How do the monetarists see the effects of inflation

Economics Economics Questions
1

I hear they have this theory that since prices rise uniformly, inflation neither harms nor benefits.

2

If inflation is expected and is generetad uniformly in all prices, then I’d say it has no effect. However, inflation is always created by injecting money into specific sectors, while at the same time central bank is claiming it’s primary goal is “price stability”. Go figure.

3

Money supply inflation does not lead to uniform price inflation. This allows the effect of inflation to be disguised.

Even if prices rose uniformly, inflation allows the people who print and spend new money to steal from everyone else.

4

But not if we all know what’s going on… It will be reflected in prices immediatly. That’s why CB generally wants to “hide” inflation and make you believe in “price stability”.

5

Even if prices immediately adjust so that the receivers of new money must pay the price that is adjusted to the new money supply, people on fixed incomes or with a fixed amount of savings are harmed directly by the price increases.

I don’t see how monetarists can sidestep this obvious moral dillema, even if money supply increases were correctly forecast and known by everyone (lol).

6

That’s correct. But if the inflation is expected, people will tend to use variable interest rates or debt indexed to CPI or similar. Evil surfaces from the deception that prices are maintained stable.

7

I have never heard that stated by the Monetarists. My understanding of the Monetarists is that they agree with the Austrians in several important areas:

  1. Inflation/Deflation is a monetary phenomina.

  2. Freedom and free markets drive economic growth and prosperity. Coersion and force, EXCEPT IN THE AREA OF MONETARY POLICY, will hurt long run economic growth and stability.

So far so good for the love fest between the groups. Now the differences:

  1. Main Difference: Monetarists believe that monetary policy, specifically creating money to set interest rates lower than market rates, can help the economy and create more growth.

The Austrians are more than completely opposite the Monetarists here and believe that central bankers suffer from the same Fatal Conceit that all other central planners suffer from. Austrians do not believe that producing something out of nothing helps grow anything and it leads to businesses making investments that are not consistent with consumer preferences. Furthermore Austrians do not believe in government or central bank controller money and believe that markets will determine what is money and how to value it.

Milton Freidman wrote a book on the Great Depression that stated the tight monetary policy of the central banks turned the crash into the depression and that a looser monetary policy could have ended it.

  1. The Monetarist believe that to keep the harmful effects of inflation at a minimum and still get the benefits of loose monetary policy that the central bank should work to make a low but consistent inflation rate. Austrians would argue that any central planning of the price of money will cause distortions in the economy and end in business cycles.

  2. The Monetarists are much more into prediction and mathematics than the Austrians.

8

No one thinks inflation is harmless. Workers with fixed contracts will find themselves with a lower real wage in the short run if inflation occurs. High inflation can also lead to volatility in interest rates. Monetarists just believe that during recessions inflation can produce faster recovery. Milton Friedman favored a zero inflation target for normal times.