At the moment we see that the worldwide economy is slowing down. The economic activity is slowing down. In China, the United Kingdom and the United States economic activity is slowing down. Southern Europe is technical bankrupted. Germany depends on the Chinese economy so will also hit a recession and take Europe with it.
With the economic activity going down we see the increased pressure from policymakers, commentators, and politicians to fight deflation. They say deflation is a bad thing. Lower prices mean that consumers delay the purchase. With this, the economy will collapse. So central banks should fight this. But should they?
So if deflation is bad for the economy than it would be good to have monetary and economic policies who fight this. So we would need to have policies will make things more expensive. This is what inflation does.
Let’s have a look at what inflation is. Inflation is one of the key reasons prices will go up. This means that you need more money to survive. The average USA household needs to increase it’s monthly cash flow with USD 2,000 a month. Just to keep up. But inflation is also something else. Inflation is the increase in money supply growth.
This system works well. At least so long the prices are going up. This is important for policymakers and politicians. Inflation is t taxation. A nice method to pay off the massive government debts.
The inflation is a tax politician will not have to defend. They will blame the central bank for this. Central banks are a political independent. At least, officially. At the latest FED turnaround, we saw the influence the USA politics have on the monetary policies. The politicians are hearing the head of central banks about the policies and the effects on countries. So why not be open about the political influence and allow money, which is just the method of exchange, to be enough to just survive.