Wednesday, December 08, 2010

 

Quote of the Day: On the effect of inflation

Inflation is a redistributive mechanism in favour of the few that can protect living standards, against the large majority who cannot. —Tim Ash, emerging markets chief of the Royal Bank of Scotland, as quoted in "China's credit bubble on borrowed time as inflation bites"

Mr. Ash, of course, was applying this insight to China. But it applies to any country you like—the U.S. for instance.

I point this out so that you may better understand why Ben Bernanke, chairman of the U.S. Federal Reserve bank, which sets U.S. monetary policy, is so afraid of deflation.  As he said in his famous speech of 2002,

I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

Of course in 2002 Bernanke also thought that "the chance of significant deflation in the United States in the foreseeable future is extremely small." He has revised his opinion lately. In October he opined,

... in effect, inflation is running at rates that are too low relative to the levels that the [Open Market] Committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run. In particular, at current rates of inflation, ... the risk of deflation is higher than desirable. Given that monetary policy works with a lag, the more relevant question is whether this situation is forecast to continue. In light of the recent decline in inflation, the degree of slack in the economy, and the relative stability of inflation expectations, it is reasonable to forecast that underlying inflation ... will be less than the mandate-consistent inflation rate for some time.

I also mention the redistributing effect of inflation so that you will have a reply ready the next time you hear about "socialist redistribution schemes" from your right-wing pals. 

Incomes are constantly being redistributed in all economies, and a significant portion of that redistribution has nothing to do with "hard work" or individual merit of any sort.  So the political question is not whether redistribution should be allowed—in fact it cannot be prevented. The political question is "from whom" and "to whom."

Related posts
"First" of the Day: Fall of the CPI (12/19/08)
"First" of the Day: Fall in consumer prices (11/20/08)

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