There is only inflation when the amount of currency in the economy far outweighs the goods and services available. Inflation is a way of balancing the books. Too much money around, and things become more expensive as a result.
Deflation occurs when there is too little currency around for the good and service capacity of a nation. In such times, you need to pump more money into the economy to right the balance. Some economists argue that deflation is far worse than inflation, because it just stops the economy. When money becomes more valuable, people have an incentive to hold onto it, waiting to spend it when they can get more for it. No one buys, and no one sells, and no one needs to make anything because there is no market.
Inflation, at least, encourages production and spending, since people want to buy before their money loses some of its worth.
So let’s think. Before the housing industry went bust and the financial institutions collapsed, we had a certain industrial and service sector capacity. We had a certain amount of capital goods stocked up. After the recession, did we have any less capacity? Were there any fewer goods available?
Pretty much no. Except that due to a lack of confidence, people stopped purchasing things, and so capacity was idled, people were laid off, and the cycle continued to the detriment of all of us.
What we have now, is too much capacity for the demand. The balance between money supply and capacity has shifted to too little money available for all the capacity we have. What we need is to stimulate demand in order to get that capacity back into production. What we need is to pump more money into the system, so that demand will increase, and the productive capacity will be put back to work.
The trick is to balance money with capacity. We don’t want to overshoot the mark, because that does lead to inflation. However, it seems to me that the Fed has been pretty good at matching money supply to capacity. Generally they are far more cautious about printing money than I think they should be. If there is a hint of inflation, they will drive up interest rates right quick so as to slow the economy down. They will not let hyperinflation occur. That can only occur if we flood the market with more and more money, even after the available supply of goods and the capacity for generating new goods is far less than the money chasing those goods.
No one is going to let the money supply get that far out of whack. It is extremely unlikely that we will see hyperinflation. People who think that, I believe, have little fear monsters running around in their heads making them paranoid about the world government conspiracy and the power of big corporations to ruin life for the little guy. If I were their doctor, I’d prescribe clonazepam!
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