Inflation: Inflation is theft. Rising retail prices cut into the value of fixed income investments, robbing virtuous savers of their rewards and cutting into the real value of pensions — while bailing out reckless borrowers. The biggest losers are often the old and the weak. Even so, a burst of consumer price inflation could actually provide some rough justice. The debate on the rights and wrongs of inflation is heating up because some economists are either predicting or recommending higher prices as the way to make high government and private debt levels affordable around the world. But the argument should have started earlier. There has already been a particular kind of inflation for most of the last two decades: asset prices rising faster than nominal GDP.
These disproportionate capital gains had a lot to do with the magic of leverage, which was multiplied by falling interest rates. Ever cheaper borrowed money flowed into a wide range of assets, almost effortlessly creating wealth. Leveraged investors such as private equity firms and homeowners did especially well.
The investors who reaped the above-GDP gains were relatively well-off to start with. Their gains came at the expense of the generally poorer non-investing portion of the population. Investment returns, debt levels and income inequality increased together, especially in the United States.
The financial crisis has reversed some of those trends. Still, a big part of the savings that consumer price inflation would erode was spawned by riding the rising financial tide, not by cleverness or frugality. Inflation now, it can be argued, would largely destroy wealth that should never have been created.
Even an inflationary reduction of the real value of pensions would not be entirely unfair. Some decades ago, the working generation made generous promises to itself about future retirement income. But it is the next, smaller generation that actually has to keep these promises. Inflation could lighten the heavy load.
Of course, an acceptance of inflation benefits irresponsible borrowers and profligate governments, as Hugo Dixon of Breakingviews argues. He is right that an inflationary wave would sweep away economic wheat along with much financial chaff. But it could prove less unjust than any plausible alternative.