Inflation is typically caused by the increase in the money supply often experienced in a fiat currency system. Why is it so popular for these fiat currencies to inflate? Who benefits from inflation? Let’s take a look.

Short Term Beneficiaries

In the short term, governments can benefit from inflation. Say a country wants to inject fiat money to create liquidity (have more cash in the system), inflation can grease the wheels and get an economy that has stagnated going again in the short term.

Often governments spend more money than they bring in. Usually, this would cause a government to go bankrupt. By inflating the money supply, governments can offset imbalances in their budget. It is their way of cheating the system temporarily.

Politicians that are not fiscally responsible can benefit from inflation by running a deficit. Politicians that have a social program or project that they do not have the funds for can have their cake and eat it too by inflating the money supply, this can help them in the short term by implementing popular programs or appearing to get things done, even when the money isn’t there.

Companies benefit by having their debt eroded over a short period. If a company has lots of debt on the balance sheet and there is inflation in the economy, then companies will have an easier time refinancing debt. In the short term, companies can benefit from inflation.

Who else benefits from inflation? The people. In the short term inflating the currency can create easy money causing the markets to go up, debt levels to be eroded, and often times easy lending practices from financial institutions. All of this makes the economy appear to be firing on all cylinders.

Long Term

Who benefits from inflation in the long term? The short answer is almost nobody. Let’s look at why.

Governments that run deficits eventually have to pay the piper. Weather they repay the debt later or default, they are in a predicament. Often they won’t be able to balance their budgets because they are hooked on all of the easy money that is used to fund their programs. If they keep resorting to inflation, they run the risk of hyperinflation, which usually is game over for a fiat currency.

Another loser from long term inflation is the people. Their wages rarely keep up with inflation rates so every year it takes more of their income to survive. This wave of inflation can wipe out the middle class and diminish discretionary spending for everyone. Savers can see the purchasing power of their savings erode in the long term. Investors can look at their assets gain in value equal to inflation and have to pay capital gains tax when they were only keeping up with inflation.

Companies face many of the same problems that people do in an inflationary environment in the long term. They need to make more cash than they used to (which is taxed) for their profits to have the same purchasing power.

How To Benefit From Inflation

Lots of ways to benefit from inflation some include not sitting on lots of cash, investing in tangible assets like gold and silver, and being aware of the current state of the economy.

My name is Mychal Raynes, and I have been fortunate enough to protect myself from inflation over the years. Here at Any Economy we try and prosper in any economic environment, including inflation. If you would like to receive free meaningful investing and economic commentary then sign up for our newsletter below.