21 September 2010

In praise of inflation

James Surowiecki the outstanding financial columnist (and author of the 'Wisdom of the crowds') for the New Yorker writes in defense of inflation In Praise Of Inflation, which is worthy of a read:

"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. "

Read the full piece at the New Yorker - linked above.

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