it ought to be.

1 comments:

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