What’s a good argument to make when someone claims limited inflation is good to encourage investment/spending?
start with : how do you know that?
Point to the computer/electronics industry or the 1870s in the US (price deflation and very high real GDP). Also ask them if they’re going to delay food purchases for a year if the they expect the price to drop 5% or even 10% in that time period. I kinda doubt they’ll say yes. People aren’t going to put off their purchases forever just because the price might fall a few percentage points just as people don’t go and rush out to get rid of all their money when there’s 3% price inflation.
With price deflation, savings becomes more attractive since your money gains value, and as long as the price deflation is mild and predictable borrowers and lenders will factor deflationary expectations into the interest rate so neither party is harmed.
“encourage investment/spending” is a euphemism for distorting the time structure of production towards producer goods over consumer goods which, as Mises explained, generates the business cycle. All so the central bank can surreptitiously expand the money supply to close the government’s running deficit and ease the political consequences of over-taxation to fund the government’s over-reaching social and foreign policy agendas (as well as earn the central bank cartel members a healthy chunk of risk-free interest on non-existent money through fractional-reserve credit expansion).
Clayton -
Ask them:
What do you mean by “inflation”?
How do you know how much a “limited” amount is?
If 2% CPI is limited, what happens to savings after 40 or 50 years?
What if, under unhampered market conditions, there would have been a 2% deflation? Now, your 2% CPI is actually 4%, which exceeds your target.
What is the connection between “inflation” and investment / spending?
If CPI inflation is a market phenomenon, then why should the central bank set targets, or decide what is tolerable, etc? If CPI inflation is not a market phenomenon, then why should the central bank introduce it?
It is likely the person has never heard of the Austrian concepts of inflation and the time structure of production. Thus, any argument you make will likely be rejected. They will rely on mainstream notions about the nature of inflation, and will point to empirical correlations / studies to support their ideas.
I suggest having a discussion rather than debate.
Just ask them to explain what they mean, and continue to ask questions about each assertion. The claim is self-contradictory.
I’m guessing that they are trying to say that expansive monetary policy leads to decrease in the interest rates, which leads to boost in investment spending. Well, you can tell them that low interest rates should be a function of high savings. Then you can point out that when low interest rates are brought about through expansive monetary policy, we end up having boom and bust cycle as explained by ABCT.
Another thing they might mean by “low inflation leads to investments” is that consumers choose to purchase goods sooner rather than later due to rising prices. Consequently, they boost consumption, which leads to higher sales, so business become optimistic and choose to boost investment spending. This might be true for the businesses that can quickly produce goods needed by consumers. They can reinvest their higer profits in maintaining and expanding machinery needed for the production of consumer goods. On the other hand, businesses that are involved in long term investing, which ultimately boosts the economic capacity and leads to economic growth, won’t be able to raise the capital needed for long term investment spending. They could go out on a loan or equity market to raise capital. However, for long term investing you need more capital. And capital is a function of savings. Consequently, if consumers are boosting consumption then they are cutting back on their savings. This leads to a decrease in capital which is needed for long term investing. And remember long term investing leads to greater productive capacity and ability to consume more in the future.
Also, I have noticed it is easier to persuade people in the harms of low inflation if you try to make a moral argument. Once you point out to people that even low inflation leads to wealth redistribution and that bankers and governments are the first to benefit from the influx of the new money at their expense, they definitely become more hostile to the idea of low inflation.