Why is inflation deep-rooted? Within many centuries – since there was an indirect exchange and there was money – the mankind saw the change in price reasons only on the side of goods and services, but not on the side of money in any way.
Jean Boden (1529–1596) was the first who challenged this situation. Now that the objective exchange value of money (their purchasing power) constantly changes, nobody doubts, at least, from those who comprehended economy at the higher school.
If to approach business purely theoretically, it is possible to think that dynamics of change of purchasing power of money can develop as follows:
first, purchasing power of money can decrease (inflation);
secondly, purchasing power of money can increase (deflation);
thirdly, it can remain invariable (stable).
In practice we observe, as a rule, only the first option, that is inflation which rates can change from the country to the country: from creeping inflation when the prices grow gradually, approximately for 3–5% (at most for 10%) in a year as it occurs in more or less developed countries, to a hyperinflation when the increase in prices exceeds 50% a year and can reach astronomical values. Between these two extremes there is a zone of a galloping inflation which is characteristic, mainly, for developing countries.
Inflationism is very often justified, and frequent by method "by contradiction": say, if we lived in the world where the prices fall day by day owing to increase in purchasing power of money (deflation), all purely psychologically would seek to save the money and to postpone purchase for later time when it costs less. It can lead to a situation in which all spend money very reluctantly that, in turn, will entail such situation when the offer starts decreasing because of demand reduction, and it will cause welfare reduction because the richness of the country directly depends on the offer. In other words, some consider that in order to make the economic system progress, small though continuous inflation surely has to be observed to make people buy things now before the value of their money decreases. That is why it will be better if the prices and a salary always go up. (However, if to proceed from such logic, it is unclear why inflation has to be small – after all the more inflation, the more desirer people have to get rid of money and "to run away in real values" that in itself will intensify production).
The similar reason looks rather reasonable and plausible, however, if we remember dialectics or, in other words, that fact that everything in the world has its pluses and minuses, we can come from the given points of view to other – not the worst − conclusions. It is only necessary to look at everything from other point of view.
Still Socrates said: "How many things which I don’t need exist in the world!" ("How many things which I don’t need exist in the world "). In other words, postponement of purchases for later time would lead to natural and human reserves wouldn't be used injuriously. Future generations still would have much more resources. There would be less garbage and harmful production waste. The ecology considerably would improve. There would be more slender people. Isn’t it bad? Nowadays everyone strives to carry his back in a personal car, maybe bought on credit, but not in public transport. What it led to, all of us perfectly see − even in country towns there’re lots of traffic jams in the afternoon, not to mention large cities, and these are all dull losses of time and a road condition which nowadays became our talk long ago, aren’t improved.
A person won't manage without necessary – he will buy all the same and, therefore, the necessary will be made, and excesses are harmful – all slightest degree competent people know about it. Thus, the inflation justification that circumstance that supposedly in other conditions − deflation conditions − economic system will start slipping and, eventually, will stop, doesn't correspond to truth.
In the same way there doesn't correspond to truth that point of view according to which inflation stimulates economic development. The increase in quantity of money, as a result of which there is a decrease in their purchasing power, so inflation takes place, doesn't lead to increase in a stock of the consumer benefits which are at the disposal of members of society. Its consequences are expressed in change of distribution of the economic benefits between people, but not in increase in total volume of the benefits (wealth) which are at their disposal. So inflation − in general − doesn't increase economic welfare.
Here, however, it is necessary to make a small explanation. Certainly, increase of welfare can be reached by an indirect way as change of distribution of the economic benefits can influence production – in that case when those subjects in favor of whom redistribution was carried out, dispose of additional money to accumulate the bigger capital, than the one who would be accumulated by those persons from whom this money was withdrawn. In other words, if conditions of concrete process of depreciation of money develop in such a way that the wealth flows from poor to rich, a certain incentive to saving (and, thereby, to accumulation of the capital) which can make some stimulating impact on production with the subsequent increase in wealth is created. It took place during early eras of economic history: moderate inflation could make such impact. On this example defenders of the stimulating impact of inflation refer to economy. However it is necessary to understand that depreciation of money as it reduces motivation to savings, undermines process of accumulation of the capital. The boom caused by depreciation of money has illusory character. Moreover, it leads to "decumulation" of the capital by means of falsification of economic calculation.
It is easy to see that in the conditions of falling of value of money usual accounting practice which doesn't take depreciation of money into account, shows fictitious profit because the profit pays off as a balance difference between the sums of the revenue received from sales and measured in money of the gone-down value, and costs of production which are estimated in money of higher value. Besides, practice of the accounting of write-offs of the capital consists that from the balance cost estimated in money of higher value its components estimated in money of the decreased value are written off. Thus, that is mistakenly treated as profit, and actually represents the spent part of the saved-up capital, either is consumed by the businessman, or transmitted to consumers through cut prices which don't consider depreciation of money, or to workers in the form of the overestimated salary, and the state assesses all this with income tax (or the income). It is especially important to consider the last circumstance from the point of view of the analysis of the relation of the state to inflation, but about it below. Anyway, distortion by accounting of the account of the capital leads to its "decumulation". In some cases the corresponding decrease of the capital and increase in consumption can be partly compensated to that depreciation of money can bring and to increase in real profit (for example, debtors) which isn't consumed, and collects as a part of reserves. However it can reduce only somewhat extent of destruction of the capital called by depreciation of money.
Someone can object that supposedly there is an International Financial Reporting Standard (IAS) 29 "Financial statements in hyper inflationary economy" (in the territory of the Russian Federation No. 160n is put into operation by the order of the Ministry of Finance of the Russian Federation of November 25, 2011; the letter of Bank of Russia of February 5, 2013 No. 16-T to the same document also "About Methodical recommendations "About an order of drawing up financial statements by the credit organizations") which regulates an amendment procedure in financial statements for the accounting of inflation refers. Strictly speaking, the standard 29 doesn't establish absolute value of a rate of inflation at which it is considered the hyperinflation passing into a stage − according to the called standard that circumstance, at what moment there is a need of recalculation of financial statements, is defined on the basis of professional judgment, − however a number of signs which indicate existence of a hyperinflation in the country is given in it. The following is among these signs, in addition:
1) the main part of the population prefers to store the savings in not monetary assets or in rather stable foreign currency; the available sums in local currency immediately are invested for preservation of purchasing power;
2) the main part of the population counts sums of money not in local currency, and in quite stable foreign currency; the prices can be specified in this foreign currency (remember notorious Russian c.u. – conventional units equivalent to US dollar);
3) sales and purchases with a delay of payment are made at the prices offsetting the expected losses of purchasing power during the payment delay period even if this period is short-term;
4) interest rates, a salary and the prices are attached to a price index;
5) the cumulative rate of inflation in three years comes nearer to 100% or exceeds this level.
If, say, the last point isn't observed, the called standard isn't applied, but it doesn't mean that inflation absolutely "doesn't work" and doesn't participate in formation of fictitious profit.
The main reason of an inflationism is covered that first of all the state is interested in inflation, as if it denied this fact and didn't stand up for fight against inflation. The matter is not only that depreciation of money provides benefit to exclusive groups of debtors (and the state itself quite often enters the market of loans as the debtor) at the expense of creditors (the negative attitude towards creditors remains since appearance of the first usurers) because it is possible only if depreciation of money is sudden and unforeseen. Sometimes, most often during the pre-crisis periods, recommendations sharply are distributed and in one stage "to lower" ruble on n%, but not to play "for time", doing it throughout rather long period of time. The trouble is that the advisers distributing such recommendations don't take norm which is formulated regarding 2nd part of article 75 of the Constitution of the Russian Federation accepted in 1993 into account namely:
"2. Protection and ensuring stability of ruble – the main function of the Central bank of the Russian Federation which it carries out irrespective of other public authorities".
The given norm is also directed on control of the feeble efforts connected with any manipulation with the exchange value of domestic money. That is why the state represented by the Central Bank if it wishes to keep a good mine at that game which develops, usually doesn't go for sharp depreciation of domestic bank notes even if it would strongly want it, it will be too obvious violation of the basic law of the Russian Federation what the Constitution of the Russian Federation. By the way, for someone also those somersaults which were made by ruble in 2008-2009 were defiant, without speaking about 1998. Those who in the called times quickly oriented in a situation and "went" to stable currencies or in real values strongly didn't suffer, the same who remained faithful to domestic bank notes, cruelly paid for it, especially in 1998.
If inflationary measures and reduction of purchasing power are expected, then those who trusts money, will demand the raised percent rate − to offset possible loss of the capital, and those who seeks to obtain the loan, will be ready to pay the increased percent as they count on increase in the capital. As it is impossible to predict extent of depreciation of money in principle, in some cases creditors can really incur losses, and debtors − have profit, despite the raised interest rates. Nevertheless, the general regularity consists that any inflationism policy if only it doesn't begin suddenly and unexpectedly, can’t provide advantage in relation of creditors to the debtors by means of simple increase in quantity of money. To avoid losses, those who lend money, will have to issue loans in currency which value is stable, than the value of currency of own fatherland, or to increase an extra charge to a percent rate which represents attempt to compensate a certain predicted rate of depreciation of money, by the certain size reflecting risk of less probable, but accelerated (in comparison with predicted) decrease in purchasing power of money. And if those who seeks to obtain the credit, intend to refuse to pay this compensation extra charge, such potential borrowers decrease in the offer will force to accept these conditions.
Popularity of inflationism policy is explained, of course, not by aspiration "to salt" to creditors, and that it opens new sources of replenishment of public finances. Inflation represents quite effective remedy of disposal of budget deficit whereas the deflation which is carried out in the form of withdrawal of money from the address (or by issue of bonds, or through taxes) demands from the state of some victims. In particular, the termination of issue during increase in demand for money assumes, at least, refusal of the potential income of treasury. Therefore it is clear why the states prefer to pursue inflationism policy and the deflation avoid. Inflation has advantage in comparison with other ways of financing of the public expenditures as it is followed by signs of economic prosperity and increase in wealth, forging all calculations made in money and suppressing the fact of "decumulation" of the capital.
It was shown above how inflation generates the artificial profit at subjects of economic activity perceived as their income which is subject to the taxation, allowing to hide thereby from the public, and sometimes from taxpayers that fact that thus through taxes the part of the capital is withdrawn.
For this reason the state considers admissible to resort to inflation every time when it can't carry out loan and doesn't decide to make direct increase in taxes as has the reasons to be afraid that his politician will lose any support if financial and economic consequences of such policy are found too early, for example, before elections when the ruling elite wants to keep in power. That is why inflation is considered as the most important resource of any economic policy which consequences have to be hidden. Misleading public opinion, inflation allows to prolong existence of such system of board on which people would never give the consent if its consequences would become clear to them. Political function of inflation consists in it.
Besides increase in money supply, being the main method of realization of inflationism policy, conducts to enrichment of those sectors of society to which the stream of additional money directs first of all, and to infringement of interests of those whom it reaches in the last. It is connected with that whom additional money reaches first of all, have opportunity to make purchases and to conclude bargains still on "old" (to lower prices) as the market didn't adapt for "throw" in economy of additional money yet (the transition process connected with it hasn’t come to the end yet). In process of adaptation of the market the increase in prices caused by increase in demand and whom the thrown additional money will reach in the second will begin and the subsequent turns, will be compelled to make purchases and to conclude bargains on the growing (higher) prices until transition process comes to the end.
So the reader can have a question why is ittraditional ways of attraction of financial resources for financing of the public expenditures – the increase in loans and/or strengthening of tax burden − are impossible or undesirable?
Loans aren't free, and possibility of their increase has the limits which depend on an economic situation. It is enough to remember lessons of 1998 when there was a collapse of a pyramid of GKO-OFZ (state credit obligations – the state short-term bonds, federal loan bond – bonds of a federal loan): money which managed to be collected as a result of placement of new issues of bonds, wasn't enough for repayment of bonds of the previous releases any more, without speaking about that though something remained on "patching of holes" in the budget. The state loans from the mechanism of a covering of budget deficit turned into some kind of pump which started fleecing the budget on repayment of earlier issued bonds. It couldn't proceed endlessly and on August 17, 1998 led to default. The state which allowed default inevitably loses trust of investors, and on restoration of trust time is required, sometimes considerable – if the economic situation isn’t in favor to its restoration.
If to speak about taxes, it is possible to increase them only when those which the weight of the additional taxation falls on, agree with those purposes for which achievement the resources will be spent paid from the increased receipts. Besides it is necessary to notice that the burden of taxes becomes heavier, the society is more difficult to convince of impossibility completely to assign tax burden to a small number of the members of society belonging to rich layers. As taxes on rich or on property have impact on all society in general, final consequences for the needy can appear more severe in that case when the tax burden falls exclusively on rich, but isn't distributed more or less evenly between all members of society. It is more difficult to distinguish these consequences when taxes are low but when taxes are high, these consequences become notable, if not for all, for very many. Besides, expansion of base of the taxation can't be hidden so that to guarantee it public support. The state realizing large-scale social programs needs money to carry out the projects which aren't bringing in the income to pay compensations by the unemployed, etc. Such state also has no opportunity to provide itself with financial resources by means of taxes as in this case it should tell people the truth, namely: "rescue of the drowning – deal of drowning"; in other words, dear citizens, at first you need to increase receipts in the budget, and then the native state for you will go all out.
Fight against budget deficit − not the only purpose of carrying out inflationism policy. Inflationism can pursue various aims, and it causes a variety of those receptions by which the policy of inflation is carried out in practice. If depreciation of money is required to provide advantage to debtors at the expense of creditors, the corresponding practical task is drawing on interests of creditors of sudden blow. Sudden because as it was shown above, in that measure in what it is expected, predictable depreciation can't change relative positions of creditors and debtors, and the policy of gradual reduction of value of money isn't capable to provide the last any advantages.
If depreciation of money is conceived in order that "to stimulate production", to facilitate export, to complicate import and to lift competitiveness of domestic goods and services, it must be kept in mind that the absolute level of value of currency, that is its purchasing power expressed in goods and services and its exchange rate on other currencies − doesn't matter for external (as well as for internal) trade. The matter is that the process of change of objective exchange value of money has impact on business only until it isn't complete. Depreciation of money renders on trade "the stimulating effect" only until depreciation didn't affect all goods and services. With completion of process of adaptation "the stimulating effect" disappears. If the purpose consists in giving it constant character, it is necessary to resort to decrease of purchasing power of money again and again. It is absolutely not enough to lower its once, having carried out some series of actions as it is short-sightedly recommended in compositions of some authors − supporters of inflation. Only the progressing depreciation of money can provide continuous achievement of the purposes proclaimed by them.
In foreign trade the alternative to inflationism policy was made by such protectionist measures as the rates of the customs duties and transport tariffs applied to difficulty of import and encouragement of export. And in general by means of the tools alternative to inflationism policy the same objectives were achieved more simply, quicker and without undesirable consequences inherent in inflation. So, if the purpose consisted in assistance to debtors, it is possible to establish the temporary moratorium or in general to proclaim full or partial cancellation of obligations for repayment of loans – let’s remember the same 1998 in Russia or the latest events in Cyprus (if to consider investors as lessors). If the purpose is export encouragement, it would be possible to found export bounties. If it is necessary to complicate import, it is possible to impose a direct ban on import of these or those goods or to impose on them high taxes. Certainly, all these measures assume discrimination of separate groups and persons, branches and regions, but it that is unattainable in case of carrying out inflationism policy. Inflation rewards all debtors, including rich, and negatively affects all creditors, including needy whereas the measures for debt relief realized by means of special resolutions allow to pursue selective policy. Inflation encourages export of all goods and constrains all importers; instead of this it would be possible to use the discrimination, that is operating selectively awards, duties and a ban.
It is necessary to recognize that in connection with Russia's accession to the World Trade Organization the range of opportunities for use of alternative tools, most likely, will be narrowed, but after all there anybody by force didn't exhaust us.
All said above isn't necessary to consider as an appeal to implementation of policy of a deflation because the economic science doesn't impose neither policy of inflation, nor policy of a deflation. Pursuing inflationary or deflationary policy, the state doesn't promote welfare of society, the public benefit or interests of all country. It only shows favor concerning one or several groups of the population at the expense of other groups. If to compare policy of inflation to deflation policy, it will be found out that the last costs much to treasury and is unpopular in the people whereas the inflationism policy for treasury – the benefit and is very popular among ignorant masses. In general practical danger of a deflation is insignificant that can’t be told about inflation. That fact that the policy of inflation has the adherents, is explained by exclusively that circumstance that is such policy, concerning the purposes and which intentions the population can be deceived for a long time. Actually popularity of policy of inflation roots is in difficulties of full understanding of all its consequences.