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Source link: http://archive.mises.org/11068/good-inflation/

Good Inflation

November 20, 2009 by

Cash-economizing inflation is benign because it is an outcome of individuals striving to optimize their property holdings through the voluntary exchange process. Indeed, it improves economic welfare. FULL ARTICLE by Joseph T. Salerno


M. B. Moon November 21, 2009 at 12:57 pm

“One kind of “good” inflation typically results when innovations and changes occur that permit people to economize on the amount of money they need to hold in their cash balances. For example, the introduction and increasing availability of credit cards bring about a decrease in the demand for money, which, all other things being equal, causes a general rise in prices.” Joseph Salerno

Except extension of credit via fractional reserves in a government enforced monopoly money is theft of purchasing power from all money holders including the poor. Theft is not “good.”

Shay November 21, 2009 at 2:23 pm

P.M.Lawrence wrote, “Actually, there is a mechanism that promotes credit cards and expropriates other people’s wealth. They are structured and imposed so that their fees fall on all purchasers, even cash purchasers, not just on credit card users. Australia recently changed the law to allow user pays, but in general the credit card companies insist that merchants spread fee costs on all prices, so other customers subsidise them.”

This is still all voluntary. The credit card processing company requires that businesses spread the processing fees over all customers, as a part of its contract. The business owner is free to decline the contract and as a result be unable to accept credit card payments. The customer is free to patronize only those businesses who don’t accept credit cards, so as to avoid these fees. As much as I hate these hidden fees, having never owned a credit card in my life, I don’t think the state has any business telling credit card processors what they can put in their contract.

T. Ralph Kays November 21, 2009 at 2:33 pm


How do the credit card companies force the merchants to charge people who don’t use credit cards?

newson November 21, 2009 at 7:18 pm

to george selgin:

sure, free bankers like yourself are opposed to central banking, but the inherent fragility of the frb business model (potential insolvency at any, unknowable, instance) makes a lender of last recourse very appealing. other cartels only risk lower profits if they dissolve, banks risk actual closure.

music leads to dancing and dancing leads to…

i liked your steam engine stuff better.

newson November 21, 2009 at 7:42 pm

pm lawrence says:
“and in many times and places the law favours the credit card companies, so it doesn’t happen.”

if, as i said, there’s no legal restriction on new entries into the banking sector, i’m implying that there is no dedicated banking legislation, so no law favoring any operator. i’ve made it abundantly clear i’m not commenting about the cartelized and highly regimented contemporary australian financial market.

in a free market, cross-subsidization is perfectly legitimate. dissenters can always set up their own cash-only chain in competition.

Pömmelhorse Pümmelfister November 21, 2009 at 8:15 pm

Why is George Selgin (and other free banksters, e.g., Steve Horwitz) always bitching about being misinterpreted? Seems like a lot of people come to conclusions about his work that he doesn’t like; maybe the problem is with the work, not the interpreters.

Shay November 21, 2009 at 8:22 pm

T. Ralph Kays asked, “How do the credit card companies force the merchants to charge people who don’t use credit cards?”

They can’t force merchants, but they can stop processing credit card transactions if a merchant offers a discount to buyers paying with cash or other non-credit-card means. Without anyone to process the transactions, they have no way of accepting credit cards. There might be other ways via a third-party, but those would probably involve significantly higher transaction fees.

I will have the biggest fucking smile on my face the day I see a sign like this in a major retailer: “A $0.40 + 3% fee will be charged if you are paying by credit card.” It’d be almost as good if they posted something like “Pay by cash and get a $0.40 + 3% discount.” I know some smaller businesses do this already, in defiance of the credit card processor.

newson November 21, 2009 at 8:43 pm

Pümmelfister is right. the songs sucks, not the singer.

T. Ralph Kays November 22, 2009 at 1:50 pm

So you are saying that cash customers aren’t being charged for credit card transactions.

Fourier November 22, 2009 at 6:52 pm

“Why is George Selgin (and other free banksters, e.g., Steve Horwitz) always bitching about being misinterpreted? ”

Hahahaha! This is coming from a Rothbardian no less! Ahaha

Look buddy, the great George Selgin is more than capable of making himself to the rest of profession. It’s only a few Rothbardian nuts who seem to have problem understanding him.

Pömmelhorse Pümmelfister November 22, 2009 at 6:59 pm

Fourier is the intellectual equivalent of a Cleveland steamer.

Fourier November 22, 2009 at 7:51 pm

Once you know what a liquidity trap is get back to me. (Hint: it’s not when there’s infinite demand for money).

Pömmelhorse Pümmelfister November 22, 2009 at 7:59 pm

Fourier is the intellectual equivalent of a hairy milk dud:


John Vizikas November 23, 2009 at 1:40 am

Dr. Salerno,

Following our class discussion, I had to think about “good inflation” as well. The first thing that popped into my head was the case you made in defense of deflation through “An Austrian Taxonomy of Deflation,” and I asked myself, broadly speaking, why should good inflation not just be the inverse of what good deflation is?

Certainly, the Austrian position cannot be that deflation in itself is always good and that inflation is always bad. If Keynesians are by default deflation-phobic, Austrians should not counter by being kneejerk inflation-phobic. Rather, it is government (central bank) intervention and manipulation that turns everything sour. Given that, as you already pointed out, “confiscatory deflation” is the only type of deflation that is truly evil, it could be deduced that the only type of truly evil inflation is the one we have been exposed to for decades now, namely, inflation stemming from the government (the Fed) just “printing” money and pumping it into the economy.

The case for why “growth deflation” is desirable is extremely compelling, but could we then not make the case that contractionary inflation is benign as well (remember, no government intervention)? Suppose an economy experiences a decline in productivity without a change in money supply. It would appear that price inflation is desirable, especially in order to avoid or alleviate shortages. Under this type of inflation the “exchange demand” for money would decrease. This scenario would not require some calamity to take place (e.g. an earthquake destroying a bunch of factories), but it would just require a decrease in overall productivity for whatever reason.

You already made the case for a “cash-economizing inflation,” which would appear to me to be the inverse of a “cash-building deflation,” but how about the inverse of “bank credit deflation?” The way I understand this type of deflation is that it is desirable and necessary to eliminate excesses of the past and put the economy and banking system on a stronger footing. Bankers were too aggressive in giving out loans which lead to an excess of malinvestments and the deflation is designed to cure those ills. But what if banks were too cautious or felt they had been too cautious? I am aware I still talk about a fractional reserve system, but not all fractional reserve systems are equal. There is 10 to 1 leverage, but there could also be 3 to 1 leverage. Is it not conceivable that banks could find it prudent to increase their leverage ratios in a substantial way? Suppose that in an economy that previously had no natural resources of its own, large oil reserves have been discovered all over the place. Banks increase their leverage ratios and give out more credit to those who want to invest and develop those oil fields in order to produce oil in the future. Could this not lead, at least temporarily, to bank credit inflation?

I will stop for now and I am sure there are some flaws in what I outline here. I look forward to discussing the issue further with you, as this is a very interesting topic.


newson November 23, 2009 at 3:39 am

to john vizikas:
inflation is not the problem per sé, nor are austrians inflationphobes. specie-regimes are subject to money supply growth. see hülsmann:


scott t November 23, 2009 at 4:07 am

“Certainly, the Austrian position cannot be that deflation in itself is always good and that inflation is always bad…”

how many years have augrians had to figure this out?

here are some excerpts form lrc and mises about inflation:

“When gold was largely the basis for money and when central banks did not have the power to divorce themselves largely from gold convertibility, inflation was not a substantial problem.”
so inflation became a problem when?

“Textbooks in economics construe inflation far too narrowly. They dismiss it as neutral, as in the case of helicopter money spread evenly over all persons. That is a serious error in the economics that fails to see the economic imbalances that inflation introduces.”
imbalances…a bad thing?

“inflation helps states to maintain belligerent postures toward one another that lead to waste, frictions, and wars that undermine economic progress.”
couldnt too much malt liquor do the same thing?

“But the inflation-funded welfare state also has a corrosive effect on society. The pipe dream that the inflation monster can be used to promote good instead of evil illustrates a certain naïveté about the nature of the state itself. ”
the good inflation funded welfare state?

“Inflation may be an indirect tax, but it is very real – the individuals who suffer most from cost of living increases certainly pay a “tax.”
suffer…from inflation caused cost of living increases?

“Government officials stick to their claim that no significant inflation exists, even as certain necessary costs are skyrocketing and incomes are stagnating.”
due to inflation?

“Taxing, borrowing, and inflating to satisfy wealth transfers from the middle class to the rich in an effort to pay for profligate government spending, can never make a nation wealthier. But it certainly can make it poorer.”
if only they would use good-inflation or its nifty inverses?

“More inflationary finance can only make the present situation worse.”
worse….when “when prices are adjusted for inflation, Americans today spend ’40% less on clothes, 20% less on food, more than 50% less on appliances, about 25% less on owning and maintaining a car’than they did during the early 1970s. Over that same period, Census Bureau tables show, US median household income rose by at least 18% in constant dollars . . .”
how much worse can it get?

“The end game for this policy of monetary inflation is that the money in your bank account loses purchasing power. So, by keeping failing banks afloat, the Fed punishes those who have lived frugally and saved. ”
so we shouldnt save?

“Food and energy prices are soaring. Inflation is squeezing consumers and roiling financial markets. Official pronouncements are failing to ease inflation fears.”
fear of inflation? soaring food and energy”
when “Measured in real dollars, gas prices peaked in March 1981 at more than $3 per gallon. We have not even come close to paying the highest real gas price in history — today’s prices are still 30% below the all-time high.”
is usa today wrong or not telling the truth?

“As always, government officials are attempting to underreport the inflation estimates. ”
i guess so…since “There was economic growth, but it was not spectacular after 1973, when real wages grew stagnant for two decades. The stock market did not outperform general economic growth. After taxes, it did not match economic growth.”

“Indeed, inflation breeds many evils of which most Americans are unaware.”
is it double digit percentages less for a great many goods (adj for inflation since 1970′s) or is it stagnant wages for two decades?

“…the US$ plummeted in an inflationary crisis and has depreciated ever since,….”
in reality terms?

“Inflation is the disease and rising prices are a symptom.”
are diseases ever good?

“Of course inflation is an insidious tax, transferring wealth from one group to another,…”
is the transfer insidious as well?

“Libertarians as well as Austrian economists would agree that inflation is a problem…”
there you have it…inflation is a problem…not good.

“….monetary inflation lead to confiscation of wealth and destabilizing business cycles,…”
but prices for many goods have dropped in real terms since the 70′s destabilaing millions of people?

“At best inflation will have a purely redistributive effect, benefiting some groups at the expense of others, but mostly it will be worse then that and ultimately destroy wealth. While some may still benefit from it, the damage to others will likely be greater.”
more good inflation?

“the popularity of inflation is the result of lobbying by active special interests in collaboration with economists who deceive….”
deceivers? where?

“Conventional economists are waking up to the negative effects of inflation.”
is there a list of conventionals and when the woke up?

“The newest price data raise serious concerns that we are being robbed (that is what inflation is) by this government ….”
but if prices in real terms have dropped by double digit figures since the 70′s…or is that incorrect?

“Inflation robs us of our savings, redistributes wealth from savers to debtors, reshuffles property from consumers to those connected to the government, ….”
but if prices in real terms have dropped by double digit figures sinve the 70′s isnt that a hidden-save??

“Rather than solving our problems, more inflation will only add to the crisis.”
problems from existing inflation and a crisis from more inflation. i havent seen the augrians say anything good about inflation.

“Our Enemy, Inflation

Everything the Fed does is based on a foundation of lies. It does not represent the free market. It does not curb corporate greed for the benefit of the little guy…”
but prices for many goods in real terms have dropped…are there even more prices not reported that have increased in excess of the ones mentioned earlier?

“even as the Fed cuts interest rates and wildly inflates the money supply; we’re told there is no inflation, yet housing prices skyrocket…”
bad inflation here i guess.

“Positive inflation? Isn’t that like positive cancer?”
On the LRC blog, Norman Singleton

” there is no way to protect savings from confiscation through inflation.”
unless many goods drop in real terms like a hidden boost to savings?

“Without exception, every revision has shown less inflation. That alone should prove that something’s fishy about government and its index numbers.”

“he is bound to understand the immense threat of inflation heating up…”
immense threat? augrians seem concerned about inflation.

i didnt see any augrian positives about inflation. unless they werent augrian…i guess.

maybe they are kneejerk.

Gerry Flaychy November 29, 2009 at 12:19 pm

Joseph Salerno, in brief, what you are speaking of, is ‘relative’ inflation, not ‘absolute’ inflation. It is ‘relative’ inflation that you say is good.

Gerry Flaychy November 29, 2009 at 1:22 pm

Joseph Salerno wrote: “A second type of good inflation ……………… all other things being constant, including the stock of money ……………….. Overall prices will naturally rise … “

If I have a total of, say, $2 000 for spending during the rise of overall prices, and cannot wait the end of that period to spend it, then my money will buy less during that period, so that this ‘relative’ inflation will not be good for me.

Then, for whom will it be good ? For the sellers who will have more money at the end of the period ?

Shay November 29, 2009 at 5:34 pm

Gerry Flaychy, such good inflation in times of scarcity will be good for the aggregate. The higher prices will encourage less consumption, so that the more limited resources get used more wisely. If the product is reusable, people who already own them will be more willing to sell them. The higher prices will also encourage finding new ways of producing similar products with less-scarce materials. In short, the higher prices inform market participants of the scarcity.

Gerry Flaychy November 30, 2009 at 3:31 pm

Shay, if I spend more money than before to buy the same goods, I will not be able to buy other things with this surplus of money, thus it is a loss for me. How can such a loss be good for me ?

(Another way to see it: I buy less goods and services than before with my money, so it is a loss for me.)

Less scarcity of goods and services is better than more scarcity of them. If more scarcity is good, than let’s destroy everything !

Therefore, any inflation, relative or absolute, is a bad inflation.

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