One of the many demonstrably false myths of the official state religion — and by that I mean Keynesian economics — is the notion that we can have perpetual inflation at a “reasonable level” with no adverse affects. In this blog entry, I’ll demonstrate why this is indeed a myth.

Certain types of businesses do better during an inflationary environment, while others would (theoretically, at least) do better under a stable money supply, or even deflation. A clear example of a type of business that does well under inflation is anything connected to government — after all, with the Fed monetizing its budget deficits, the federal government gets new money first and dishes it out to government contractors. The more inflation, the more money there is for these economic rent seekers.

By contrast, a type of business that would do well under a stable money supply, or even better with deflation, would be “hard money” lenders. By this, I mean pawn shops, payday lenders, etc. After all, one of the advantages of being a debtor in an inflationary environment is that you get to pay off your debts with depreciating dollars. By the same token, if you’re a debtor in a deflationary environment, you have to pay off your debts with dollars that are worth more over time. This isn’t a very good deal for you, but it is for the lender.

Now hard-money lenders have a bad reputation in modern America — but they shouldn’t. After all, they’re only providing a service to customers who want loans and who can’t get them elsewhere. Do they charge high rates? Yes, but given that their customers are high credit risks, these rates are warranted. Perhaps the differential between what a poor credit risk is charged by a hard-money lender and what a good credit risk is charged by a Fed bank is larger than it should be, but that’s because Fed banks can create money for loans out of thin air, while hard-money lenders can only lend money that they actually have. If people with good credit did seek out hard-money loans, they’d pay much higher rates than they do with Fed banks.

In fact, the above is an example of what I’m trying to demonstrate. Inflation discourages hard-money lending, in general, though it keeps the business open to poor credit risks that the Fed banks refuse to serve. If we transitioned into a deflationary environment, in which banks did not create as much money to lend, then “higher quality” borrowers would seek out hard-money loans. The market for hard-money loans would thus expand, and with the expansion of the market, more firms would move into this business.

This is precisely why reversing the course on inflation is so politically difficult. As inflation becomes the norm, resources are shifted to businesses that are profitable in that environment. Reversing course would render these businesses unprofitable, and cause unemployment. And no politician likes unemployment — people out of work tend to vote for the other guy. This is why the Fed and the politicians who control it are always pushing for more and more inflation. They all hope that the can keep the corpse of the U.S. economy animated until they’re out of office. But I think they’ve finally pressed their luck too far this time.

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