Inflation vs. Division of Labor

by Donald Daniel, Nov 2009, revised Feb 2012

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Many economists seem to think a small positive rate of inflation is preferable to zero inflation. This is apparently based on the idea that savings should be invested and put to work, not left to moulder in a bank.

Savings do not rot stagnantly in a bank. The bank lends the funds. More importantly, a currency trader like George Soros is not obliged to learn how to design an automobile in order to have the privilege of driving one. A value investor like Warren Buffet is not obliged to learn how to run a farm in order to have food to eat. Similarly, the automobile engineer or farmer should not be obliged to learn how to be a trader or investor in order to be able to accumulate savings. He should be able to put it in the bank without it dribbling away at 3% per year. He should be able to devote his full attention to creative ideas in the real economy, and not wastefully dilute his talents trying futilely to compete with Soros or Buffet just for the privilege of saving his hard earned money.

Economists bemoan the fact that this country does not have as high a savings rate as some others. Why save money if it is going to be inflated away? The inflation rate can be expected to have a strong influence on the savings rate. Even if a person is not discouraged by inflation and saves at the rate he would without inflation, the maximum savings that he can accumulate is limited by the rate at which his savings looses value from inflation.

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