Replies

What matters is relative prices, that is the difference between inputs and output. Inflation is always a monetary phenomenon. How come if inflation is "given", we had astounding economy growth during the 19th century while experiencing price deflation?

BTW, Zimbabwe is a third world country, how come they have hyperinflation??

Monetary inflation, that is the increase in the money supply, is inherently immoral. Not all people get the money at the same time, the financial system gets it first buying goods at today's prices while the last fool gets the money at next week's prices.

Even Mr. Alan "Bubble" Greenspan has said it so:

"Capital gains do not add to GDP. The higher prices of plant and equipment and homes are reflected in an economy's cost structure, which directly or indirectly increases prices of goods and services, leaving real output largely unaffected. Capital gains, of course, cannot supply any of the saving required to finance gross domestic investment."

Cool. You and I are on the same page on a number of issues.

BUT! If, indeed, monetary inflation is, in the classic dichotomy, "neutral", it cannot therefore be "inherently immoral". Hyperinflation is the result of trying to appease a population or destroy an economy long after the problem was first detected.

In re real prices - inputs and outputs remain constant REGARDLESS of what goes on with nominal. As Friedman and Phelps pointed out -- it evens itself out. Some management is required to stabilize inflation and unemployment; but overreaction to perceived or antipcated or expected inflation is what causes the inflation/unemployment pendulum to swing into large arcs.

"BTW, Zimbabwe is a third world country, how come they have hyperinflation??"

I like to give that question a Forest Gump kind of answer. It's because there is an enormous amount of money and few goods to buy with it. ...a macro-macro-economics answer for you. ;-)

And yes, macro- instructors teach that inflation is caused by near-full employment and more buying power. But Zimbabwe is suffering from a forced decrease in production.