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Why inflation stimulates the economy
By Dave Winer on Thursday, August 18, 2011 at 12:12 PM.

I've been hearing economists say this, and I wanted to say that as an individual with some assets to manage, I understand what they're saying. #

Here's how it works. As long as inflation is low, as it is now, and the future of the economy is uncertain, again, as it is, you're inclined to use dollars to hold value. Where else would you put it?  #

But if there's inflation, all of a sudden, the cost of storing value in dollars becomes higher. The more inflation, the higher the cost. So as inflation goes up, or even the prospect of inflation goes up, money tends to move out of dollars and into real things that will rise in value with inflation. Like houses. Or into anything you've been putting off buying because you're scared. Because one thing you know, with inflation, it will cost more tomorrow.  #

Our problem right now is deflation, which makes you even more likely to store value in cash, where it isn't stimulating anything. If the car I would buy today is going to cost less tomorrow (that's what deflation is) I'm better off waiting to buy it.  #

Another benefit of inflation is that it makes debt easier to pay off. You pay back pre-inflation dollars with post-inflation dollars, the latter which are easier to come by.  #

This economics stuff actually is fairly easy to understand. :-) #

A good post to give some background is Ezra Klein's piece on how we got out of the Depression. It wasn't, he says, as many people think, because of World War II's stimulative effect. Roosevelt devalued the dollar by getting us off the gold standard, which increased demand for our products, and therefore our workers, and by threatening Europe, Hitler caused value to flow into the US, as money there sought safety here. #

Re comments, please keep them responsive to this post. Your own differing opinions about inflation belong on your blog. If you have some fact or idea to illuminate this, stated briefly, that would be on-topic. Thanks. #

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