There is a myth in mainstream economics that stable prices are necessary for the economy. The idea of price stability became popular in the 1920s, during a period known as the Roaring Twenties.
I recently talked to a friend who questioned the importance of inflation. He mentioned that inflation could be helpful in the event of a major crisis. He specifically talked about natural disasters.
Stagflation is an economic phenomenon marked by high inflation and simultaneous high unemployment and stagnating economic growth. The term first came up in the 1960s to describe a novel phenomenon that Keynesian economists couldn’t explain at the time. Inflation is thought to stimulate economic growth and lower unemployment.
The Austrian Business Cycle theory aims to explain booms and busts through artificial credit expansion. According to the theory, economic boom and bust cycles aren’t due to flaws of the free market or natural occurrences but caused by artificially low interest rates. The theory originates from the Austrian school of economics.
Fractional reserve banking is a banking system in which banks only keep a small percentage of deposits on hand. The rest of the money is lent out. Under a fractional reserve banking system, banks expand the money supply with each new loan. This provides the economy with money.
Deflation is when prices decrease throughout the economy. It is the opposite of inflation and most commonly associated with a contraction of the money supply, a drop in aggregate demand and technological progress. When there is less money chasing the same number of goods and services, prices decrease.
Consumer Price Inflation is when the prices of goods and services increase throughout the economy. When the money supply grows faster than the production of goods and services, there is more money chasing the same number of goods and services. Due to supply and demand, this bids up the prices of goods and services.
Over 70 years ago, economist F. A. Hayek published his book “The Road to Serfdom” in which he warned the world of the dangers of centralization and planned economies. Today, I revisit some of his warnings.