Why Inflation is Something You Must Understand

I’m not a follower of Ron Paul. There are many reasons for that. Detailing them do not add to the immediate context of this post–which is on the topic of inflation. When it comes to this interesting and vaguely positive sounding word, I am quite squarely in Paul’s corner:

NRO: One thing that matters to you and a lot of disciples of Austrian economics is inflation. Some think it’s necessary and good because, with sticky prices, it helps to stimulate growth. Can you explain your problems with steady inflation?

PAUL: It’s the worst thing any government could deliberately do. It’s counterfeit. It means some people will benefit at the expense of others. People who saved money and are living off their savings get cheated. It’s a moral issue: They might make 1 percent on their certificates of deposit, and they can’t live on that. And the government practically gives the money to the banks and then they turn it over and buy Treasury bills and bonds and make 3 or 4 percent. So they make billions of dollars after having just been rescued from their bankruptcy.

It’s wrong to deliberately devalue the currency, because prices go up and if your purchasing power goes down, then somebody is stealing from you. So to me, it’s theft. And they should never be allowed to do that. And the responsibility of government is to guarantee the value of currency. The Founders understood it clearly, they had had runaway inflation of the continental dollars, that’s why they said you cannot admit bills of credit, no paper money — we totally ignored that and it’s one of the major reasons we’re in the mess we’re in. [emphasis added]

Amazing, isn’t it? Inflation is not a modern phenomenon–which means that the old white guys who wrote the Constitution might have known what they were talking about. And yes, we all understand that life is full of people who benefit at the expense of others. That is sad–but it should not be government which is encouraging and setting up the constructs whereby such damages may perpetuate.

NRO: So inflation transfers wealth?

PAUL: Inflation goes from the middle class to the wealthy, and it is a tax, and the people don’t know about it. It’s invisible. That’s why they get away with it. Eventually the people wake up, and then it’s too late, and you get rampant inflation. Bernanke brags that he can turn off inflation in 15 minutes. He can’t. There’s so much money out there, which is going back into use — commodities are going up. This idea that there is no inflation is absurd. One thing they do is they want everyone to talk about inflation as the CPI. Austrians say that inflation is when you increase the money supply — sometimes some prices go up, sometimes it starts out in land, but eventually it can be everything. [emphasis added]

We could do worse than pay attention to what Mr. Paul is saying on the economy. On second thought, I suppose we have already done worse than that. Perhaps all is not lost and we have time for a do-over.