The stability of the financial system as a whole is predicated upon the fact that money that I earn today will be worth something tomorrow.
The main purpose of currency is not the eternal accumulation of wealth. It is for liquidity: making bartering easier. If you want long-term stability, you can invest in gold or bonds.
The reason why the US has planned inflation is to maintain liquidity when productivity rises or currency becomes horded. Economists such as Bernanke have learned from the Great Depression that rising deflation with the same productivity results in spiraling unemployment:
...a town full of shoe factories that closed during the Depression, leaving the community so poor that its children went barefoot. "I kept asking, Why didn't they just open the factories and make the kids shoes?"
The reason is because companies know that consumers do not have money to spend so they fire people to preserve their appreciating currency. By doing nothing, these companies gain wealth while children walk without shoes.
From a purely capitalist view, these companies have the right to do so. But would you really still hold that belief if all the farms shut down in this manner?
If you don't inflate the currency to a certain level when productivity increases due to technology or population growth (such as right now), it may result in a deflationary spiral.
As Aaron said, it is a personal opinion of how much inflation you prefer.
Do you prefer a relatively high inflation because you want to be employed? Or do you want a relatively low one so your assets appreciate or keep their value?
Comments
The stability of the financial system as a whole is predicated upon the fact that money that I earn today will be worth something tomorrow.
The main purpose of currency is not the eternal accumulation of wealth. It is for liquidity: making bartering easier. If you want long-term stability, you can invest in gold or bonds.
The reason why the US has planned inflation is to maintain liquidity when productivity rises or currency becomes horded. Economists such as Bernanke have learned from the Great Depression that rising deflation with the same productivity results in spiraling unemployment:
...a town full of shoe factories that closed during the Depression, leaving the community so poor that its children went barefoot. "I kept asking, Why didn't they just open the factories and make the kids shoes?"
The reason is because companies know that consumers do not have money to spend so they fire people to preserve their appreciating currency. By doing nothing, these companies gain wealth while children walk without shoes.
From a purely capitalist view, these companies have the right to do so. But would you really still hold that belief if all the farms shut down in this manner?
I kept asking, Why didn't they
That's kinda the problem right there. Anyone can "keep asking". It's the "they" that get things done that you really need.
I'm advocating keeping inflation under control, not deflation. These are two entirely different things.
If you don't inflate the currency to a certain level when productivity increases due to technology or population growth (such as right now), it may result in a deflationary spiral.
As Aaron said, it is a personal opinion of how much inflation you prefer.
Do you prefer a relatively high inflation because you want to be employed? Or do you want a relatively low one so your assets appreciate or keep their value?