Vorlon, many people don't understand the link between mild inflation and increasing the velocity of money, especially because our national memory is of inflation linked with stagnation in the 1970s. But one way that inflation can improve economic growth, other than by providing an incentive to invest rather than sit on cash, is that it will help with our massive overhang of consumer debt and mortgage debt which right now inhibits people from spending and creating demand.
Prices are sticky, especially house prices. Inflation is a way around that.
I agree with what others say about the danger of getting the genie back in the bottle after it's out. No one likes runaway inflation. But in the 1980s, we had inflation rates of 4%, and it was "morning in America." Now 2% inflation is considered too high.
Yes, but using inflation as a tool to reduce the cost of debt servicing simply begets more inflation..
If I am a bank or other financial institution I need to lend money at "X" percent to make it worthwhile to do so. If the expectation of future inflation goes up, "X" has to increase to match this expectation of future inflation.
Right now, as a personal example, I am lucky enough to have a 5 year mortgage at 2.85% that I took out at the height of the meltdown. - If public policy pushes the inflation expectation to say 4%, I can guarantee with metaphysical certainty that when I renew, the rate will not be 2.85%, it will be well above that...
So yes, in the short term, yes indeed my mortgage cost would be "sticky" for the remainder of the term, but after that it would inevitably rise to incorporate the rise in inflation...
Inflation comes from three sources...
The first is when companies or individuals achieve pricing power in the marketplace - Sometimes this is "good" because it reflects a strong economy. For example when there is a shortage of workers due to low unemployment, workers can demand higher wages.
The second is when demand for a product exceeds supply, or the supply can be manipulated (think OPEC or Enron) or if there is a new "monopoly" temporarily achieved due to a technological breakthrough (for example, if some drug company tomorrow invented a cure for cancer, they could charge absurd sums of money for it until such time as their competitors reverse engineered and equivalent product)
The final source of inflation is the destruction of the value of the currency through "printing money" or otherwise dramatically loosening the money supply.
But my point is that inflation, in and of it's self, does not create jobs of economic growth... The arguments presented by others are simply that inflation could be used as a tool to facilitate the use of other tools.. (ie effectively negative interest rates, etc...)
The final source of inflation