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I have always considered inflation to be a natural result of our model of constant growth and the need to inject new funds into the market, not a policy per se,

by tt433 6y ago

I have always considered inflation to be a natural result of our model of constant growth and the need to inject new funds into the market, not a policy per se, can you elaborate?

johbjo 6y ago
A zero-inflation policy would correspond to matching the money supply growth to productivity growth. This would, ideally, result in approximately stable prices. Relative prices would still vary. A more efficient candy-bar machine would lower prices of candy-bars, whereas hourly wages would be unchanged. Defacto, there is a policy to aim for consumer price inflation of around 2%. Many justifications can be thought of, but one is the tendency that prices and wages rarely adjust downwards. So instead of expecting the economy to lower prices due to productivity increases, the central banks depreciate the currency. This means flat wages in stagnating industries, instead of falling wages. One could argue there is some psychological benefit to this. Another justification is because cash savings depreciate, there is need to invest them. In a textbook world, savings become investments, which creates growth.
- deleted 6y ago
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imtringued 6y ago
Inflation as a policy is just a treadmill. It makes working tomorrow more valuable than working yesterday. Imagine 100% inflation. You're going to get paid 100k in 2020 but 200k in 2021. Working in 2021 is more lucrative than working in 2020 but since you have to live through 2020 to get to 2021 you will keep working through the entire period and you will never stop because each year is better than the next. Now imagine the opposite. 50% deflation. In 2020 you get 100k and in 2021 you get 50k. Working in 2020 is more lucrative than in 2021. When you consider that food has to be grown every year then the second scenario is a disaster. People will work a lot in the beginning and then they work less or not at all because the 100k+ in your bank account are worth far more than the 1k per year salary in 2026. If nobody is working then where is all the food and all the other products supposed to come from?
- johbjo 6y ago
  You're assuming inflation in wages, but not in prices. And there are relative differences in price inflation. Nowadays, assets typically inflate first, then wages and consumer prices. Prices can move faster than wages, so wages would inflate/deflate last. So you have to imagine that your wage is fixed for the year, while your prices change every month or week.

by tt433 6y ago

I have always considered inflation to be a natural result of our model of constant growth and the need to inject new funds into the market, not a policy per se, can you elaborate?

johbjo 6y ago

A zero-inflation policy would correspond to matching the money supply growth to productivity growth. This would, ideally, result in approximately stable prices. Relative prices would still vary. A more efficient candy-bar machine would lower prices of candy-bars, whereas hourly wages would be unchanged. Defacto, there is a policy to aim for consumer price inflation of around 2%. Many justifications can be thought of, but one is the tendency that prices and wages rarely adjust downwards. So instead of expecting the economy to lower prices due to productivity increases, the central banks depreciate the currency. This means flat wages in stagnating industries, instead of falling wages. One could argue there is some psychological benefit to this. Another justification is because cash savings depreciate, there is need to invest them. In a textbook world, savings become investments, which creates growth.

deleted 6y ago
[deleted]

imtringued 6y ago

Inflation as a policy is just a treadmill. It makes working tomorrow more valuable than working yesterday. Imagine 100% inflation. You're going to get paid 100k in 2020 but 200k in 2021. Working in 2021 is more lucrative than working in 2020 but since you have to live through 2020 to get to 2021 you will keep working through the entire period and you will never stop because each year is better than the next. Now imagine the opposite. 50% deflation. In 2020 you get 100k and in 2021 you get 50k. Working in 2020 is more lucrative than in 2021. When you consider that food has to be grown every year then the second scenario is a disaster. People will work a lot in the beginning and then they work less or not at all because the 100k+ in your bank account are worth far more than the 1k per year salary in 2026. If nobody is working then where is all the food and all the other products supposed to come from?

johbjo 6y ago
You're assuming inflation in wages, but not in prices. And there are relative differences in price inflation. Nowadays, assets typically inflate first, then wages and consumer prices. Prices can move faster than wages, so wages would inflate/deflate last. So you have to imagine that your wage is fixed for the year, while your prices change every month or week.