Thursday, June 21, 2012

How Inflation Can Create Jobs

I'm a little surprised to see Matt agree with the dreaded "hard money types" that inflation can't create jobs, because there's a pretty straightforward way in which it can.

Suppose you're a business or bank sitting on a big pile of cash and not doing anything that could create jobs, like hiring people or making loans to someone who wants to hire people. If inflation shows up and you see that the real value of your cash is going to decay if you just sit on it, you'll have an incentive to do something with that cash that will get you a non-negative real rate of return. And if you see that all your cash-rich buddies are in the same situation, you'll want to quickly invest the money in something complementary to what they're doing. If other people are putting their money into restaurants, you want to hire people who make forks, or lend money to someone who does. Inflation gets people to do productive things with cash instead of sitting on it, and that results in jobs.

If you haven't read "Japan Replaces Yen With Beef", I recommend it.
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