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Philosophy, Economics, Politics & Psychology Tested with a Hammer

23 Things they Don't Tell You About Capitalism
By: Chang Ha-Joon
Major Topic: Economics
Minor Topic: Politics

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         Thing 6: Greater Macroeconomic Stability Has Not Made the World Economy More Stable

         We are often told that inflation is the worst thing for the economy. Inflation makes prices unpredictable in the long run and therefore hurts future investment and the stability of all economic actors. Low or no inflation is the best foundation for prosperity.

         Hyperinflation is most certainly not good for anyone, however low or moderate inflation is not necessarily always a bad thing – it can actually be good for the great majority of people.

         The major economic problem is in naming the goal of low inflation as the first and most important indicator of stability. There are other metrics of economic stability such as: full employment and economic growth. Concentrating on low inflation to the detriment of the other two is the biggest source of instability in economic growth and job creation.

         Once inflation control becomes the main goal of central banks, the rest of the economy suffers. This is due to the fact that the tools a central bank uses for reducing inflation are harmful for economic growth and job creation.

         The fear of inflation is actually a fear of hyperinflation and they are not the same nor does inflation necessarily lead to hyperinflation. It is the fear that it might that makes people tolerate central banks' unbalanced policies. The worst part is that these policies which have tamed inflation have not actually lead to any great economic growth. In fact most economies have grown most during moderate to high inflation periods (but not during hyperinflation). This growth is not only in nominal terms but in real terms: real in the wides possible meaning: that is not only in terms adjusted for inflation but also in terms of thr economic and personal financial security of individuals and nations.

         In the last thirty years inflation has become the monster that everyone fears and which had to be killed off. The result of this murder has been increased 1) frequency of financial crises; 2) insecurity in traditionally stable jobs.

         The reasons for these problems are that neo-liberal policies (such as low inflation, capital mobility and labor flexibility) are directed to the benefit of people who hold financial assets. Financial assets are denominated in nominal terms therefore inflation erodes their value. Capital mobility allows them to move capital to find the best return in the shortest time. Labor flexibility allows them to restructure companies more quickly so as to get returns faster.

        

Added on: 2012-10-05 12:06:17
Text Crawl by: James Jeff McLaren
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