There
aren’t a lot of tricks to understanding the basics of inflation and its
effects on families, although economists have perfected the anti-human
science of sesquipedalianism (using long words where short would do),
and messing everyone up with more graphs and formulas than you could
easily shake a stick at.

All of which can result in this if you aren’t careful.

The
negative side effect of this is an unfortunately too common perception
that the government can always print more money if they want to, and
that it is only nasty right wing sadists of the type who used to tell
the other kids there is no Santa Claus who refuse to take this course
because they like to see people suffer.

Or something like that.

But
the basic principle behind inflation is this: More currency + the same
amount of goods does not equal more long-term prosperity and a pony or
puppy-dog for everyone. It simply equals a currency that is worth less.

And less.

Inflation: The real culprit in the murder of penny candy.

In
the short run printing more money can give the economy a temporary
boost, as the government pours money into projects and entitlements,
providing families with more money in their pockets to spend on goods
and services.

Does
that mean that printing more money to fund stimulus is a good idea
after all? Well, that depends on who you ask. Some look at the recent
stimulus spending in the United States and argue that it didn’t do much
good at all, as families continued to struggle with high unemployment
and the economy is hardly booming right now.

worse depression from forming.

Who
is right? As with most “what if” questions it is hard to know for sure,
although we can guarantee that the fight will continue for many years.

But what is so bad about inflation anyway? Why can’t we just cope with it in the name of short term growth?

For
one thing, there are “menu costs” -- a term to describe the costs that
firms incur to adjust to inflation -- for example, changing prices on a
menu.

Trouble
can also arise when inflation distorts the economy, as not everything
adjusts immediately to inflation; for example, wages which are subject
to a multi-year contract, or retirement savings. This can lead to
hardship, especially in the short run, as families adjust to lower real
incomes.

Also,
as we mentioned earlier, printing more money doesn’t increase
prosperity in the long run, as prices simply rise far enough to eat up
the extra cash.

And
if you attempt to continually prop up economic stimulus by simply
printing more money, you risk hyperinflation. This can cause devastating
economic turmoil as prices skyrocket, sometimes on an hourly basis, and
economic predictability disappears -- predictability that is vital to
any healthy economy.

So
the moral of this story is, that, while you can argue that people who
advise against too much currency creation are nasty right wing sadists,
the truth is that Santa Claus still doesn't exist, and printing money
still has consequences for families and individuals.