The effects of inflation
The general price level is rising almost continuously. In some years it goes faster than in others, but in the last century, it has been rising almost continuously. One dollar from 1900 can buy as much as 30 dollars today. Some people, including some highly regarded economists, do not consider inflation to be a serious problem. It is, they believe, merely a continual devaluation of the unit of account of the economy that has little or no significant real impact. This view is wrong. In fact, inflation has a range of harmful effects.
Most importantly for those who value freedom, inflation destroys, in several ways, the free market economy. Firstly, inflation is the monetary counterpart of taxation. It has the same effect but without the influence of politics. Politics also has an interest. The financing of government budget deficits by this invisible tax on money shifts wealth from the private sector to that same government. Holders of government bonds are created. When inflation shoots up, as it did in Germany in 1923, the tax has become so high that everyone is condemned to begging. Inflation destroys not only the free market economy but the whole of society. A collapsing currency turns the bourgeoisie into the proletariat overnight.
Another way in which inflation attacks the free market economy is the effect that taxes and inflation have on the lender’s remuneration. This leads to a negative incentive, resulting in lower investment. Without investments, there are no productivity improvements and a stagnating economy. Inflation also increases the uncertainty surrounding all economic transactions. Higher inflation is also usually more volatile, which makes it difficult for producers and consumers to compare and find the right price. A lot of noise is created and the free market functions sub-optimally.
Greater randomness in the price mechanism weakens the link between effort and reward. The increased role of luck and the decreased role of thrift and hard work reduce the legitimacy of market-determined rewards. As a result, governments will have to intervene by, for example, wage and price policies. The result will be the disappearance of the free market economy. Companies cannot plan beyond today if they do not know what the money will be worth tomorrow. This has happened before and partially recovered afterward.
Inflation undermines the value of money. According to Marx and Lenin, the best way to destroy the capitalist system is to devalue money (inflation). Inflation causes the proletariat to revolt. Take, for example, the recent Arab Spring, a direct result of rising food prices. Or the yellow shirts that revolted in France against rising energy prices, a strong parallel with the French Revolution when half of a worker’s income went on bread. It is time for the sixth republic. Even the uprising in Tiananmen Square was preceded by an inflation spike of no less than 20 percent. Yet, through an ongoing inflationary process, governments manage to seize, in secret and unnoticed, a significant portion of their citizens’ wealth. While the process impoverishes many, it also enriches some. The sight of this arbitrary reallocation of wealth affects not only security but also confidence in the fairness of the existing distribution of wealth. Those for whom the system brings windfalls, which exceed their merits and even their expectations or desires, are called freeloaders. They become the object of the hatred of the bourgeoisie, impoverished by inflation, no less than of the proletariat. As inflation proceeds and the real value of the currency fluctuates greatly from month to month, all permanent relations between debtors and creditors, which are the ultimate basis of capitalism and the cement of society, become so completely disordered as to be almost meaningless. The process of acquiring wealth degenerates into a gamble and a lottery. Lenin was right, there is no better way to overthrow the foundation of society by weakening its currency (a consequence of inflation). Incompetent central bankers are a communist’s greatest friend.