No, lenders aren’t dumb. But wage-earners are (sort of).
One major case for having some inflation usually has to do with the psychology of wage stickiness.
In a downturn, the optimal thing to do is for everyone to take a small pay cut, and keep on working. This is a bummer (no one likes pay cuts), but it’s generally not disastrous.
But it turns out that people really don’t like pay cuts. The morale impact on your employees is huge, because getting a pay cut feels like someone telling you you’re bad at your job. It also kind of feels like your company is spiraling down the tubes, and maybe the best employees decide to go find another job. Even in a recession, there are people who are more valuable than they’re being paid, and if cutting their pay spurs them to look elsewhere, that’s bad news for a company. All in all, the psychological impact of broad pay cuts is big enough that it’s pretty rare for it to happen. Maybe in some small companies, where people have a strong personal connection to each other and can feel like they’re all pitching in to keep the ship afloat. But in most companies, it’s pretty much a non-starter. This resistance to lowering wages is called “wage stickiness”.
So what actually happens is that instead of, say, everyone taking a 5% pay cut, a few people get laid off. This is slightly better for the people who keep their jobs, but it’s disastrous for the people who lose them, and for the economy as a whole. Unemployment is way worse than lower pay, both because the skills and self-worth of the unemployed degrade, and because, in a very real way, there’s less stuff being accomplished. If everyone building roads or writing sonnets or assembling widgets is paid a bit less, we still have just as many roads and sonnets and widgets (wealth creation!). If you lay off 5% of them, well, we probably get fewer of all those things. And a lot more depressed people watching TV and spending a lot of time in other not-very-productive ways. And it’s more likely to have positive feedback, since the people who get laid off will severely restrict their spending, which then lowers overall demand even more, which causes more people to be laid off. Pay cuts don’t have
So, you can’t effectively cut pay, and the other way to reduce labor costs (layoffs) has really bad effects. Inflation to the rescue. Just stop giving people raises, and their real wages will slowly drop. Effectively, every year you don’t get a raise, you’re getting an inflation pay cut. But people don’t see it that way (as long as inflation is pretty low). We think in nominal values, not real ones. People are not fully rational beings, and it turns out that minor inflation effectively counteracts some of the most irrational bits of nominal wage stickiness.