The Mass Deceit That Is Inflation

Economists, and certainly Federal Reserve decision-makers, are quite convinced that a little bit of inflation lubricates the economy, helping to generate faster growth than what would otherwise occur. (The New York Times surveyed the subject this weekend as part of a discussion catalyzed by a new book from former Fed chief Alan Greenspan.)

Most of the arguments in favor of inflation revolve around the idea that relative prices can adjust more efficiently -- and that inflation confuses people as to what those relative prices really are. The classic example is the problem that John Keynes identified during the Great Depression, that of "sticky prices." Prices and wages always move up easily -- people always want to make more money -- but they do not adjust downward quickly. Especially as it concerns wages, no one likes a pay cut or to make less money, so they hold out for higher prices longer than what is economically appropriate. This effect of "holding out" slows necessary economic adjustment. With some inflation thrown in, prices and wages can be cut invisibly if they simply stay flat or grow more slowly than the inflation rate....584 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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