Inflation and Debt

Last time we discussed the topic of inflation. In games like Monopoly, the inflation is experienced by everyone at the same relativistic rate, so there is no change in the purchasing power. In MMO games, we've seen how gold-farming can induce an inflationary effect by creating too much money for too few goods. This discourages the casual player from playing the game, and disincentives the beginning player from taking up the game. From the standpoint of the overall health of the game, such gold-farming is bad by reducing the number of players in a game and the more players which play a game, the healthier the game is going to be.

Today, I am going to touch upon inflation from a nationalistic level and why inflation is considered a bad thing.

From a country's standpoint, inflation appears to solve problems. For instance, if I have credit card debt of $10,000, this can be trouble for me. Nations too carry debt. At the time of this writing, the United States National Debt is around $14,000,000,000,000. How is the United States going to deal with this debt?

One way of dealing with this is to simply “print money”. Just turn on the printing press and pay off the debts that way. As you can imagine, it does seem like it would solve this issue.

But individuals are not permitted to print their own money and while nations CAN print their own money, nations SHOULD NOT print money to pay off debts. Why? Remember “too much money chasing too few goods?” If I sell X to a government that I know is printing money, am I going to charge the same for item X or will I “inflate” the price so that I can obtain the same fair value exchange I had before? Of course I will. Workers will demand more money just to keep up with others charging more. And this trend continues. For those interested, research the Wiemar Republic and how inflation destroyed Germany and brought about the Third Reich.

Inflation hurts those with fixed incomes and those living in poverty. If the value of what little they have decreases because of inflation, their standard of living also decreases and thus, further the poverty trap. How can these people escape the poverty trap?

Let me conclude this lesson with some common sense: printing money to deal with debt never solved a country's problem. If it did, wouldn't every country do it?

Next time we are going to discuss inflation's opposite, deflation, and why it too is not a good thing.