The Significance of Social Cost in Inflation: Beyond the Shadows of Hidden Theft

While the economic impacts of inflation are often abstract and hard to quantify, its social costs are insidious and pervasive. Inflation, unbridled or mismanaged, can lead to severe economic instability, inefficiency, and poverty, potentially causing extreme outcomes such as starvation, civil war, and human death. This article delves into the multifaceted social costs of inflation and examines ways to mitigate them.

What Are the Social Costs of Inflation?

The social costs of inflation are far from being just an academic discussion. They include:

Instability: Inflation can undermine the stability of an economy, leading to unpredictable fluctuations in prices and wages. This can cause businesses to struggle, and in extreme cases, it can lead to economic crises. Inefficiency: Inflation distorts resource allocation, leading to misallocation of capital and labor. This inefficiency can stifle innovation and growth. Poverty: The hidden costs of inflation can exacerbate existing inequalities, disproportionately affecting low-income and middle-class families who have no choice but to pay higher prices for essential goods and services.

Worse still, these social costs can lead to more extreme outcomes such as:

Starvation: When inflation is severe and persistent, it can drive up the cost of food and essential goods, leading to cases of starvation. Civil War and Death: Extreme economic and social pressures caused by inflation can sow the seeds of conflict and violence, leading to civil war and loss of life.

The False Narrative of “Needed” Inflation

Unfortunately, the narrative that “needed” inflation exists is a myth. Inflation is always destructive, primarily because it is a form of hidden tax that transfers real wealth from savers to spenders. This wealth transfer is from the middle class to the political class, a stark and undeniable form of economic injustice.

When inflation occurs, those who hold savings lose purchasing power, while those who receive inflated currency first can take advantage of the devaluation. This is theft by another name, and it is always destructive to the economy and society.

Revisiting the Myths of Inflation

Contrary to popular belief, inflation is not inevitable and necessary to avoid recessions. Rather, it can be managed through better economic policies and institutions. The effects of inflation can be significantly reduced if:

Reduction of Inflation on Fixed Assets

The rate of inflation can have profound effects on fixed assets such as savings, home loans, and foreign currency reserves. For instance, when inflation increases, fixed interest bonds and other savings devalue, leading to significant financial instability. Here are some of the effects:

Fixed interest bonds fall in value, which can destroy pensions and pension funds, as well as banks and other savings institutions. This lowers the overall financial health and economic stability. The cost of home loan monthly payments can increase, leading to financial distress for borrowers and instability in the construction industry. This can affect up to one-third of some economies. Avoiding the improper rising of the trading currency, which can make imports more expensive, damaging businesses and undermining economic growth.

Proposed Solutions for a Fairer Financial System

To address these issues effectively, several solutions can be implemented:

Index-Linked Wealth Bonds

One solution is to replace fixed interest bonds with Wealth Bonds. These bonds are linked to the National Average Earnings (NAE) and rise with rising incomes and spending. This means that pension funds and other entities providing liabilities can match rising costs.

A $10 investment in these bonds could provide a pension of $0.5 NAE for 20 years, growing in line with NAE increases. This ensures that pensioners and other beneficiaries continue to benefit from rising wages and incomes.

Twofold Home Loan Repayment Model

Another key change is to transition from a one-dimensional home loan repayment model to a twofold Integrated Loan Secured (ILS) model. This model allows for variability in interest rates, which can help stabilize loans and reduce arrears and repossessions.

Market Segmentation of Foreign Currency

To address the mispricing of foreign currency markets, it is necessary to divide the foreign currency markets into two segments with their own market prices. This ensures that the balance of trade is balanced by market price rather than being influenced by market distortions in international capital.

Join the Campaign for Financial Fairness

The damage being done by inflation and its distributional effects is unfair and often avoidable. To defend yourself and your community, you can:

Support a campaign for financial fairness by advocating for the implementation of these solutions. Share this information through social media platforms, such as tweeting this article. Participate in or organize protests or demonstrations for the Campaign for Financial Fairness (CFF) outside the seat of power to promote these changes.

Together, we can work towards a more just and equitable financial system, where the negative social costs of inflation are significantly reduced, and the benefits of economic growth are distributed more fairly.