@ Ndungi & @ Mark
The opposite of inflation - deflation - is actually a worse ... Google "Japan's lost decade".
Suppose I need to buy a house, yet I know in a year it will cost 10% less. I'll logically wait a year to buy the house. Now suppose everybody thinks the same way - rationally or due to herd mentality ... it doesn't really matter. Demand for housing will fall, leading to even further drops in prices ... and a vicious cycle of lower prices and demand. And fewer construction jobs and higher unemployment - an economic contraction.
On the other hand, if inflation is stable (say, at 10%), I'll know it doesn't pay to wait till next year to purchase goods. If everybody thinks similarly, rationally, then housing jobs will remain. In fact, investors will continue pumping money into the housing (and other) industries.
That's why banks in Europe and US, in the thick of the financial crisis, printed tons of (worthless) money which they pumped into the world economy (they call it quantitative easing), to stave off deflation. At the time, inflation was practically zero and there was real concern that deflation would kick in.
So, yes, inflation can spur investment.
@ Davis
To take your analogy further: Today's currencies are backed by gold - only the gold vanished into thin air in 1982 when Nixon moved the US out of the gold standard. All the world's currencies are backed - directly or indirectly - by the belief that the US Fed Reserve can redeem the value printed on your currency with some gold. Only the US Fed no longer has any gold - it simply creates value out of thin air. The amazing thing is that world over, everybody believes the USD is worth something - including during the US-created financial crisis when the US printed trillions of USD as part of their quantitative easing.
Even our own CBK creates value out of thin air when it prints new currency. Unfortunately the CBK is on a tighter leash than the US Fed since few people have "faith" in it.
Isaac.
On Mon, May 24, 2010 at 7:16 PM, Davis Waithaka
<daviswaithaka@gmail.com> wrote:
@Mark
I was glad to help. I would however like to clarify Stan's analogy to today's financial systems; the cowrie shells' best analog is gold bars, rather than currency. Currency in its true form eg shilling is simply a representation of some wealth. It should ideally cost nothing to make (eg print cash or mint coin). This makes plastic money the most efficient form of currency today.
Gold, however, has a long and expensive process to be realized. It is universally accepted as rare and valuable. It can be used to 'really show' how wealthy a person or a country is (ie for them to acquire 1 ton of pure gold) and is thus declared 'hard'.
As money, however, gold can be quite useless because it is hard to tinker with its value (eg how many milligrams of gold dust would buy a piece of roast maize? How would the maize vendor measure these milligrams? etc)
Davis
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