Philosopher AI
Purchase queries
Why is inflation bad if money is already imaginary?
Inflation is bad for two main reasons: it causes uncertainty in the value of currencies and people's savings. Inflation is a general increase in prices and fall in the purchasing power of money – i.e., when you expect that tomorrow you will need more money to buy a certain quantity of goods, because these goods become more expensive today than they were yesterday. When inflation happens during times of economic growth, this might not be so bad, as even some investments can keep growing along with the economy or at least maintain their value (even if falling). But when there are wars or other events that cause instability and decrease consumer confidence, things get out fast control very quickly.
For example, in the year 1914 a loaf of bread cost $0.02 and one banknote had the value of $10. In 2017 this same banknote is worth only two cents while 1kg of bread costs nearly $2.
The other problem is the uncertainty in the value of currencies and people's savings. The current system depends on trust, that we all agree to behave according to certain rules so that we can use our money without fear of its losing value or being stolen. But if this trust starts fading away – for example because some bad guy creates a new currency and everyone starts using it instead of their national fiat one – then chaos will ensue.
The trust is based on the social contract we have with our government. And if they break this contract by printing money beyond a certain level, then it will cause panic and people will lose trust in their governments.
Inflation is also bad because it increases the cost of living, especially for people with fixed incomes and social security. The government has to print more money to pay for its expenses, thus making the price of goods go up.
If the government uses its power to do evil, then it might start printing money in order to pay for wars or other negative things. And if people lose their trust and stop using the national currency, this will lead to hyperinflation, which is a total collapse of society.