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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: grusum who wrote (151157)9/27/2008 2:41:05 PM
From: GraceZRead Replies (1) of 306849
 
how can inflation drive prosperity?

Well it doesn't, even for the debtor example you gave.

What I meant by inflation driven prosperity is the worldwide movement in developed countries towards government providing social insurance against the effects of economic contractions while also using counter cyclical monetary policy to smooth out the effects of economic cycles.

Before the government took on the task of lessening the pain of economic downturns, eternal prosperity, these downturns had a cleansing effect in that weak companies went out of biz, people lost their jobs and prices for everything, including labor, naturally fell from the highs they reached at economic peaks. Painful, but it had the effect that prices were stable over very long periods of time.

Economic prosperity, primarily coming from the accumulation of knowledge and technological progress within a framework of the rule of law, doesn't bestow its benefits evenly across populations or time. Governments have been trying to "fix" this "flaw" for the better part of a century. This is the reason they choose policies that pursue low stable rates of inflation. They reason that more people, the masses, can adjust to a slow erosion in the value of their money easier than they can adjust to the sometimes swift and brutal correction in the price of their labor.

It is no secret that developing countries with few government provided social safety nets have much higher rates of saving. People save more to allow them to provide for their families during downturns. Developed countries with social safety nets tend to have lower rates of saving. Inflation hurts savers more than debtors so it is natural for a country with an anti-deflationary bias to borrow more than it saves. Problem is, this hollows out the source for real prosperity, because it is saving which provides investment funds to invest in the technological progress that provides prosperity.
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