Governments tell us that inflation is necessary for economic growth. Prices need to go up for economic development.
I started to question this lately after ding some reading and listening to crypto enthusiasts who challenge traditional schools of thought.
With economies of scale prices are supposed to reduce when mass production takes place for food, gas, electronics... So why is it that prices need to go up in order for economic development?
Let's look at some of the reasons economists use to support this:
Stimulating Spending
They say that inflation can encourage people to spend their money sooner rather than later because the value of money decreases over time. This can help stimulate economic activity and boost demand for goods and services.
Encouraging Investment
We're told that moderate inflation stimulates investment because if you leave your money in the bank with less than a 1% interest rates to grow, inflation will outweigh it. This I agree to. I see all the traditional investment options pointless with annual compounded rates of 2-4%
Debt Management
Economists say that inflation can erode the real value of debt. As prices go up, debts become worth less compared to what they could buy before. This can help borrowers, including governments, manage their debt burdens more effectively.
Flexibility in Adjusting Wages and Prices
When prices rise, it might be easier for companies to increase wages without significantly impacting their bottom line. This is the problem! Companies give their employees nominal wage increases which again get outweighed by inflation.
Avoiding a Deflationary Spiral
Economists often warn us about the dangers of deflation, where prices continually decrease. This situation can lead to consumers delaying purchases in anticipation of further price drops, resulting in decreased demand, economic stagnation, and potentially recession. This I agree with to an extent. If I ran my own company whether it was goods or services or both I was providing, with constant deflation I would need to mass produce to sustain myself barely reaping any significant profits. How would startups and SMEs sustain themselves?
I might not be looking at all the angles or the topic in entirety. I really see cryptocurrency as a solution to this issue. With economic inclusion, lower transaction costs and a number of other advantages it has. Cryptocurrency really is the key to solving major economic problems. I'll get into it later. That's a post for another day. Stay tuned😊
I'm not fully convinced on the emphasis our governments lay on inflation in fostering economic growth. Let me know your thoughts on this in the comments below.
Feel free to re-blog.