Thursday, September 02, 2010


Not to say that hyperinflation in Germany was a good thing, but it actually took place many years before the Great Depression and well before Hitler took power.  It wasn't hyperinflation that led to Hitler coming to power, in fact, it was the Great Depression.  Hyperinflation in 1920's Germany was certainly disruptive but in the aftermath Germany was not left in a terrible economic situation.  After all, when there is hyperinflation, what did people do?  Consume and invest.  A rich man would build a factory, or a house, or purchase equipment, anything rather than let the money get eaten up by hyperinflation.  Once the economomic picture settled down, all of these investments still had real productive value, as France discovered shortly thereafter.
On the other hand, consider deflation.  People with debts are worse off:  think of middle class people with mortgages, car payments, student loans, etc.  These people will seriously struggle and certainly will decrease their discretionary consumption (think of American farmers in the 1930s).  Now consider the rich:  people who may have a bunch of liquid assets.  They have every reason to sit on their fortune rather than invest it.  They will postpone purchases for as long as possible so that the money becomes worth more through deflation.  This means less consumption, and less investment.
I can understand why inflation is something to be avoided in general.  However, from my rudimentary economic knowledge I'd think that given our current contractionary situation, inflation might be a good thing while deflation will exacerbate the problem significantly.  Right now we are on the verge of a deflationary spiral, whether or not people want to admit it for political reasons. 
Disclaimer:  there is a conflict of interest to this post.  I am sitting on approximately $ 200,000 dollars of student loan debt (as are most medical students).  So I stand to gain a lot more from inflation, which will eat away my debts, than deflation, which will exacerabate them. 
Too much deflation and I may be forced to flee the country.

No comments: