Inflation is not much bother to high income people; it is a definite bother to middle income people; it is a blood-sucker and poverty-perpetuator to poor people. And, only the government benefits because it gets more money to spend on more things. And history shows that whenever the government gets more money, it just spends more money.
Inflation saps the will of an economy. It causes and maintains poverty and is rightly known as the most evil of all taxes to mankind because it disproportionately hurts poor people.
History shows us, time after time, that when a country’s economy weakens, especially through inflation, the economy eventually collapses. It has always meant the loss of freedom . . . the loss of rights. It usually means dictatorial powers come into play supported by some kind of police or army. People have no choice, they have no rights; they are told what to do, they are told what not to do . . . penalties are supreme. Those who do not learn from history are condemned to repeat the mistakes of history.
Well if inflation is so bad, why do some people say that deflation is worse? Let’s take a look. . .
Let us recap the example from last time on inflation:
Our government currently has $1,600,000 in circulation. The budget is $400,000 short on funds for promised programs. Taxes are already high and politicians are afraid to raise taxes or they could lose future elections. The government is in charge of printing all currency, so they just print $400,000 more to pay for the programs.
Prior to printing the extra money we had 100,000 things available for sale in the country, called goods and services. When we had $1,600,000 in total money divided by 100,000 things, the average price for a ‘thing’ was $16. Now that we $2,000,000 in total money divided by 100,000 things, the average price for that same item is $20. What used to cost $16 now costs $20 all because the government printed extra money.
$1,600,000 ÷ 100,000 = $16 average cost for a thing before inflation
$2,000,000 ÷ 100,000 = $20 average cost for a thing after inflation
Things that used to cost $4 now cost 5 $. Remember, the Gross Domestic Product went from $1,600,000 up to $2,000,000 in money, but the actual goods and services stayed the same.
$20 – $16 = 4
4 ÷ 16 = 1/4 = 25% inflation
A loaf of bread that used to cost $1 now costs $1.25. Bus fairs go up because union workers demand more money because their bread costs more now too. The tailor charges $50 instead of $40. The doctors charge more because their expenses go up. And the politicians and government workers pay more too, so they vote themselves pay raises. Then the $400,000 that was printed to cover programs has already been spent on increases in government pay and expenses, and the programs are still not funded.
Let’s look at borrowing. Under the inflation model, our friend Joe borrows $10,000. The interest rate is 5 percent over 10 years. Joe will pay $106.07 each month for 10 years, a total of $2,727 in interest. Inflation decreases the real value of money so demand is high because people and businesses are behind on their bills because of the inflation. Joe might even default on his loan because he has less money to live on and now the added expense of the loan. So the bank increases their rates to 10% for the next customer and they now make $5,858 in interest.
Well now let’s look at how deflation would work:
Our government currently has $1,600,000 in circulation. Instead of printing money, production rises by 25,000 things, or $400,000. Now we have $2,000,000 as the Gross Domestic Product because the actual goods and services increased. But we still have only $1,600,000 to spend.
$1,600,000 ÷ 100,000 = $16 average cost for a thing before production increased
$1,600,000 ÷ 125,000 = $12.8 average cost for a thing after production increased
$12.8 – $16 = -3.2
-3.2 ÷ $16 = -20% deflation
A loaf of bread that used to cost $1 now only costs 80 cents. Bus fairs don’t go up. People don’t have to demand more money just to make ends meet. They even have a bit extra to spend.
Let’s look at borrowing now. Under the deflation model, our friend Joe doesn’t really need to borrow money, but he’s doing okay and the bank offers him a low interest rate loan to buy that new sports car he’s been eyeing. The interest rate is 3 percent, but Joe only wants to pay over 4 years. Joe will pay $217 each month for 4 years, a total of $624 in interest. That’s over $2,000 less than the same loan in inflationary times. Deflation increases the real value of money so demand is low because people and businesses are ahead on their bills because of the deflation. So the bank decreases their rates to 1% for the next customer and they now make only $205 in interest.
It looks like citizens win and banks lose in times of deflation.
Now, what if the banks received a bailout from the government? They would win once because they would be given taxpayer money in exchange for nothing. Then the would win again by the inflation caused by the government spending, because inflation means citizens get less for their money and need loans, and banks get more business and higher interest rates.
My question for you is: If inflation hurts citizens and helps banks, and deflation helps citizens and hurts banks, why does the government say deflation is worse than inflation?