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The advantages and benefits of Inflation

Even though linked with the decreasing currency values in general, inflation is an economic definition used to connote the increasing prices of goods as well as services. Rapid demand or supply changes and government financial or monetary policies are the two most common rationales behind the existence of inflation. In reality, there are some benefits of inflation; however, unconstructive long-term effects are left unanalyzed. Therefore, managing inflation is a significant part of national monetary laws.

The present economic planners may dispute that inflation is not the chief issue in this era of stimulus packages and bailouts. Inflation has always been seen as a threat to the economy, and is reliant on the current stimulus packages’ function, making it either a critical component of the changing financial system, or just a part of textbooks about economics.

Inflation:  The Advantages

Investors and businesses with a huge pool of funds tend to place their money in assets to prevent the setback of inflation. Since the price inflation leads in an increase in the investments value, like stock or real estate, investors are granted the opportunity to maintain their financial status even if the price of currency plummets. Therefore, small inflation value promotes more investing while proscribing money hoarding.

Here are some of the most popular inflation benefits:

Business Growth – In actual fact, controlled growth of inflation can help you retire wealthy since it can become a significant component of business development. This is for the reason that savings are frequently invested to avoid net loss when housed in banks. When there is controlled inflation, some people spend their money since they are afraid that prices would increase. Therefore, they choose to save their hard earned money by purchasing now, instead of paying more later.

Plunging Debt Values – While more people view the benefits of low inflation, some realize the good side of higher inflation. Higher inflation eliminates the real value of currency. Thus, the actual value of debts lessens — a scenario that indebted private individuals as well as businesses can take advantage of.

Stock Values Increases – Stocks procured at an earlier value significantly affects the Roth IRA rates. During inflation this could increase in price and be sold at a higher value generating more money.

Asset Values Increases – Values of most fixed assets may increase, making some companies more financially stable and secure. This may profoundly influence the interest rates for IRA. Higher inflation most of the time results to higher prices, thus, fixed assets in conjecture may rise in value.

Economic Benefits of Inflation

Current Economic planners may argue that inflation is the not the main issue in this age of bailouts, and stimulus packages. Inflation is always a threat to any economy, and depending on how the current stimulus packages work, could either become part of the changing economy, or part of an economics textbook.

What are the Advantages of Inflation:

1. Business Growth 

 Controlled growth of Inflation, can become part of business growth, simply because savings are often invested, because of the net loss if they are kept in a Bank.

During times of controlled Inflation, people in the past tended to spend, as they feared prices could rise, saving on buying now, rather then paying more later. 

  

2. Falling Debt Values 

 Higher Inflation eats away at the real value of a currency. This could mean that the actual value of debts decrease, benefiting indebted businesses and private individuals. 

  

3. Higher Stock Values 

 Stocks bought at an earlier value, could rise in price and sold off at a higher price bringing higher profitability. 

  

4. Rising asset Values 

 Values of fixed assets could rise, making some Companies more financially secure. Traditionally higher Inflation often leads to higher prices, therefore fixed assets in theory should rise in value. 

  

THE FINANCIAL PAGE

IN PRAISE OF INFLATION

by James SurowieckiSEPTEMBER 27, 2010

In the two years since Lehman Brothers went under, the Federal Reserve has taken extraordinary measures to get the economy moving again. It has bailed out huge financial institutions, slashed interest rates almost to zero, lent hundreds of billions of dollars to American companies, and bought piles of dodgy assets. This pulled us back from the brink of disaster, but, as the fifteen million Americans out of work can testify, it hasn’t been enough to get the economy out of neutral. And so a surprising number of high-profile economists, on both the left and the right, think that it’s time for the Fed to try one more extraordinary measure: injecting the economy with a healthy dose of inflation.

Odd as that may sound, it’s actually not a crackpot concept. Right now, the U.S. economy has two fundamental, and interconnected, problems. First, consumers face huge debt left over from the borrowing spree of the past decade. Second, the dominant sentiment is caution—consumers are hesitant to spend, and businesses are hesitant to expand, invest, and hire. If the Fed were to moderately raise its inflation target—currently around two per cent—and commit itself to keeping prices moving higher for the next couple of years, it could help change this dynamic. If people believe that prices are going to rise in the future, they may be less cautious about spending in the present, since money that isn’t put to work will lose value. And, because inflation erodes the real value of debts, people’s debt burdens would shrink.

Unfortunately, when the Fed meets this week, it’s unlikely to be talking up the merits of an inflation boost. Central bankers are congenitally obsessed with the dangers of inflation and are more concerned with stable prices than with lost jobs. Also, the Fed, by its nature, looks after the interests of lenders, for whom inflation is generally bad news. But there’s a more basic reason, too: people really, really hate inflation. In polls, voters regularly cite high prices as one of their biggest concerns, even when inflation is low. A 2001 study that looked at the “macroeconomics of happiness” found that higher inflation put a severe dent in how happy people reported themselves to be. The distaste for inflation is such that a 1996 study (titled, aptly, “Why Do People Dislike Inflation?”), by the Yale economist Robert Shiller, found that, in countries around the world, sizable majorities said that they would prefer low inflation and high unemployment to high inflation and low unemployment, even if that meant that millions of extra people would go without work.

Weimar-style hyperinflation is, of course, an awful thing. But people loathe inflation even in moderate doses, where the evidence suggests it does little damage. The best estimates of the cost of inflation find that even a ten-per-cent inflation rate—much higher than anyone is currently pushing for—shrinks consumption by just 0.1 to 0.8 per cent. There are other costs, to be sure: inflation shrinks the value of people’s savings, and uncertainty about future prices makes business decisions less efficient. There’s also the risk of inflation getting out of control. But the historical record suggests that the risk of three-per-cent inflation turning into hyperinflation is very small.

So why is inflation unpopular? The biggest reason, Shiller found, was simply that people believe higher prices reduce their standard of living and make them “poorer.” This is obviously true for people living on fixed incomes or off their savings, but for everyone else, as many studies have shown, inflation translates into higher incomes as well as higher prices, and it typically doesn’t have much of an effect either way on people’s standard of living. (After all, we’ve had sixty years of inflation in the postwar era, yet we’re much more prosperous than we were in 1950.) That’s not how it feels, though: myopia leads us to focus on how much more we have to pay, rather than on how much more we earn. Inflation also sets off other alarm bells. It often increases uncertainty, which most people are averse to, and, because it can be described as “weakening” a country’s currency, it affects morale. Shiller found that people associated rising inflation with dwindling social cohesion. There’s also a moral dimension: we connect inflation to a lack of discipline and failure to live within our means. The most striking thing about Shiller’s study was that no one surveyed mentioned any possible benefits of inflation, even though to Americans currently besieged by debts it would be a lifesaver.

This intuitive prejudice against inflation may not be purely rational, but in normal times it’s beneficial: it encourages sober habits and discourages quick fixes. But, in times of crisis, other policies may succeed where pure rectitude can’t. After the Second World War, when the U.S. was struggling beneath a huge pile of debt, higher inflation helped shrink the real national debt to manageable proportions. And, in times when people are reluctant to take risks, a little inflation can help grease the skids. In doing this, though, inflation helps debtors and spenders at the expense of creditors and savers. It’s easy to see why this makes us uncomfortable. It seems to reward those who have behaved recklessly, and to punish those who played by the rules, saving their money and living frugally. But the economy doesn’t exist, in the end, to reward virtue and punish vice. It exists to maximize our well-being, and, currently, doing that may require helping the undeserving and irresponsible, if only because there are so many of them. Boosting inflation isn’t the right policy, but it may just be the correct one. ♦

The Benefits Of Inflation

2008 JULY 14

by Kyle

from → Economy

Inflation gets a bad rap.  Sure, runaway inflation is horrible for any economy; nobody is denying that.  But is inflation always bad for society?  Many, if not most, of economists think not.  In fact, inflation can have some powerfully positive effects on the economy.  Following are some of the most-commonly cited benefits of inflation.

Is Moderate Inflation Good For You?

When inflation hits double digits, everybody panics for good reason.  An unstable pricing platform makes it difficult for businesses and consumers to judge their future purchasing power and discourages productive investment due to increased economic risk and uncertainty.  But with inflation consistently below 4% in practically all of the developed world, are there really significant benefits of forcing it even lower?

For starters, there is little if any empirical evidence that lower inflation serves to increase economic growth once inflation is below a reasonable limit, say 5%.  A plot of inflation rates versus economic growth of all developed economies from 1960 to present does not form any discernable trend.  That is, there doesn’t appear to be a correlation between inflation (once below a reasonable limit) and economic growth (Source: OECD: pdf opens in another window).  But that doesn’t necessarily mean that inflation is good for you but rather, only that moderate inflation isn’t particularly bad.  For some concrete reasons, we have to dig deeper.

Inflation Greases The Gears Of Capitalism

Wages tend to be fairly inelastic.  People are loathe to take a cut in pay for any reason.  Unfortunately, sometimes wages need to be cut in failing industries or regions in order to free up capital for more productive uses elsewhere.  Fortunately, inflation provides a way out of this dilemma.  While workers probably wouldn’t be willing to accept less money in absolute terms, they would be far more accepting of flat wages for a year or two while inflation ranges 3-4%, which is effectively a pay cut in real terms.  These sorts of phantom capital reallocations simply wouldn’t be possible in a world without inflation.  Since this type of inflation allows capital to be allocated more efficiently than it otherwise would be, it will tend to boost economic growth in a situation where it might otherwise be retarded.

Another advantage of moderate inflation is that it leaves room for negative real interest rates to boost economic activity.  If interest rates are 2% at a time when inflation is 4%, borrowers are essentially being paid to borrow money.  Since interest rates can never go below 0% in nominal terms, this sly economic tool would not be possible in a world without inflation.  Of course, many economists doubt the necessity of negative real interest rates but there is no doubt it has been used effectively at times.

Finally, persistent moderate inflation allows firms with marginal pricing power push through price increases under the guise of inflation.  If inflation is non-existent, any attempt to raise prices by firms will certainly be noticed and heavily scrutinized; however, if the public comes to expect that prices will rise over time due to inflation, it will be easier to raise prices.  This is because consumers don’t pay too much attention to the magnitude of moderate price increases:  they just notice they happen.  If a firm raises prices by 4% when inflation is running at 3%, that amounts to a 1% real rise in prices.  Consumers probably won’t question the increase, though, because it’s small and not dramatically higher than the inflation rate.  Since consumers expect inflation, they accept the price increase without question.  This leads to higher profits for firms and eventually higher wages and lower unemployment than what might exist otherwise.

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