the scourge of inflation

the cause of inflation is well known. Inflation is created by an
increase in the amount of money or credit in circulation. economists
generally agree that inflation is one of the worst things that can
happen to an economy. For example, keynes describes inflation as a
threat to society itself -

"By a continuing process of inflation, governments can confiscate,
secretly and unobserved, an important part of the wealth of their
citizens. By this method they not only confiscate, but they confiscate
_arbitrarily....There is no subtler, no surer means of overturning the
existing basis of society than to debauch the currency. The process
engages all the hidden forces of economic law on the side of
destruction, and does it in a manner which not one man in a million is
able to diagnose."

- j m keynes (http://www.gutenberg.org/files/15776/15776-h/15776-
h.htm)

Inflation doesn not just devalue savings and make it difficult for
businesses to plan ahead. it also distorts an economy. This is because
when new money or credit is created it must be spent into circulation
and it is spent into a particular area of the economy. The section of
the economy in which the money is first spent experiences inflation
first. we have all witnessed this with the recent house price boom.

rising prices are indicate an increase in demand. entrepreneurs
respond to this apparent increase by investing in that sector of the
economy. this diversts capital from other sectors of the economy. this
is known as mal-investment. (see http://www.mises.org/journals/scholar/Sechrest10.pdf)

The only way to prevent inflation is to introduce sound money and full
reserve banking.

.

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