Saturday, April 25, 2009

why Bother About inflation ?

perhaps the main reason for trying to prevent the persistent upward movement in the general price level, which constitutes inflation according to our definition, is that it leads to a redistribution of real income which is arbitrary and which, therefore, may well be socially unjust. people whose money income rises less rapidly than the general price level will lose relatively in times of inflation, while those whose money income rises more rapidly than the price level will again. The losers will probably include pensioners, people whose main source of income is interest or rent, professional people such as lawyers, doctors and academics and the producers of some primary products sold on world markets. the gainers will include other primary producers, strongly organized wage-earners and businessman. while some of this redistribution may be socially desirable, it is clear that much of it will not be.
The redistributive effects of inflation are not confined to real income; they extend also to real wealth. people or institutions whose wealth is comprised mainly of assets with a fixed, or virtually fixed, money value, such as bank deposits, government bonds and private debt of various kinds, will lose relatively in terms of wealth under inflationary conditions. persons whose assets consist mainly of real property or whose liabilities remain fixed in money terms will gain relatively. Once again, while some of this redistribution may be in a socially desirable direction, much of it will not be.

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