Deflation would be lots of fun for people who are rich. Instead of having to invest their fortunes in order to maintain them, they could literally sit on a mountain of gold and it would accrue wealth by simply existing.
(note: not saying anyone's promoting deflation. Didn't read enough of the thread to determine that. Just wanted to pop in)
Anyhow, realistically, no rich person in a deflationary economy would keep their money under the mattress/in a cave/buried at the bottom of a mineshaft etc, they'd put it in a bank, which in turn would actually support the economy.
Besides that, a rich person in an inflationary economy is even better off, as he has the benefit of receiving the newly printed money first, meaning he gets all the benefits of free money without the downsides of higher prices. He can dump his money in the stock market and outpace the inflation on goods that the suckers at the bottom of the printed money pyramid have to shoulder.
Then the bank is going to hoard the cash. Inflation is a tax on cash holding, deflation is a tax on every single non-cash asset. Guess which condition encourage investing and which encourage hoarding cash. Also, I don't see why rich people get the benefits of free money in an inflationary system. Banks do, because they're the one creating it, and I agree with you it is a problem, I would much rather see the central bank do that directly.
I'll get to your other point shortly, I need to restart my computer.
The idea of inflation resulting in investment while deflation results in hoarding instead of investment is a bit of a fallacy, but that's a big rabbit hole that I'm going to avoid right now.
On the other hand, it isn't too hard to see why rich people get the benefits of free money from inflation, at least how some of them do, anyway. When new money is created, the effects on prices don't come into play until after it has circulated through the economy. Since the money itself creates no wealth, whoever receives it first is basically taking wealth directly from those who receive it last. Who receives it first and last, then? Well, the money is created, depending on the system, either by a central bank or by the banks themselves. Regardless, this money then goes to commercial banks for lending, investment, and so on. Primarily, though, the new money will then move on from the banks to the stock market, where it will be used to pump up stock prices. Some will be used for loans as well. The last people to receive it, meanwhile, will be most of the public in general but wage workers in particular, who will get a raise well after the fact.
It's worth mentioning that Keynes himself advocated inflation for the very reason that it cuts real wages when workers wouldn't accept a pay cut, so this is hardly conspiracy theory stuff.
GJ: What damage does a modest inflation of, let's say, 5% do? Granted, 20+ % are bad (and inconvenient, too), but what's bad about low-level inflation?
Because it slowly takes money and redistributes it from wage earners and pensioners to bankers and investors, at least when the new money is introduced into the economy in the way it is these days. The methods of obtaining price inflation also have unintended consequences, specifically resource misallocation.
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