Questioning the Economics of Perpetual Inflation

For decades, mainstream economic theory has championed the notion that growing economies necessitate an expanding money supply. Paired with this belief is the conviction that moderate inflation is not only preferable but essential to economic health, while deflation is cast as a specter to be avoided at all costs.

Central banks and academic institutions present these ideas as near-axiomatic truths, but how robust is the empirical foundation of these claims? And what incentives might underpin their persistence in economic discourse?

The Theory: More Money, More Growth?

The argument for an expansionary money supply often begins with the notion that as an economy grows, its monetary base must grow accordingly to facilitate increased transactions.

Proponents claim that a static money supply in a growing economy would cause deflation, discouraging consumption and investment. Yet this premise rests on assumptions that deserve closer scrutiny.

Empirical evidence does not unequivocally support the idea that money supply growth drives economic growth. Japan's multi-decade experiment with monetary expansion resulted in stagnation rather than prosperity.

Meanwhile, periods of remarkable growth in the 19th-century United States coincided with a largely stable money supply under the classical gold standard.

In reality, productivity improvements, not monetary expansion, drive sustainable economic growth. Producing more goods and services with fewer resources increases wealth regardless of the money supply's growth.

If more efficient production leads to gradual deflation, why should this be inherently problematic?

The Fear of Deflation: Myths and Realities

Deflation is often portrayed as a destructive force that triggers economic depression. The Great Depression is regularly cited as a cautionary tale. Yet the simplistic linkage between deflation and economic collapse overlooks critical nuances.

Deflation resulting from technological innovation and productivity gains differs fundamentally from demand-driven deflation caused by a collapse in consumer confidence.

Consider the technology sector: persistent deflation has been the norm for decades, with ever-cheaper computing power driving widespread innovation and prosperity. Consumers have not postponed purchasing smartphones or laptops due to falling prices; they have embraced the benefits of higher quality at lower costs. If technological deflation spurs progress in one industry, why should moderate deflation be inherently detrimental in others?

Moreover, the assumption that consumers cease spending when prices fall overlooks a more nuanced behavioral shift. Rather than halting consuption, individuals often redirect their spending toward higher-quality goods, capital investments, and durable assets.

When essential needs become more affordable, resources are freed for more significant expenditures; education, property, and long-term business ventures. In such a scenario, consumption does not vanish; it simply migrates to endeavors that promise enduring value.

This shift from high-time-preference consumption to low-time-preference investment could foster more resilient, innovation-driven economies.

Still skeptical? Just look at the tech sector. Smartphones get better and cheaper every year; and yet somehow, the lines outside Apple stores do not get any shorter. Consumers are not sitting at home, wringing their hands and whispering, "Maybe if I wait another year, the next iPhone will cost five dollars less."

They buy because the value proposition is compelling. Meanwhile, businesses use these same technological efficiencies to reinvest in more productive capital rather than simply burning through cash on flashy marketing gimmicks.

Who Benefits from Inflation?

If the empirical foundation for mandatory monetary expansion is questionable, why do policymakers and economists remain so committed to it? The answer may lie in the distributional effects of inflation.

• Politicians: Inflation erodes the real value of public debt, making it easier for politicians to "manage" large fiscal deficits. Pegging economic stability to inflation thus serves the interests of incumbents, particularly in heavily indebted nations. After all, who would choose to raise taxes at the expense of their popularity when they can just print it?

  
  

• Financial Sector: Banks profit from inflationary policies through increased lending activity. A growing money supply often corresponds to more credit issuance, expanding banks' balance sheets and profits.

  
  

• Asset Owners: Inflationary environments typically benefit holders of scarce assets such as real estate and equities. As money loses purchasing power, asset prices rise, enriching those already invested in financial markets.

Conversely, savers, wage earners, and those on fixed incomes bear the brunt of inflation. The silent taxation of purchsing power disproportionately affects individuals without access to speculative investments, exacerbating wealth inequality.

Inflation and Institutional Orthodoxy

Academic economics has largely institutionalized pro-inflationary doctrines. Textbooks reiterate the dangers of deflation and the necessity of expansionary monetary policies with limited critical examination.

This consensus often traces back to institutional incentives: central banks fund a significant portion of macroeconomic research, and the revolving door between academia and policy institutions reinforces prevailing narratives.

Moreover, inflation conveniently facilitates state intervention in markets. Monetary expansion enables governments to deploy fiscal stimulus and manage crises without directly raising taxes; an electorally appealing proposition.

The Real Winners and Losers

History provides some illuminating case studies:

• Weimar Germany: Wheelbarrows of cash could not buy a loaf of bread. Inflation destroyed the middle class.

  
  

• Zimbabwe and Venezuela: When money printing goes unchecked, currency collapses and chaos ensues.

  
  

• The U.S. 19th Century: A period of productivity-driven deflation saw extraordinary growth and industrial expansion.

These examples suggest that inflation does not guarantee prosperity. It simply determines who wins and who loses in the monetary game.

Rethinking Monetary Orthodoxy

If economic growth can arise from productivity gains rather than monetary inflation, perhaps the foundational premises of modern monetary policy warrant reconsideration. Bitcoin, with its programmatically limited supply, challenges the entrenched belief that expansionary money supply is a prerequisite for growth.

Its decentralized nature and deflationary tendencies present a live experiment in monetary orthodoxy's counterpoint.

Ultimately, the notion that expanding economies require expanding money supplies rests on shaky empirical ground.The persistent advocacy for inflation may reflect institutional incentives rather than objective economic necessity. As new monetary models emerge and historical narratives are re-examined, the question remains: Is inflation truly indispensable, or is it merely convenient?

In fact, inflation might serve more as a convenient mechanism for governments to manage debt and for financial institutions to profit from credit expansion than as a genuine economic necessity.

Reconsidering this orthodoxy could open doors to more grounded, innovation-led growth models, challenging us to rethink the true drivers of prosperity.

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Disclaimer: The content of this article is for informational purposes only and does not constitute legal advice. The opinions expressed are the author’s own and do not represent the views of any organization the author may be associated with. Please consult me in my professional capacity for advice tailored to your individual circumstances before making any decisions based on this article.