Quote of the Day: Troubles of Mild inflation

The Wall Street Journal’s Notable & Quotable section presented the great Henry Hazlitt’s excerpt on the “troubles of even a mild inflation”.

Here is the complete quote from Hazlitt’s must read classic Economics in One Lesson (p.150-51) [bold emphasis mine]

So inflation turns out to be merely one more example of our central lesson. It may indeed bring benefits for a short time to favored groups, but only at the expense of others. And in the long run it brings disastrous consequences to the whole community. Even a relatively mild inflation distorts the structure of production. It leads to the overexpansion of some industries at the expense of others. This involves a misapplication and waste of capital. When the inflation collapses, or is brought to a halt, the misdirected capital investment—whether in the form of machines, factories, or office buildings—cannot yield an adequate return and loses the greater part of its value.

Nor is it possible to bring inflation to a smooth and gentle stop, and so avert a subsequent depression. It is not even possible to halt an inflation, once embarked upon, at some preconceived point, or when prices have achieved a previously-agreed-upon level; for both political and economic forces will have got out of hand. You cannot make an argument for a 25 percent advance in prices by inflation without someone’s contending that the argument is twice as good for an advance of 50 percent, and someone else’s adding that it is four times as good for an advance of 100 percent. The political pressure groups that have benefited from the inflation will insist upon its continuance.

It is impossible, moreover, to control the value of money under inflation. For, as we have seen, the causation is never a merely mechanical one. You cannot, for example, say in advance that a 100 percent increase in the quantity of money will mean a 50 percent fall in the value of the monetary unit. The value of money, as we have seen, depends upon the subjective valuations of the people who hold it. And those valuations do not depend solely on the quantity of it that each person holds. They depend also on the quality of the money.

This only goes to show why policies of inflationism has hardly been about economics, but mostly about advancing the interests of some politically favored groups. Such that once embarked upon, like narcotic addiction, inflationism becomes hard to stop as this would reverse the gains made from the early infusions.

Importantly, the consequent economic and financial system built around such policies becomes entirely dependent, not only on the sustenance, but on accelerated inflationism.

Mr. Hazlitt’s warning seems in full motion as central banks persistently ramps on their balance sheets.

chart from Cumber.com

And like narcotics addition, the long term outcome would not be pleasant.