Over at ZeroHedge, there is an interesting little article on inflation and how it, well, inflated during the 20th century as currencies were moved from being backed by gold to being backed by nothing more than confidence.

The interesting section for me being on politicians looking to extend their terms rather than pursue the policies necessary for the good of the country, which having just got the last lot out here, comes as no surprise :

“Politicians value staying in office more than they value the long-term health of the country. Spending money in the short-term buys votes. It’s not good politics to take on the obvious long-term insolvency of popular programs that transfer wealth from the young to the old. The elderly reliably show up on Election Day. Children have no voice at the polls. The AARP is an extremely powerful interest group. There is no similar organization lobbying on behalf of ten year olds.”

Importantly, the positive impact of an expansionary monetary policy is short-lived.  But Bernholz correctly suggests that voter’s “rational ignorance” will judge the performance of government on these former policies where results are targeted to particular segments of the population and costs are spread widely so as not to be felt.  The convenience of such a strategy is that expenditures can be increased without burdening anybody.  Sure, we will have to pay back the mounting debt, but that is a problem for the next generation, the next administration, and after the next elections.

It is obvious from the above commentary that the temptation for inflationary deficit financing are highest during periods of slow, or no, economic growth.  We suggest anyone questioning this argument, keep a close eye on Europe, and the ECB’s recent change of heart on the subject of debt monetization.  Critically, Bernholz concludes that a hyperinflation has never occurred throughout history, which was not driven by a huge budget deficit of the state.

All very familiar I think and certainly one to watch in Europe.

The article itself is worth a read, having some insight into inflation as a phenomenon taken from the book Monetary Regimes and Inflation by Peter Bernholz, Professor Emeritus of Economics in the Center for Economics and Business at the University of Basle, Switzerland :

“Inflation presupposes the existence of money, which evolved as an unplanned social institution by a number of inventions and innovations during a period of perhaps 2500 years . . . It follows that inflation cannot be older than money.  But if seems that especially rulers soon detected the potential to increase their revenues by tampering with its value . . . The damage and suffering caused by inflation during the course of history are enormous.  Still, the worst excesses of inflation occurred only in the 20^th century.  This development was a consequence of the further technical development of money from coins to paper money and book money together with changes in the monetary regime or constitution ruling supply and control of money.”