"This relationship holds, I believe, because low inflation tends to focus people's attention on productive investments at the same time it promotes confidence by delivering stability, while high inflation tends to encourage speculative investments and discourage investment because it increases uncertainty. If prices are generally stable, for example, then it is difficult to make money by buying commodities, and the only real game in town is making money the hard way, by working harder and doing things more efficiently. If on the other hand prices are rising, then it becomes easier to make money by speculating in commodities, and it becomes very difficult to work more efficiently or to take on long-term investments because one loses confidence in the future. During the 4 years I lived in Argentina the inflation rate was well over 100% per year, and I can personally vouch for the fact that investment horizons shrink dramatically as inflation rises, and the business of life eventually becomes reduced to survival rather than planning and saving for the future." Read more.
Calafia Beach Pundit
Via Seeking Alpha, August 10, 2010.
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