To TS,
Since 2061D refuses to share his 'correct views' or the lack of
it, then I feel responsible to share mine on the point of
contention that 'inflation is irreversible'.
The opposite or reverse of inflation is deflation. Deflation in
simple terms means producers cutting the prices of existing goods
to woo a stagnant demand ( or the lack of demand). When that
happens, it means doomsday is at hand.
Cutting prices is common, sometimes are gimmicks, sometimes due
to prudent costings and better productivity.
It real circumstances it occurs when companies are not doing
well, so have to sell their goods at lower prices, sometimes to
break even their costs and worse still in bankruptcy cases, way
below costs. It means doom for the company.
Pretty ok in isolated cases, but IF on the scale of total
economies, its bye bye world.
When everyone is hoarding their money, producers become
desperate and sell cheaply, each outselling lower and lower.
Companies everywhere fold, employees laid off, suppliers unpaid,
etc, the vicious cycle of poverty occurs. Doomsday, even for
the rich as they become targets of crime.
No govt in the world worth their salt would allow deflation to
occur. You can imagine the chaos. There are limits on how much
govts can control, for their wealth are limited and not forever,
not matter how much they have using it to prevent deflation from
entrenching.
Once confidence is gone, everyone will hide behind close doors
and closed wallets, driving themselve deeper into the doom.
Better to allow inflation to occur in manageable
flutuating rates, with wise and prudent monetary policies to
encourage wealth generation for everyone thru education, innovation
and productivity, than to go cheap cheap cheap. That's the squeal
of hens before they are slaughtered. And we are not hens, but
thinking human beings.
Question
Is inflation Irreversible ?
Steps :
1. Define inflation
Inflation is the inordinate, sustained
and general increase in price level
ie the cost of basket of goods and
services has increased over a period
of time usually monthly, quarterly
or yearly.
2. Define irreversible
Irreversible means cannot change
something back to what it was before
3. To rephrase the question
Is inflation irreversible ?
Can the increase in prices of the
baskets of goods and services be changed
back to the original prices ?
4. Theoretically, it is
possible to change the prices back to the original
prices
ie
inflation is NOT irreversible.
5. Empirically, there are few cases that the prices
can be changed back to the
original prices ie most
countries experienced inflation over the years with some
countries experiencing higher inflation
rate while some countries experienced
mild inflation rate.
Though it is to be noted that some
countries can experience deflation in some
periods of time.
6. It is to be noted that the inflation rate as measured
by the formula
2009 Inflation rate = [(2009 CPI - 2008
CPI) / 2008 CPI] x 100%
has many shortcomings eg a 5%
inflation rate will affect each individual
differently. In addition, the inflation rate
will be different when the goods and
services in the basket are being replaced and
new goods and services are
added into the basket.
Hence, the inflation rate of 20 years ago
should not be compared with the
current inflation as the goods and services in the
basket are different.
7. The reason for asking this question is inflation irreversible
is probably due to the
concern of the rising prices and the falling
purchasing power of money.
In economics,
inflation is not a problem if the inflation is matched by an
equal
percentage
increase in productivity ie the increase in prices is equated with
an
equal percentage
increase in money income for everyone.
However, during
inflation, there are some people who gain and some
people
who lose and
different sectors of the economy are also affected differently
by
the inflation.
Indeed, the groups who suffered most during
inflation are people whose income
remained fixed or with no income eg the pensioners,
the aged, sick, handicap
and the unemployed.
Hence, we need the government to help these groups
of people during inflation.
It is to be noted that the government has more
taxed income when there is
inflation in the economy and so the government
should use the increased tax
income to help these groups of people.
