Inflationary economic policy fuels speculative activity, tends to grant both political and cultural power to successful speculators, and tends to impoverish regular mercantile activity.

Why does this happen? Is speculation morally illegitimate? Is it at least suspect?

On the left and on the more traditionalist right, the answer tends to be ‘because speculators are evil, yes, and yes.’ This owes to a misunderstanding of the role of the speculator in economics. Surely the rise of an enormous speculating class is a sign of social problems, but they are not necessarily themselves the source of those problems. Governments especially enjoy using speculators as scapegoats, because many of them tend to succeed more from volatile prices, which people who are not skilled speculators tend to struggle to deal with.

The function that speculators perform is to re-order production through speculative buying and selling to changes in real market conditions, meaning changes in supply and demand. If there is a good harvest, then production needs to be re-ordered to take that into account — supply is stronger relative to demand. If there is a bad harvest, then conditions must change to take that into account.

Every person engages in some measure of speculative activity, even if it’s not their primary goal.

Inflationary monetary policy, meaning a policy that involves issuing more currency than is retired, tends to fuel speculative activity because it introduces a major additional variable to the way that markets work. Adding on foreign exchange between different national markets only adds to the complexity. The more shifting conditions that need to be addressed to maintain production, the greater the need there is for speculators.

What we see in an inflationary economy is the creation of a parallel structure of production to the previous one which existed before the great inflation. This is often articulated as the creation of a ‘new economy’ using new methods, with new people who are closest to the institutions that provide the new money and credit. According to all the reasonable metrics, this creates the appearance of an economic boom. It can be around railroads, software, farm settlement, war materials, or whatever industry that the state wishes to promote first, at the expense of the preexisting economic structures.

The shiny new railroad company gets pumped full of investment to build tracks to nowhere, while the existing canal company moving a greater quantity of freight finds it difficult to continue operations — the redistribution inherent in the inflationary process changes the structure of production. That the railroad goes bankrupt once the monetary expansion slows down, while the canal company also goes bankrupt due to the earlier policy, shows the pointlessness of inflationary monetary policy at least from the perspective of the broader society.

This is what is confusing about the usual definition of ‘inflation’ as a general increase in the price level, rather than referring to the expansion of the money supply. First, there is no objective definition of the ‘price level,’ and can never be, because the data set is too large (being nearly infinite) to draw anything but inferences from. Second, the increase in prices is only a lower order effect of inflationary monetary policy. It just happens to be the effect that tends to topple governments due to mass rebellion.

When the people are crying for bread at a lower price, your government’s days are probably numbered, because it’s an easy justification for a coup.

Prices are also rarely correlated in a general fashion. If you create special lending facilities for, say, racial minority home ownership, you are going to provide a lot of purchasing power to racial minorities, having a disproportionate impact on the price level of homes in the areas where they are buying them. If this lending facility is more profuse than others, it will have a disproportionate impact on prices in the areas where it is used.

Similarly, special lending facilities for certain investment banks or for entire nations prop up prices for the goods, securities, and services that those beneficiaries of inflation buy first, to a disproportionate, non-correlated degree, at least until the new money has worked its way throughout the broader economic system.

This explains ‘ghost city’ phenomena — credit is extended to a new development on a speculative basis (there is no financial history for economic development on a barren patch of land — only manipulable comparisons can justify it). The construction happens, producing apparent economic activity (‘GDP growth’). When the development proves to be uneconomical, the development is abandoned, and it does not produce anything for anyone anymore, because the project was untenable.

In such an environment, the speculators find easy opportunities in correcting the prices continually because of the issuance of new money. It creates volatility where there would otherwise be stability and predictability.

The ‘class of degenerate speculators’ that historians typically observe in these environments tend to succeed because they call the bluff of the inflationary policy, see that the projects being funded are shams that will not survive, and ride the spikes and short the collapses, because it’s much more profitable to capture the monetary spread than it is to actually do productive work. Speculation makes production possible, but it is not production itself.

When you learn to spot this type of character, you tend to spot them over and over in both the historical context and the contemporary one. In the modern US, the speculative type — and their political enablers — dominate the business press, earn the adulation of the people, and enjoy popularity among politicians. They seem to exude a numina which would not exist absent the monetary policy that provides them with their privileges.

In terms of politics, the speculators tend to be in favor of the continuation of inflationary policy, because, as a class, most of them can only survive in an easy money environment. They are like a type of fish that explodes in population when ocean temperature rises above a certain threshold (in America, this is sometimes called the ‘financialization‘ of the economy, noting the mass increase in employment in the Finance, Insurance, and Real Estate industries [FIRE] after 1971).

Normal people see this and feel resentful about the state of affairs — they see that honest labor is not rewarded as it once was. The reason why it is not rewarded as it once was is because loose monetary policy leads to a continuous economic restructuring — routine systematic errors (the boom/bust cycle) shake workers out of companies and dissolve those companies regularly, because these fixed economic structures are not very liquid — it takes time to strip a factory of equipment and sell it, but it takes picoseconds to sell a financial position.

Inflation also tends to have corrosive impacts on social mores. The hard worker suffers because his long-term orientation shackles him to doomed companies or even entire industries, while the speculator can move his capital from one burning building to another, blithe to what happens to the people living and working within those buildings.

In general, when society has departed from sound money principles, it’s difficult to revert to the previous state of affairs without war. Napoleon returned France, at least as far as the state was concerned, to stringent hard monetary policy, following the financial depredations of the revolution.

The funny thing about this mode of political degeneration is that rhetoric almost never works. It can sometimes be halted by bureaucrats or strong leaders that see the value of instituting a wise but unpopular policy. It’s more typically ended by coup, revolution, or invasion, because the long term effects of this monetary policy is a hollowing-out of the previously existing social structure, temporarily strengthening the hand of the state, but destroying the body of the people.