Mises Wire

Zero Percent Inflation is Still a Tax and Wealth-Destroying

Zero Percent Inflation is Still a Tax and Wealth-Destroying

Heavyweights Kohn,Volcker Spar Over Inflation Goal notes that:

Federal Reserve Vice Chairman Donald Kohn's question-and-answer session at a Vanderbilt University conference Saturday was going as countless others surely have in his years as a top policy maker. ... Until Paul Volcker raised his hand."

Former Fed Chairman Volcker ... questioned how the Fed can talk about both 2% inflation and price stability. ... In the minutes of its January policy meeting, the Fed said ... 2% inflation would be ... price stability. "I don't get it," Volcker said ... By setting 2% as an inflation objective, the Fed is "telling people in a generation they're going to be losing half their purchasing power," Volcker said. ... Kohn responded that by aiming at 2%, "you have a little more room in nominal interest rates ... to react to an adverse shock to the economy." "Your problem is 2[%] becomes 3 becomes 4," Kohn told Volcker. But other central banks with a roughly 2% target haven't had that problem, Kohn said.

A friend observed that at least Volcker deserves credit here for somewhat favoring low inflation. I disagree. What the mainstreamers fail to realize is that even zero percent "targeted" (price) inflation is horrible. They do not get this. This is because they mean absolute price inflation in dollar terms. They don't mean money-supply inflation. With a relatively fixed 100%-standard money supply (say, gold), prices would continually, gradually fall, to everyone's benefit. Let's say there would be 5% price deflation every year. Well, if you inflate the money supply at about 5% to achieve 0% price inflation, you are still taxing the populace at about 5%.

In other words, a 2% (price) inflation is thus really like 7%. So the danger is not only that it rises to 3 or 4 or 5%--which would really be 8 or 9 or 10%--it's that there's a hidden tax for this reason.

Moreover, not only is central-bank caused price inflation a redistribution of wealth--it's a redistribution from the average and poor into the pockets of bankers and friends of the state. It is Robin Hood in reverse. It's a regressive tax; yet the left is all in favor of this, since they do not favor a gold standard.

In addition to this wealth-redistribution, any central inflation of a fiat money supply gives rise to the business cycle, which destroys wealth overall; thus adding yet another overall tax to everyone. This is another tax--10%? 20%? Who knows.

And of course another problem with a targeted price inflation is that price stability itself isn't even a well defined concept, and depends on an arbitrary (and ever-shifting) basket of prices; and it ignores the Austrian subjectivist approach to value, which shows that value is not only ordinal as opposed to cardinal, it's not only interpersonally incomparable--it's intertemporally incomparable even for the "same" individual (or to put it another way, me now is not the same as me later, since only me-now can make judgments in the present, and so on; and value is only coherent in terms of demonstrated preference).

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