People like me tend to think of inflation as "stuff getting more expensive." But another way to think of it is "non-cash assets becoming more valuable." This is why a little inflation happening can be good -- it's some of the stuff you own increasing in value before your very eyes.
(How's this for inflation: Of the almost 900 paintings created by Vincent Van Gogh, he only sold one during his lifetime, "The Red Vineyard" in 1890, for the modern equivalent of about $1,600. A conservative estimate of the painting's current value is somewhere between the gross national product of Anguilla and "OH MY FUCKING GOD!!!")
An increase in the value of your leveragable assets means you can borrow lots of money against your now-more-valuable stuff -- money which you will use to increase your wealth by investing it or using it to grow a business. A little inflation is seen by some as good. A lot of inflation is seen by everyone as bad. But what some people see as truly horrible is even a hint of the dreaded deflation.
Deflation is when prices decrease, meaning the value of cash increases and you can buy more with it... which is good for people like me who have most of their assets in cash. But as money becomes more valuable, the stuff you can buy with it becomes less valuable, which sucks for you if most of your assets are in non-liquid things like real estate or a business.
Deflation seems to terrify economists and it's probably one of the reasons why Federal Reserve Chairman Ben Bernanke started "printing money" (i.e. increasing the money supply) to try and make cash a little less valuable. If you're a big company or a big bank or just a wealthy individual in the midst of a period of deflation, the thing you want to do is have and hold on to as much cash as possible because cash is the only real wealth at that point. If things are trending toward deflation, there's a disincentive to invest money in the sorts of big things that really move the economy. Bernanke was interested in dealing with the situation's most undesirable side effect: banks and big companies sitting around feeling all rich with their big piles of cash and not investing in anything because a day later their investment wouldn't be as valuable as their cash was. So by "printing money" Bernanke was trying to say, "Companies and banks: go invest in expensive stuff and get money circulating again instead of just letting it sit around! The stuff you invest in will be more valuable tomorrow! I swear!"
|Bernanke, The Mighty|
The big problem for workers: inflation isn't uniform. Prices and wages don't necessarily go up at the same rate and in the eyes of businesses and banks, our value as workers has been decreasing instead of increasing (most people aren't considered good "investments"). The cost (i.e. value) of the work we do hasn't been keeping pace with the cost of everything else and we aren't really earning as much as we used to: paychecks are bigger, but when you adjust for inflation, we can't buy as much with them as we could have a few decades ago. Since our salaries aren't going up fast enough, for us, inflation is still just "stuff getting more expensive."
So, Chairman Bernanke has a choice: does he "print money" and head off deflation (unhappy working class, happy investor class) or does he allow the dollar to get stronger (happy working class, unhappy investor class)? And what about the federal budget? And productivity? The savings rate? International trade? Deficit spending at the state level? Etc., etc., etc. The upshot: At any given moment, Ben Bernanke is a very busy man whom many people really, really hate. Which probably, on occasion, leaves him feeling somewhat... deflated. ‹--------- LAUGH DAMMIT! IT'S FUNNY!
- Economics, 16th Ed. by Paul A. Samuelson & William D Nordhaus. © 2001. Published by McGraw-Hill.
- The 21st Century Economy: A Beginner's Guide by Randy Charles Epping. © 2009. Published by Vantage Books.