Easy Money Undermines Social Mobility
Central banks around the world target a stable price inflation rate of 2 percent annually over the medium term. This is widely considered to be monetary policy’s most important contribution to the smooth functioning of a dynamic economy. This view is wrong on multiple grounds, but there is one problem with it that is commonly ignored. Inflation, even if it remains relatively moderate, can contribute to rising inequality and undermine social mobility. It therefore poses a serious threat to a free and market-based economy. Few things are as potent as inequality, especially inequality caused by the inherently unjust process of inflation, in stimulating further fiscal interventions, higher taxes, and redistribution.
Inflation, even if it remains around 2 percent, creates strong incentives for households to change their saving and investment behavior. Both kinds of changes affect the distribution of income and wealth.
As money loses its purchasing power over time, households are incentivized to redirect their savings into asset classes that can potentially protect them against that loss. Inflation therefore generates an overproportionate shift in demand from nominal assets, such as cash and deposits, to real assets, such as stocks and real estate. The inflationary process thus generates overproportionate asset price inflation. European real estate markets provide one of the most striking examples in recent decades: housing price inflation has swept all European Union countries, though the onset has admittedly been staggered.
When the euro was introduced in 1999, it took only eight years for average housing prices in France and other southern European countries to double. During the same period housing prices in Germany remained constant. Only after the outbreak of the financial crisis of 2007 and with the advent of quantitative easing did housing prices in Germany begin to increase. They have since doubled. In France there was no correction of housing prices after the crisis. They remained high and have increased even further in recent years.
Overproportionate asset price inflation can be observed in many othe
Article from Mises Wire
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