Inflation is the disease, not the Cure

I am posting this thread in response to the sad lack of knowledge displayed by some members here , that claim Inflation is the solution to the financial meltdown

I will attempt to show that they are clearly wrong, and that Inflation is the Disease, not the Cure.

Originally posted by ConservativeJack

so we need to INFLATE the currency (peter schiff wont tell u dis)

so home prices go up

and all is well with the system again

home prices going down is the main problem

a solution is inflation

this is the mentality I will be attacking here

first of all I have a perfect real world example of what Inflation does to a nation's economy = Zimbabwe
edition.cnn.com...
www.cnn.com...

if you think inflation is good , go to zimbabwe and tell me how awesome that "paradise of inflation" really is

Another important point to make here is that inflation causes the "purchasing power" of a consumer to drop significantly , for many reasons.

One major reason is because the wages of workers will not rise fast enough to compensate for the inflation in prices of goods.

Lets say you get paid 10 $ an hour today. And by the end of the week inflation went up 100%. That means the prices of goods will cost double , but your income remains at its original 10$ an hour.

A suggested solution to this major glaring problem is "Price Controls".

"Just set fixed prices on goods and you dont need to raise the minimum wage" is the suggested solution to this.

If you fix prices, and keep a fixed wage for workers, and yet the currency gets inflated to obscene amounts. A critical new problem arises.

Trade.

Lets say that my gas station sells a Lighter for 99cents. And lets say I import it for 50 cents.

And lets say that the currency gets inflated 1million %.
But the govt put a "Price cap" on my Lighter, causing me to keep the price at 99cents.

That means that when I import the lighter from China (who doesnt have similar price caps or inflation problems) they will realize American money has been inflated 1million %, and thus will ask for 10,000 x the original price for that same lighter.

SO now my gas station has a huge issue, China wants 500,000 american dollars for a Lighter now, but the US govt says I HAVE to sell it at 99cents.

You see the type of losses that will incur? and thus my gas station goes out of buisness overnight because operation costs are totally unbalanced with local economic conditions, and world economic conditions

Hypothetical example.

1 Canadian dollar = 1 American dollar (not exact just an hypothetical example)

After Americas currency gets inflated 100 fold, that means now
1 Canadian dollar = 100 American Dollars

So by setting prices in American markets, WHILE inflation is going unchecked, will cause the importing of goods to become totally unaffordable for any buisness, and thus will totally obliterate the economy of the nation expierancing the inflation (with price controls).


Conversely, lets suppose all nations expieranced the exact same inflation rates equally.

So now all currencys remain balanced in respect to each other.
And lets say we add price controls to each nation so the minimum wage will not be superceded by the inflation rate by any noticable amount.

Guess what happens?

The buying power of each consumer will raise drastically and sharply , while the price controls kept prices low yet inflation insured there was way more money floating around.

This means each human would within a few years, be able to purchase their own mansion and garadge full of Ferraris.

Problem is, there is not enough mansions or Ferraris to give everyone a few. Therefore Inflation in PRICES is impossible to prevent. Because the Rarity of a resource while a very high demand strains it even further, will cause such an imbalance in the system that prices will have NO CHOICE BUT TO RISE DRASTICALLY.

[edit on 9-1-2009 by muzzleflash]

[edit on 9-1-2009 by muzzleflash]

[edit on 9-1-2009 by muzzleflash]

If prices dont rise to compensate for the inflation in a equally inflated world market (with price caps and wage caps) , either the price will break thru the barrier and rise, or

ALL SHELVES will be empty within a week and production will never meet the demands.

You would have to increase production by many fold, to compensate for the new lack of goods to meet the new high demands.

But this is impossible, because there is not enough resources or workers or factorys too meet those new demands, and the growth rate of manufacturing would never be able to catch up to the inflation rates.

Also lets just say we inflate the currency without enforcing any price caps or any wage changes.

if you dont raise minimum wage, yet inflate the hell out of the currency
your buying power drops significantly at a very fast pace

just think of getting paid 10$ an hour still, after burger prices get inflated to billions of $$$

Therefore I conclude, that Inflation is in no way a solution to any of our problems, as it will only increase the problems we already are facing.

Conversely , deflation has similar ill consequences if left unchecked, and can lead to many severe problems.

So my final conclusion is the only solution is to seek a STABLE CURRENCY.

By avoiding inflation OR deflation , Stability can be achieved.

Stability is what the market needs right now, but it is not happening.

The market today is definatly unstable and "uncertainty" increases by leaps and bounds as every day passes.

Both Peter Schiff and Ravi Batra(Author of Surviving the Coming Inflationary Depression) made the case for an inflationary spiral in 1999. His research illustrated a 30 year cycle of inflation with the worst of it seen in the 1970's, coincidentally around the time American production took a cut and foreign products made a leap. Because of this wages have not kept pace with economic growth, and while share prices continued to soar, ever throughout the 80's and 90's(Despite minor recessions and panics) this only served to create an environment of inflation, where the buying power of the average consumer decreased nearly 50 %. This has not changed at all.

We've been living off of foreign money since the 1970's and just like a junkie, eventually we will get cut off. I'm betting this will happen mid 2009 when all those t-bonds come to maturity.