Inflation: Part 2 – The Friends of Inflation

Posted by Ashe | Posted in inflation, intervention | Posted on 07-01-2012

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The Politically Well-Connected

When extra money is introduced in to the economy, the people that benefit from it are those that can spend it first.  Before the economy knows to raise prices to counteract the new money, the people that get the newly printed money first can spend it before the prices react.  They do not see the harm of inflation because the new money has not been used in the price calculation until it is spent, and starts to circulate.

Since the government has a monopoly on the creation of money via legal tender laws it can dole out the freshly created money to those whom it wants (for whatever political reason).  A good example is the bank bailouts of 2008-2009.  Fresh money was digitally “printed” by the billions/trillions and given to those well-connected few at the banks to temporarily side-step their bankruptcy.  Once this money is lent out and spent, it is expected to affect the prices of certain goods.  It is not possible to tell exactly where the “loose money” will end up, meaning which good’s prices will rise.  The Austrian economist can only know that the extra money, when introduced in to the larger economy, will cause prices to rise unless the overall demand for money rises by the same amount.  This rise in the demand for money will only exist in a growing, healthy economy where more wealth is being produced via new goods.


It should be pretty obvious that politicians benefit from inflation.  If new money is printed to cover bills, it makes buying votes that much easier for their re-election campaign.  Typically politicians would need to tax Group A to provide benefits to Group B, but this is not so when they inflate the money supply.  As mentioned above, favors can be doled out to politically connected groups without having to immediately pay for them.  Eventually these “freebies” will be paid for by everyone in the form of higher prices.  Sounds like a good deal in the short term, but like most government programs the outlook turns bleak as more and more time passes.  The constituents may not understand where the money is coming from to pay for the social services (welfare, medicare, food stamps, housing loans, etc) but everyone likes getting something for free, and they especially favor the person promising and providing these free goodies.  Eventually the money starts to lose value, and the people’s demand for it weakens.  If the demand for money decreases as the overall monetary supply increases it means inflation is coming.

War is one of the terrible side-effects of inflation.  It is very expensive, and is not helpful in growing a healthy economy.  Despite what Paul Krugman says about the need for space aliens to attack, war is a racket and simply blowing up and rebuilding bridges does not promote positive economic growth.  Without inflation, wars would have to be paid for by taxing the citizenry which drains personal wealth.  If government simply prints the money to fund a war, it is not initially felt by the citizens.  This makes it much easier to support needless wars of aggression that have nothing to do with the safety of the country.  Politicians use war to expand the power of government, and to control its citizens.  If wars had to be paid for by taxation, they would be less frequent, and much shorter.

Large Debtors

Inflation can also help those with large amounts of debt.  The reasoning is that the money used to pay off the debt will have less value than the money that was originally borrowed.  This is ONLY helpful to the Average Joe if he has the means to increase his income ABOVE the rate of inflation.  In this case, the borrowed money will lose value as the dollar loses value, and will essentially be worth less when the debt is paid off.

Links to other parts:

Part 1 – Inflation Defined

Part 2 – The Friends of Inflation

Part 3 – The Enemies of Inflation

Part 4 – The Rich…


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