Quote Originally Posted by zook
I appreciate the lesson. But with full reserve banking, and thus a stable money supply, wouldn't we have deflation as long as economies keep growing?
Sure, but I think "deflation is bad" is a myth. I think that argument gained popularity after the great depression. The saying was that as long as the government could've avoided the deflation then we wouldn't have had the depression. But if you think it was the over-consumption of the twenties that caused the great depression then the argument is void. If over-consumption is the problem, then under-consumption is the solution. It obviously did cause some disturbances during the great depression but it was the sudden transition that was the problem. We actually had a general decrease in all prices for most of the 19th century and it didn't seem to cause too much harm then.

It also depends on how you define inflation/deflation. Austrians define it as an increase/decrease in the money supply, not an increase/decrease in prices. Inflation cause price increases but is not equivalent to it. I think that definition makes much more sense because the word "inflate" obviously refers to a volume of some sort. Prices just go up or down. The money supply expand or contract.

With that definition inflation is nothing more than a redistribution of wealth. Real wealth is unchanged by an increase in the money supply. The problem is that newly created money has to be spent into the economy from specific points. The early recievers of the newly created money will experience an increased purchasing power since the prices hasn't had time to adjust. The late recievers will experience a decreased purchasing power since prices will increase before they see any of the new money.

Who are the early recievers today:
Banks
Government
Borrowers (the more you can borrow the more you gain)

Who are the late recievers:
Savers
Low-income workers (especially if you are unable to borrow)

The inflation tax is increadibly regressive. I think most of the poverty in the developed world is because of our monetary system.