Is inlfaiton necessary for a growing population and growing economy?

[Marcello]

If there was a fix amount of money, then wouldn't that cause deflation causing earnings to go down over time? Doesn't a certain amount of money need to be constantly added to the economy to keep up with population and economic growth?

[simon x]

Inflation and deflation only matter in relation to prices, wages, and employment. So yes, inflation in moderation sustains growth. Rapid inflation causes these three things to correct rapidly, which is bad.

[Guo Lo C]

I think so. However, it is needed to control the over heated economic growth, just like China and India. However, the current Japanese seem enjoying the so called deflation. It is recently (within one month or so) showed on TV that Japan has raised its total US dollars reserve. I think once Bill Clinton suggested the so called super imperialism should allow the Wall St. peoples to earn more. After this public speech, those greedy financial elites (crooked and greedy bankers and market speculators) triggered the most evil scheme of deregulation making the US bankers known as the most greedy and irresponsible financial personnel in this world.
http://www.informationclearinghouse.info...e20647.htm

http://search.yahoo.com/search?p=The%20c...20industry
The greed and selfishness of the US financial elites have destroyed the global economy directly and indirectly by taking too much out of it. That's why Barack Obama passed the bill of executive caps without delay.
I think the best bet is to apply the Milton Friedman, the once Nobel Prize winner in economics with his famous quote of Inflation is the Monetary phenomena. Barack Obama either take micro instead or remain with the failing macro.
http://www.oswego.edu/~edunne/340chapter26.html
I think both US and Hong Kong must try to apply what the best Chinese premier, Zhu Rongji. He did destroy the bubbles of stock markets and real estate completely and thorourghly. Since then, China economy went well with rapid population growth by annual GDP exceed 10% mark for about ten consecutive years. It will be a good to reform both the US and Hong Kong economy by declining Dow Jones to 4,000 point and Heng Seng Index to below 8,000 points, the sooner the better. It's the only way to redirect the normal and formal economic growth to deal with the growing population. However, the current America macroeconomic policy by using its monetary approach allowing the US government has the absolute power to print as much money as they wanted is totally wrong.
http://search.yahoo.com/search;_ylt=A0oG...-top&sao=1
http://search.yahoo.com/search;_ylt=A0oG...-top&sao=1

[taha S]

Moderate inflation every year can encourage productions and services , which build up the GDP of every nation. by moderation I refer to 2- 4 % inflation every year.That is why that nominal wages are also increasing almost by 4% this is automatically done to combat inflation, but if inflation is higher than this , then it results in currency devaluation , lower terms of trade for the nation, lower purchasing power , and employment is more than likely.
if the nation is fast growing inflation can be higher although the producer should offer higher wages as well to tempt more workers in order to produce more, this could be a short term solution but at some stage it needs to back off and be monitored. final word is that persisting and increasing inflation definitely is harmful.

Deflation from the other side , is not a good thing at all, make sure you don't confuse the terms " disinflation" and " deflation" , dis inflation is when the inflation rate drops , say from 5% to 3% which is good , however, deflation is when the inflation rate is negative (below zero line) this is 100% a negative situation for any nation and no government in the world is looking forward to it, it certainly creates "commodity Crisis", such those in 70s and 80s , in this case no producer wish to produce a shortage of supply is a sure bet.

The supply of money can't be fixed , don't forget that the money is only an instrument and store of value , it does not indicate the level of growth or even inflation , all those issues go back to the GDP or in a simpler world the production level.

[mtlmnr49]

Absolutely not. Keynes is dead wrong. He advocated sacrificing the long run for short term political objectives and built falsely premised, mathematical justifications to fit his policies. Above all things, policy supported inflation is a monetary phenomena that destroys more wealth than any other disaster.

The natural tendency of a free market is gentle deflation as constant productive innovations and freely functioning competitive dynamics allow the pricing system to work as it should. Falling prices democratize products and services and raise standards of living more efficiently than policy supported inflation.

Gentle deflation, like that experienced from 1866 to around 1896 in the US helped make the rapid innovation of the Industrial Revolution possible.

Natural inflation and natural deflation are simply reflections of pricing preferences at any given time, not the result of money supply changes. Neither is inherently more valuable than the other. Natural inflation attracts investment to highly demanded products and services, while natural deflation makes investment available for products and services that are in higher demand.

However, inflationary policies of central governments and central banks damage the economy over time as increases in money supply distort lending conditions. Investment capital is poorly allocated as bubbles supported by the policies build. Savings is discouraged and productive capacity falls. When the bubble finally pops, most find themselves over leveraged and are now liable for the actual value of their assets, the inflated value, and the interest associated with the loan obtained to acquire the asset. Savings is insufficient to make up for the losses. Policy supported inflation is the central cause of a deflationary spiral. Deflationary spirals wreak havoc on an economy and get the blame that the policy supported inflation deserves.

Review the causes and effects of financing the War of 1812 on the Panic of 1819, financing WWI on the Depression of 1921 and compare their responses to the loose money policies of the fed through the latter 1920s and Crash of 1929 and subsequent Depression. During each war, money supply was expanded, inflation followed, and market panics ensued as asset bubbles popped. Government responses to the Panic of 1819 and Depression of 1921 included no re-inflation and the economy recovered quickly. The Depression was met with massive attempts to re-inflate and not allow prices to fall to market clearing levels. The economy took over 15 years to recover.

The Spanish American war was the only war not financed by inflation. Subsequently, there was no massive panic as artificial asset bubbles were not built. Polk's Independent Treasury provided the stability that the Fed destroyed.

Further, our current problems are the direct result of subtle inflation endorsed by Keynesians. The stock bubble of the 1990s was built on sound productivity gains, new innovation, and loose fed money policy of the late 1980s and 1990s. When it popped, the Fed loosened further and drove interest rates to effectively negative long term levels. This sparked an asset bubble in housing. The market attempted correct the poorly allocated investment by liquidating excess capacity and lowering prices to market clearing levels. This would have allowed investors to flood the market with affordable rental properties at monthly rates that were half of the over-leveraged homeowners' current mortgage payment. Instead, the government has pulled out all the stops to keep the over-leveraged homeowners making mortgage payments that will never allow them to increase their savings rate and build any semblance of wealth that will allow future social and economic mobility.

[JeffreyB]

For starters, to address one of the other contributors, Keynes never said that he wanted inflation or that it was necessary but that it was an inherent risk of increasing aggregate demand. Furthermore, he argued that if one had to choose between inflation or deflation he would choose inflation and really only supported policies that allowed for moderate inflation.

What I think is being confused is that adding money causes inflation. Both Keynes and Milton Friedman believed in the quantity of theory money, it is just how to apply it differed. The theory goes that the true money supply isn't just the stock money that is printed, but banks can create money too by lending remember. Remember the money they lend is from their reserves and technically from deposits that can be demanded at any time, so this is money that can be spent just as the money being lent can be spent.

So deflation can occur when the total supply, the money lent and printed decreases. In fact if banks decrease lending faster than the fed prints money, then the supply of money actually shrinks, but it is this number that is considered the money supply represented as M2 and used in policy.

In any event, the quantity of money theory goes that the M2 supply * Velocity = Price level. What this means is that money must change hands at a faster rate to actually cause the price level (i.e. inflation to increase). This means that if velocity increases, then inflation can happen even if there is no change to the money supply and if velocity decreases, then a large supply of money will likely not cause inflation.

The two core differences between Friedman and Keynes is that Friedman believed that velocity was generally stable and did not change while Keynes thought it did. Friedman proposed increasing the supply at the rate of economic growth and population. Keynes said that even with these factors as levels of confidence change and people begin to hoard the money, additional money would be needed to help velocity increase, but because in a liquidity trap like the Great Depression velocity is so low, priting money alone is not enough and other fiscal measures are called for to generate confidence that would increase velocity.

Also, Friedman did believe that printing more money in a liquidity trap makes sense but did not believe any further action would be needed. In fact, this is the policy that Bernanke is pursuing and even Bernanke is skeptical that a stimulus plan will matter very much. By printing more money, the theory is that you are just replacing the money that was lost from the collapse of lending. As lending resumes you can pull the money offline. With that said, Friedman believed that such situation could be avoided by using a natural interest tied to the economy and never change it. We've never practiced this so its hard to say if this would work.

In short, both conservative and liberal economists call for an increase in the money supply to keep pace with both output and population growth. While there are debates on how to do this is the policy and yes the policy makers are trying to keep inflation and deflation at 0.

Keynes just said he preferred inflation over deflation but liked neither. The truth is markets appear to function best in areas where there is predictability which was the crux of Keynes argument. Changing prices made things unstable and deflation created what is known as the Paradox of Thrift, meaning that when uncertainty occured people saved more to guard against future unexpected events leading to less consumption, hence, less things bought, hence less income, hence a weaker economy. Keynes believed the core problem was not supply, but not a lot of aggregate demand. He did believe that full output could not be reached until everyone was working and that inflation was not a significant risk until full unemployment was reached.

Friedman just believed by expanding output demand would follow so the economy could grow with lower price levels. Unfortunately this generally happens with a huge cost to jobs in the long run since increased about does not appear to be able to be sustained unless aggregate demand keeps up and increasing aggregate demand tends to increase inflation some. He did predict that inflation of high levels could occur at high levels even with high unemployment and this did happen in the 70s.

In a wierd way it appears they were both right about different topics, but at the same time they were so diverse in what they believed. In short, money supply should increase with growing output and there is no credible economist that would say otherwise.

Now remember Glenn Beck is not an economist and neither is Ron Paul. These people represent a group of people that have no fundamental understanding about the true debate that has taken place in economics and have no idea what has been proven and settled and what is still debateable.