The Moral Hazard of Inflation

‘Inflation can make people do some really irresponsible things’

In economics, there is a concept called ‘moral hazard.’ This concept describes something that incentivizes bad behavior, or a behavior that is not beneficial to society, either economically or politically, and poses as something that does the opposite. An example of a moral hazard is welfare, which incentivizes people not to work, but poses as a measure to help the impoverished or unemployed make their way in the world. Another example is food stamps, which incentivizes people to not only depend on a government to feed them, but also to eat cheap and unhealthy foods, which is all that food stamps can buy. There are an endless amount of moral hazards that can exist, have existed, and exist right now. The hazard we will discuss here is inflation, and how it can influence and even incentivize people to make poor decisions with their money.

Inflation might seem different from other moral hazards that exist, like welfare and food stamps, but a close inspection will reveal that it is not. Inflation is, at its base level, the same as any other hazard in that it incentivizes poor behavior and even destructive behavior. But first, we need to define what inflation is.

Inflation is, according to Investopedia, a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. Inflation is inevitable at some level, but most of the time inflation happens because of the mass influx of new dollars, causing the overall purchasing power of the dollar to decrease, or even hikes in goods and services because of government regulation or market scarcity.

Inflation can happen for many reasons, but no matter how it happens, it causes people to make poor decisions with their money, making society worse off than it was before the inflation happened. One example is mass spending now in order to save yourself from the projected inflation later. This is an extremely bad habit to get into, especially if you’re trying to save for the future.

Overinvestment is another dangerous habit to indulge in. I’m not talking about investment in general, which helps the economy grow, but rather overinvestment, which describes consumers investing more money than they should into the market to buy equity, debt, etc. Overinvestment occurs because of a wide array of different external factors, including what I call the “casino effect,” or when someone sees a return on their initial investment and invests more than they should, expecting the same return.

Inflation is also a factor of overinvestment, as people invest more and more of their money into any specific market, thinking that no matter the public policy, they can save all of their wealth from inflation. For some investors, this strategy has luckily worked out, but for an equal if not greater amount of people, it has not. The truth is that you cannot save all of your money from inflation or protect yourself from government policy; that is why it’s important not only to vote, but to be educated on the issues. Overinvestment usually happens in the stock market, meaning that in times of great inflation, very few people are going to be able to afford the inflated price of stock, signaling a downward trend in the market. We saw this happen in 1929, 1978, and 2008, where millions of people, wanting to save themselves from inflation, overinvested into the stock market, only to lose everything. Investment is a good thing, but overinvestment is not, but inflation makes the option a lot more preferable.

There are economics in America who actually argue that inflation is a good thing, and that it helps businesses grow larger because of the increased money flow. They also argue that deflation is bad, and that it will have the opposite effect on businesses, especially in times of economic hardship. These two arguments are only partially true, which can represent the Keynesian ideology as a whole; focusing on one side of the equation and ignoring the other. Yes, deflation can be very bad, especially during hardship, but so can inflation, because it incentivizes people to buy more than they can afford. Then, when prices finally go up, those who overinvested end up financially destitute because they took advantage of their increased money flow and felt they needed to save their money from future inflation by overinvesting. Also, deflation during times of hardship is theoretically bad, but factually sound based on what happened during the recession of 1920.

Inflation is, with all facts considered, untenable from an economic perspective. Its mere existence lowers the standard of living for all Americans, and those who take advantage of the greater money supply only end up hurting themselves in the long run. Even with all of this in mind, it is championed by Keynesians and progressives as the source of economic growth in the United States, one of the most dangerous traits of any moral hazard.

Author: Matthew White

Founder and editor-in-chief of The Everyday Republic.

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