Thursday 4 August 2011

Currency Inflation and Deflation - A Message to Donald Tusk

A lot of people, especially leading politicians, are still basing their opinions on policy on flawed Keynesian economics. They think stimulating demand is the key to prosperity. In fact the current policy of the Polish government harkens back to 17th and 18th Century Britain before the age of Liberalism. Namely - the policy is basically mercantilist. An important aspect of the current government strategy is control over the money supply. What that entails, as we know to be true in all states, is massive public debt and inflation. But what are the arguments for this inflation? Apparently there are still plenty of people who think inflation is actually good! And this kind of thing in Poland, which was nearly destroyed by inflation twice already (back before World War II and then again in the Communist era)?!
So let's assess these arguments. The current government would say that inflation "stimulates exports". They talk about it in a positive manner, i.e "inflation helps the part of the industry geared towards exporting goods" and it "brings capital into Poland when foreigners buy our products". But when you really think about it, this is just a restatement of the old mercantilist fetish of trade being a zero-sum game and only selling products being beneficial. This means that it is good when money flows into Poland, but it is somehow bad when money flows out of Poland (i.e. exports are preferable to imports). Now it is clear that exporting a lot and importing nothing can lead to an accumulation of capital, but ever since Adam Smith's days we know that trade is mutually beneficial to both buyer and seller. Imports are just as beneficial as exports are - trade in general is beneficial.
But, more importantly, we free-marketers must demolish the myth that inflation is a subsidy to the export industry. In actual fact inflation is a subsidy to the foreign buyer. He can now purchase Polish goods more cheaply than he could before because his currency is worth more when compared to the Polish currency. But what is even more important here is that inflation actually harms Polish people. When Polish goods are being bought up by foreigners the demand for them grows. When demand for goods grows, so does their price. But here we see that the foreigner has an advantage over a domestic (i.e. Polish) buyer of Polish goods - he is using his stronger currency. Polish goods are therefore more expensive not only because inflation increases the money supply, but also because the Polish consumer has to compete with foreigners now. Furthermore, because the Polish currency is weaker, the Polish consumer cannot effectively import goods from other countries. Prices in Poland sky-rocket due to these factors.
This is especially damaging when it comes to people on fixed incomes, such as old people. I do not see any advantage in the mercantilist policy. The exporters have a bit more money than usual (and not because their goods are better but because foreigners are artificially richer), but the rest of the populace have been impoverished by their money losing value and their consumer goods becoming more expensive. How does any of this many sense?
So, please Mr. Tusk, curb your appetite, stop borrowing, allow beneficial deflation, and give the Polish consumer some breathing room!

By the way, it might be important to point out that the country which is best off in Europe right now is the non-EU Switzerland. Why? Because it hasn't been suffering from massive bail-outs and inflation, the Swiss Franc is now worth quite a lot! In fact, this is a problem for many people who, years ago, took out loans in the Swiss currency (a popular practice in Poland). So now the Swiss can afford to buy anything they like with their amazingly deflated currency while we, the inflationists, are all poor and miserable.
Also, the Swiss Franc did not actually deflate per se, it was just all the other currencies that went into such huge inflation!

2 comments:

  1. So, if it's all true true what you say, where exactly is a country that has net-imports is getting it's money from?

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  2. Firstly, it's not like I'm advocating a "import-only" policy in economics. That is what the US has been doing for many years and look where they have landed. What I mean is that a sensible policy in terms of money should be perfectly neutral. Exports are just as important as imports and vice versa. "Stimulating exports" is just an excuse that governments give in order to inflate more. And, to answer your question, countries (like people) pay for their imports with their exports. On net, it should be a 50/50 balance. But a country with a good strong money policy actually benefits qua other countries because other countries subsidize the imports of this country.

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