As a long term policy, inflation is
unsustainable and would lead to cataclysmic effects. But, in the short
run, as a "shock absorber" and "automatic stabilizer", low inflation
may be a valuable counter-cyclical instrument.
Inflation also improves the lot of corporate - and individual -
borrowers by increasing their earnings and marginally eroding the value
of their debts (and savings). It constitutes a disincentive to save and
an incentive to borrow, to consume, and, alas, to speculate. "The
Economist" called it "a splendid way to transfer wealth from savers to
borrowers."
The connection between inflation and asset bubbles is unclear. On the
one hand, some of the greatest fizz in history occurred during periods
of disinflation. One is reminded of the global boom in technology
shares and real estate in the 1990's. On the other hand, soaring
inflation forces people to resort to hedges such as gold and realty,
inflating their prices in the process. Inflation - coupled with low or
negative interest rates - also tends to exacerbate perilous imbalances
by encouraging excess borrowing, for instance.
Still, the absolute level of inflation may be less important than its
volatility.
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