Going to sleep last night I started thinking about inflation, which meant that I got to sleep later than I'd wished, but it also lead to some interesting thoughts about where the US economy is currently. Popularly inflation is considered bad, or something that needs to be controlled through monetary policy. And that we have. In the US we've seen record low inflation rates, to the point where we've lowered interest rates to where it's practically a useless lever on the economy. It seems to me that we need higher inflation.

Inflation powers the creative destruction that makes capitalism work as an economic system. For value to increase relative to inflation we must reprice things, and they must continue to have more value to the people in the economy. If weak products just stick around, with their current value in tact, they effectively stagnate as they don't get ground under the treadmill of inflation. This is the evolutionary gauntlet that destroys those who are not fit to compete. Perhaps capitalism is driven less by an invisible hand and more an invisible treadmill.

We can as a country control inflation and increase it artificially through policy in government. Policy programs like farm and transportation subsidies ensure that food prices don't rise. Starting to remove many of these would force farmers to charge more, which in turn would effect derivatives like meat and dairy to raise prices, effectively pushing inflation into play.

The economy is an ecosystem of stored value, consumers and producers. By eliminating inflation as a mechanism inside that ecosystem we've allowed the balance to be shifted and created a system that is off balance. We should adopt legislative policies to increase inflation.

posted Apr 3, 2013 | permanent link