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Friedman Forgotten?

They live in towers, ivory towers, not a thing to worry about. Their salaries are guaranteed, indexed, their jobs safe till the Lord calls them home. After employment has ended, they will be asked to sit on committees and their earnings will still be indexed. They don’t worry about inflation.
Suppose there would be a world with stable prices. A world in which a cup of coffee would costs the same next year as it costs today. Would that be a bad world, a world without a future?
Your father and grandfather told you to save some money. To keep some for a rainy day. To make sure that somewhere in the future you could use your piggy bank to buy that bike you always wanted. And so you did. You believed the things your father and grandfather had told you. You knew that your mother somewhere was keeping some money for unexpected expenses. You knew that saving couldn’t be bad. Your father was wrong and so was your grandfather.

inflation
In the world according to Frankfurter Mario, saving should be punished with a least two percent per year. When your father bought an life-insurance policy in order to make sure you could study and your mother had some to bury him, your father thought about the future. He made provisions for an event he couldn’t control. He was a responsible man. He wanted to make sure you would be able to study and get responsible too. He never wanted you to become a banker, I hope.
In a world of stable prices, a world without inflation, employers would still face price fluctuations due to the instruments of demand and supply. They would, however, not be hostage to unnatural growth by devaluation. Fixed and variable costs could be projected.
The opportunity to create new products and services would not be compromised. Inventions have never been restricted to or created by inflation.
Your cup of coffee and that bike – while you have been stuffing that piggy bank to the rim – will be available based on the savings your father advised you to do. Your house improvement and or maintenance could be planned.
You would not be confronted with the insecurity of an instable economy of “inflation growth”.
If bankers set a target of two percent inflation, and the national economy (published by the national bureau of statistics) grew by two percent, the national economy didn’t grow a bloody cent. Economic growth as predicted by the World Bank for “Old Europe” for 2016 has been predicted as somewhere between 1.5 and 2%. But that’s no growth at all. That’s make believe, fairy-tale, it isn’t growth.
Growth mean something got larger by internal energy. If an employer sells this year exact the same number of bikes as last year, his company didn’t grow. But that’s not bad. It means he has a stable company, his employees have a secure job. Their salaries can be paid based on the predictable turnover.

His company could grow as a new type of bike (say an electrical) would create additional turnover and employment. He would have to invest in new technology, additional premises, hire new employees. That would be natural growth. That would be good.
If a farmer grows onions or bananas, his turnover next year will be based on the number of onions or bananas he could grow on the land area available. His insecurity is the weather. Our bike company also has insecurity concerning the weather, but less as the onion farmer has. Now for that insecurity two different and competing systems are on offer.

 

The onion farmer could buy “weather-insurance”. That’s a mutual system in which a lot of people share the weather-risk. Risk is based on data of previous good and bad weather for onions or bananas.
Or the onion farmer could go to the mercantile exchange and sell his harvest on a future day. That’s betting, that’s speculation. The onion-soup factory could buy the harvest and make sure we all would have onion soup next year.

It would be a good thing for the onion-soup factory as they would be able to have predictable prices for the coming year. Farmer and Factory have a pertinent and essential interest in stability and sustainability.
But prices would be set by the market of demand and supply, not by inflation.
Bankers and governments don’t. Governments don’t save money. Bankers don’t save money. Both believe in lending and spending. If you started that piggybank ten years ago and inflation would diminish your savings with two percent a years, you would have roughly 78% of what you thought to have. But if you wouldn’t have saved at all, but borrowed the money from your father or the local bank, you wouldn’t have to pay back 100% but only 78% ate the end of the ten years.
Governments spend the money of future generations because the spenders will be retired when a rainy “pay day” comes calling. They know that the money they got from the market will be less in purchasing power on some sunny day.

Better even: they will never pay back at all. They will issue a “roll-over” bond and postpone national debt till our children are replaced with our grandchildren and they be replaced with our grand-grand-children and so on.
But it isn’t fair, isn’t it!
Milton Friedman agreed to that. The Friedman rule is a monetary policy rule proposed by him. Essentially, Friedman advocated setting the nominal interest rate at zero.
Friedman was the main proponent of the monetarist school of economics. He maintained that there is a close and stable association between inflation and the money supply, mainly that inflation could be avoided with proper regulation of the monetary bases growth rate.
He famously used the analogy of “dropping money out of a helicopter” in order to avoid dealing with money injection mechanisms and other factors that would overcomplicate his models.

 

Inflation is a source of tax revenue for the government and if inflation were reduced other taxes would have to be increased in order to replace the lost revenue.
Or if a zero-sum budget would have to be implemented, government would have to economize in such a way that stable taxes and expenditure would be in balance.
Do not forget: Taxation is a system used by governments to extract money from people by the use of law. Taxation is a reflection of the values of those in political power, it is not related to the purpose of good government. Taxation Rate is based on the limit to prevent revolution.
So do not be afraid of zero inflation, it might be good for us. It makes your savings worthwhile, even intellectually honest, since your debt will be not deflated too. Although some economists argue against zero inflation, they base their studies on the premises of the clairvoyant.
If our cup of coffee would cost the same next year and our son could buy that bike he has been saving for, I would like to meet the economist who can proof this to be bad.
Inflation is a redistribution-policy which awards those in debt and punishes those who save and our future generation.
Let’s stop Super Mario!
Robert G Coenen
12 March 2016

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