Wednesday, January 14, 2015


"Dance to the Euro", a digital adaptation of "Dance to the Golden Calf," etching by Pieter van der Borcht (1582/1585), Museum Boijmans van Beuningen, Netherlands. Made by Petrus Nelissen.

As a normal person, you believe inflation is not so good. Because of inflation you have to work more hours to earn the same as before the inflation period. For example, firts you had to work one hour for a sausage, with continued inflation you need over time to work two hours work for the same sausage. As a result of inflation your work is getting cheaper. So you should avoid as much as possible inflation. 

The funny thing is that many economists think about it very differently. They believe that inflation is a good thing. For example the European Central Bank's task is to keep inflation around 2%. That means that after five years of inflation, 100 Euros will actually be worth only 90 Euros. After thirty years, those 100 Euro have only worth about half.

As long as salaries increase annually by 2% and the tax bill remains the same, nothing goes wrong. You will continue to work just the same amount of time for the same amount of money. You will not become richer nor poorer. This also applies to pensions and other social benefits. As long as these are increased by 2% annually, there is nothing wrong. If this is not the case, those who receive social benefits are getting poorer. Social benefits are determined by politics, therefore a raise of social benefits will always be a matter of government and consequently part of a political struggle. Payment of social benefits politicizes the society, either left or right.

If the political decision is taken that the social benefits will no longer be adjusted for inflation, those who receive social benefits will impoverish. Because of the economic crisis, through which the state has less revenues,  the political pressure will grow to adjust not anymore the social benefits and public sector wages to the inflation rates. The costs of the economic crisis then are transferred to those who receive social benefits and to all those other workers whose wages will no longer be adjusted to inflation.

Macron also called on the European Central Bank (ECB) to quickly come up with measures to push inflation towards the target level of just under 2 percent. "This is the time to give in gas, "he said. The next meeting of the ECB's monetary policy on 22 January. (The French Minister of Economic Affairs in the Times Online yesterday evening)

But why economists still believe - limited - inflation is a positive economic phenomenon? The reason is that  in the long run, inflation erodes Government debts. Inflation gives Governments lower valued money which makes it easier to pay off the debts. It looks like debts are in the long run converting into smoke. A 100 Euro debt after 5 years  of a 2% inflation will be be only 90 euros worth.

In times of inflation nobody wants to lend money anymore, therefore the interest rate will be increased. A good example was the recent collapse of the Russian ruble. Each day the ruble lost value against the dollar. That meant a rise in the prices of import goods (more rubles for the same amount of goods) while inland also prices are going to rise. To attract foreign money and new investments the Russian Central Bank raised interest rates to 17%. That helped a little bit but not enough to restore economic growth.
In such a case the economy collapses due to the excessively high interest rates. So high that a Government can not borrow money anymore. This for example was the case with Greece and some other European countries a few years ago. Inflated money destroys the economy because investors lose confidence and try to get their money out of the country. Also citizens lose confidence in their national currency and try to export their savings or to change it in another currency. This of course leads to impoverishment of the country and its citizens.

Despite the economic crisis, and the perils of the debt countries Greece, Ireland, Spain and Portugal, Europe has averted such a downward spiral of inflation. But on the other hand, Europe has a lot of difficulties to get out of its economic crisis. It continues struggling with the economic growth and the high unemployment. To stimulate the economy, many economists preach right up to the European Central Bank, to promote inflation by throwing cheap money into the market. Their reasoning is that with cheap money, people will again consume more and companies will start to invest. Inflation is the lubricant that will get back to work the economy. If the engine is running once again investments will follow faster and  the unemployment rate will drop.

At the end, inflation economists are thus eminently the prophets of the consumer society and they are not alone. There are more prophets of the consumer society such as politicians, trade unions and employers. With the help of inflation politicians hope to avoid to make tough policy choices and economic reforms. With inflation going on they can continue to hand out money. In their words "money for new policies"  which is more of the same so they will again draw voters. The unions believe that reforms can be avoided despite the graying population, technological innovations that changes the whole industrial complex, and globalization that continues to increase. Employers believe inflation will help them to stay on the market without to much reforms in their enterprise. 

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