Inflation’s Moral Hazard

Tagline: An age of loose money not only destroys savings; it corrodes character

I highly recommend reading this article. Two favorite quotes are:

1.  “There seems to be no choice, then, but for everyone to have constant regard to his own pile, and to try to outwit the economic moth and rust that threaten to erode all but the largest fortunes: in short, he must speculate, or risk losing nearly everything.”

2. A man trying to preserve a competence learns to trust neither himself nor others.

Introduction (Via City Journal)

Information from the most diverse sources sometimes coalesces and provokes reflection on a subject to which one has not previously given sufficient thought. This happened to me recently with regard to the effect of monetary inflation on human character. With many observers predicting a substantial rise in inflation as a result of various government spending programs undertaken to reverse the current global downturn, the topic is anything but academic.

Additional Excerpts (Via City Journal)

But that 800 pounds, according to Broad’s book, would have been worth only 400 pounds as recently as 1921. If we put these two stories together, it means that 300 pounds in 1762 was the equivalent of 400 pounds in 1921; or, in other words, that in a century and a half, prices rose in Britain by about 33 percent, an overall rate so slow as to have been almost imperceptible year to year, even decade to decade. Such stability must have seemed more a fact of nature than a consequence of human behavior or policy, and therefore something that would last forever.

When I was born, it cost one and a half times as much to send a letter as it did 100 years earlier. In my childhood, during the fifties, we still used the same coins, with the same denominations, that people had used during the Victorian era. The silver coins were still made of silver, not a worthless silvery metal. Occasionally, we would even come across pre-Victorian coins. Their continued use was not absurd: though prices had risen, they still bore some resemblance to what they had been in the earlier time. When my grandmother gave me a florin—one-tenth of a pound—I felt rich. It was enough, in any case, to buy a paperback book; between 50 and 60 times as much would be required now.

That kind of tranquillity about one’s financial future is more difficult for most of us to achieve now. President Reagan and Prime Minister Thatcher brought raging inflation under control in the U.S. and Britain during the eighties—at the cost of great short-term economic pain and considerable political and social strain—but they could not reverse the public’s loss of confidence in money as a store of value. People must today try to foresee not only how long they will live but also what is even less predictable: the reigning economic conditions of the next 40 years, assuming this to be the upper limit of their retirement period. And this, to quote Doctor Johnson in another context, “requires faculties which it has not pleased our Creator to give us.”

I was astonished. The bank was encouraging me to indebt myself for an asset whose value would swiftly melt away—or for one of no resale value whatsoever.

Inflation is not a bogey for everyone—not for those who wish to restructure society, for example, or for those who want government control of ever more aspects of people’s lives. But for the rest of us, the consequences of its full-blown return are not likely to be good: for inflation is not an economic problem only, or even mainly, but one that afflicts the human soul.

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01. September 2009 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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