I recently watched this video of Ron Paul debating Paul Krugman. It is an interesting if not surprising conversation and some fairly good arguments were made on both sides. One thing that is striking about the arguments that Ron Paul makes is the overwhelming importance he places on inflation. He states that inflation is “stealing value from people who save money. If you have a 2% or 10%, the value of the currency is lost” and that this “destroys an important feature of the economy, and that is savings.” This is a fairly wide held belief, and one that Paul talks about at length, but I think a bit of reasoning will show that this view is mistaken. I do not wish to pick on Rep. Paul in particular too much, but he is the most vocal public figure to espouse this view. To be sure, some of the things that Krugman says in the conversation are a bit silly as well and are deserving of a similar post. The main reason I think this view is wrong is that it doesn’t take into account the basic economics point that low, steady inflation is not terribly destructive because rational people will simply adjust to this in taking loans or giving them out. Only a fool would make a 3% loan to gain a real return of say 3% if inflation has been and is expected to be 2% because of stable and disciplined monetary policy.

Another thought experiment regarding inflation harming savings: on a gold standard the money supply will likely stay the same or grow slower than the real economy as was the case when America used this system in earnest. This will cause a mild deflation as fewer dollars are chasing more goods. Would Paul argue that this would be dangerous because it would incentivize saving over spending? He might make some argument about how the gold standard is more natural or that saving is better than spending, but how is this really different? What if the deflation was higher: say 100% or 1000%? From this thought experiment it can be seen that what we ideally want is some sort of inflation/deflation rate that is predictable and around zero. If either one of these conditions fail, serious problems happen, but demonizing inflation in all its forms is wrong.

-Tyler Reid