9 ms·

I thought inflation was a bad thing? From this article it seems everyone is avoiding the dangers of inflation, and instead opining that everything will just....

I thought inflation was a bad thing? From this article it seems everyone is avoiding the dangers of inflation, and instead opining that everything will just....work itself out. The Fed has become too politicized, so I'm deeply suspect. I have the impression, perhaps not entirely correct, that this is the same fed that has missed and bungled many of our recent financial crisis.

sigstoat 5y ago
(without expressing my own opinion on it:) most policy folks seem to want a few percent of inflation. it motivates you to spend or invest your money instead of just stuffing cash into a mattress.
- deelowe 5y ago
  The reason why this is important is that deflation can lead to a vicious cycle that you cannot get out of so the preference is controlled inflation over time.
  - mindslight 5y ago
    Yeah a vicious cycle of human beings actually needing to work less, rather than the surplus from technological progress being chewed by up the rent treadmill and spit out into an overgrown financial sector. We certainly can't have that!
    - deelowe 5y ago
      If you actually care and aren’t here to simply be a contrarian, the term is “deflationary spiral” and it exists because interest rates cannot be held below zero indefinitely. It’s very similar in concept to why potential losses on shorting a stock are infinite.
      - mindslight 5y ago
        I'm not being a contrarian - I support deflation. The supposed problem with deflation is that economic activity slows down and enough stuff won't be produced. But we're presently drowning in stuff! I agree it is a concern for a non-developed economy not meeting human needs, especially when price signals travel slowly (high system momentum). But we're in a well developed economy with a near-instantaneous global network. Witness, we've had four decades of deflation in the technology sector. Inflation advocates would tell you that everybody should have put off their technology purchases until computers stop(ped) getting better and cheaper. But yet people were buying new devices the whole time. If we're concerned with natural resource depletion and sustainability, we really need to stop pumping the gas pedal. BTW I don't see your parallel to shorting a stock. Care to explain?
        deelowe 5y ago
        The issue with deflation (on a macro level, one sector isn’t relevant here) is that encourages hording money. To counter that, interest rates have to be lowered. Otherwise you have what’s called a liquidity trap. There comes a point where this lowering of interest rates isn’t sustainable and the economy collapses. The comparison to shorting a stock is that you can never have enough capital to cover the rise in price. Capital is a limited resource while there is no upper bound on the stock. So there comes a point where you can no longer cover and you lose big time.
        Turing_Machine 5y ago
        Price decreases in a specific area due to productivity gains or advancing technology are an entirely different thing from systemic, economy-wide deflation. The last round of significant deflation we had was during the Great Recession of 2008-2009. The last round of serious deflation we had was the Great Depression. Those weren't fun times to live in. Few personal economic events are more catastrophic than getting stuck with an underwater mortgage (it's probably worse than anything beyond major uninsured medical bills). Few large-scale phenomena are uglier than farmers dumping produce (because prices have collapsed to the point that it's no longer is worth the cost of shipping) while, at the same time, people are going hungry. While it's true that people worked less during those deflationary periods, they didn't actually find it quite as enjoyable as you seem to think it is.
- leviathan235 5y ago
  Yeah, that's the consensus among most prominent economists and by extension politicians. It's based on the flawed assumption that consumption is automatically good and savings is automatically bad. Saving money isn't just going scrooge mcduck and holding it in a vault. Saving money is investing it, which funds innovations and investments. That could be via stocks, bonds, bank deposits (which get loaned out), etc. I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target. Macroeconomics is basically a pseudo science anyways.
  - woodruffw 5y ago
    > Saving money is investing it, which funds innovations and investments. That could be via stocks, bonds, bank deposits (which get loaned out), etc. I'm not an economist, but I think the Fed distinguishes between these activities: "saving" means holding money in accounts that are subject to the FDIC's reserve requirements, which in turn means that banks can't use (all of) that money for investments. "Investing" means circulating money in instruments that aren't generally subject to reserve or similar requirements, meaning that it's supplying liquidity to the larger market. I agree with your broader point about consumption (we really need to correct our infinite-growth mindset), but an economy that encourages excessive savings is about as bad long-term as one that encourages people to shove all of their money into the market.
    - KyleBrandt 5y ago
      My current understanding is that the reserve rate is now 0% https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm , so it can all be loaned out.
      - woodruffw 5y ago
        Yeah. My operating assumption was that the 0% rate was an emergency maneuver by the Fed to increase liquidity at the very beginning of COVID, but it's not clear when (if at all) they plan on returning to a nonzero reserve rate. OTOH, the Fed has other mechanisms for encouraging bank reserves -- I believe they still pay interest on any excess reserves that banks hold at the end of each day. That rate (the "IOER rate") is (still) significantly higher[1] than the federal funds rate[2], so banks can essentially collect free money by keeping any reserves at all. [1]: https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/IOER [2]: https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS
- ls612 5y ago
  The reason is more technical than that. For a long time the Fed has had a target of 2% PCE inflation (which is a bit higher than 2% CPI inflation), but in the past decade it’s averaged 1.5% or so. This damages central bank credibility, a very important asset for monetary policy. Thus, policymakers are comfortable running 3% or so PCE inflation for a while to try and bring up the long run average to the 2% stated target.
imNotTheProb 5y ago
I think it has been politicized but rather in favor of whatever the ruling party says. The federal reserve benefits from a long ledger so they are more than happy to let inflation run rampant.
addicted 5y ago
Inflation isn’t a bad thing.
- imNotTheProb 5y ago
  To my 1 year old with $1000 it is. To a college kid with savings from teenage jobs, it is. To people who's wages didn't go up, it is.
  - caycep 5y ago
    context is always important. It's bad if wages are also kept stagnant (and maybe artificially so by whoever's employing those people). For your 1 year old, it's not a problem if that $1000 is invested in say an S&P fund If you hold a mortgage, it can potentially be good...
    - BitwiseFool 5y ago
      It's not like the banks and lenders aren't wise to the idea of mortgage's getting reduced by inflation. They calculate and compensate for inflation and make offers accordingly.
      - AlexandrB 5y ago
        I think this has cause and effect somewhat backwards. Often mortgage rates are based on the interest rate set by the central bank ("prime"). So if inflation is rampant and the central bank increases the prime rate to try to reduce inflation, variable mortgage interest rates will also increase. In the US, however, it's possible to get 25 year fixed rate mortgages. With the prime rate being so low, these can be had for 2-3%. This is very low! If many on HN are to be believed regarding a coming inflationary crisis this kind of mortgage will be hugely advantageous to those that have one because the debt will be massively devalued by rampant inflation.
      - mason55 5y ago
        It's an interesting relationship. The banks take the current interest rate from the Fed into account and base the mortgage rate on that. They can try to project out and add some percentage for risk + inflation but if they add too much then there are 100 other banks ready to undercut them. So you get a fixed-rate mortgage based on the current interest rate from the central bank. And the amount of money that your mortgage covers (basically the price of your house) doesn't change. Which means that every year, as inflation causes wages to go up, you are paying for a house that cost whatever it cost when you bought it. But! Most people shop for houses based on what they can afford as an all-in payment. To put it another way, people can afford $x/month on housing, and it doesn't matter to them really how much is going to the price of the house and how much is going to interest. If interest rates rise (which happens along with inflation) then that means the percentage of someone's monthly payment that goes to the price of the house goes down, which has a depressing effect on housing prices. So your house payment becomes more affordable but the amount you can expect to get when you sell your house goes down (or rises more slowly).
bluGill 5y ago
If inflation is good or bad depends on where you are in life. If you just bought a house that is just barely affordable, then you want massive inflation because your house payments won't go up with time, while inflation means you get large raises. Even if your raises don't keep pace with inflation, (they often don't catch up for a few years), after just a couple years you are still way ahead because your largest cost of living is staying still. By contrast, if you are retired your probably get a lot of your income from fixed incomes that won't go up over time. As such you end up having less and less worth to spend every month. There are a lot more situations, and everyone is in a different situation.
- 2bit_pointer 5y ago
  > while inflation means you get large raises Wages haven’t kept pace with inflation in the US for some time. https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/ https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us... They’re only starting to rise because of labor pool constraints from the pandemic. Inflation would be very bad for most low to median wage workers, especially those in urban center where housing crises are rampant, especially if business interests continue to succeed at putting downward pressure on them by blocking things like minimum wage hikes.
  - imtringued 5y ago
    Investment is up since the pandemic. It was going down beforehand. Real wages are stagnating because that is how macro economics works. When everyone has a saving preference and only spends the bare minimum the economy is optimizing for "efficiency" while staying the same or shrinking. More efficiency primarily means squeezing out low wages out of workers. Given enough inflation there will be an decrease in the saving preference and the problem will resolve itself.
  - xapata 5y ago
    It's not clear that the labor pool constraints will subside along with the pandemic.
- 5y ago
splitstud 5y ago
I don't have any love for the Fed, but it's not the Fed that spent without any regard for the budget for the past 40 years.
imtringued 5y ago
The Fed only did the things that the US government forced it to do. It happens very indirectly through inaction. Loans are pull based money creation. QE is push based money creation. If the private sector, public sector and consumers aren't doing anything then the central bank has to pull us out of the clown world we desperately want to live in.
- errantmind 5y ago
  How are they pulling us out of a clown world? If they use QE but the money goes towards assets / consumption instead of business development, all we end up with is more inflation without improving the economy. Window guidance could likely fix this but that is taboo

sigstoat 5y ago

(without expressing my own opinion on it:) most policy folks seem to want a few percent of inflation. it motivates you to spend or invest your money instead of just stuffing cash into a mattress.

deelowe 5y ago
The reason why this is important is that deflation can lead to a vicious cycle that you cannot get out of so the preference is controlled inflation over time.
- mindslight 5y ago
  Yeah a vicious cycle of human beings actually needing to work less, rather than the surplus from technological progress being chewed by up the rent treadmill and spit out into an overgrown financial sector. We certainly can't have that!
  - deelowe 5y ago
    If you actually care and aren’t here to simply be a contrarian, the term is “deflationary spiral” and it exists because interest rates cannot be held below zero indefinitely. It’s very similar in concept to why potential losses on shorting a stock are infinite.
    - mindslight 5y ago
      I'm not being a contrarian - I support deflation. The supposed problem with deflation is that economic activity slows down and enough stuff won't be produced. But we're presently drowning in stuff! I agree it is a concern for a non-developed economy not meeting human needs, especially when price signals travel slowly (high system momentum). But we're in a well developed economy with a near-instantaneous global network. Witness, we've had four decades of deflation in the technology sector. Inflation advocates would tell you that everybody should have put off their technology purchases until computers stop(ped) getting better and cheaper. But yet people were buying new devices the whole time. If we're concerned with natural resource depletion and sustainability, we really need to stop pumping the gas pedal. BTW I don't see your parallel to shorting a stock. Care to explain?
      - deelowe 5y ago
        The issue with deflation (on a macro level, one sector isn’t relevant here) is that encourages hording money. To counter that, interest rates have to be lowered. Otherwise you have what’s called a liquidity trap. There comes a point where this lowering of interest rates isn’t sustainable and the economy collapses. The comparison to shorting a stock is that you can never have enough capital to cover the rise in price. Capital is a limited resource while there is no upper bound on the stock. So there comes a point where you can no longer cover and you lose big time.
      - Turing_Machine 5y ago
        Price decreases in a specific area due to productivity gains or advancing technology are an entirely different thing from systemic, economy-wide deflation. The last round of significant deflation we had was during the Great Recession of 2008-2009. The last round of serious deflation we had was the Great Depression. Those weren't fun times to live in. Few personal economic events are more catastrophic than getting stuck with an underwater mortgage (it's probably worse than anything beyond major uninsured medical bills). Few large-scale phenomena are uglier than farmers dumping produce (because prices have collapsed to the point that it's no longer is worth the cost of shipping) while, at the same time, people are going hungry. While it's true that people worked less during those deflationary periods, they didn't actually find it quite as enjoyable as you seem to think it is.
leviathan235 5y ago
Yeah, that's the consensus among most prominent economists and by extension politicians. It's based on the flawed assumption that consumption is automatically good and savings is automatically bad. Saving money isn't just going scrooge mcduck and holding it in a vault. Saving money is investing it, which funds innovations and investments. That could be via stocks, bonds, bank deposits (which get loaned out), etc. I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target. Macroeconomics is basically a pseudo science anyways.
- woodruffw 5y ago
  > Saving money is investing it, which funds innovations and investments. That could be via stocks, bonds, bank deposits (which get loaned out), etc. I'm not an economist, but I think the Fed distinguishes between these activities: "saving" means holding money in accounts that are subject to the FDIC's reserve requirements, which in turn means that banks can't use (all of) that money for investments. "Investing" means circulating money in instruments that aren't generally subject to reserve or similar requirements, meaning that it's supplying liquidity to the larger market. I agree with your broader point about consumption (we really need to correct our infinite-growth mindset), but an economy that encourages excessive savings is about as bad long-term as one that encourages people to shove all of their money into the market.
  - KyleBrandt 5y ago
    My current understanding is that the reserve rate is now 0% https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm , so it can all be loaned out.
    - woodruffw 5y ago
      Yeah. My operating assumption was that the 0% rate was an emergency maneuver by the Fed to increase liquidity at the very beginning of COVID, but it's not clear when (if at all) they plan on returning to a nonzero reserve rate. OTOH, the Fed has other mechanisms for encouraging bank reserves -- I believe they still pay interest on any excess reserves that banks hold at the end of each day. That rate (the "IOER rate") is (still) significantly higher[1] than the federal funds rate[2], so banks can essentially collect free money by keeping any reserves at all. [1]: https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/IOER [2]: https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS
ls612 5y ago
The reason is more technical than that. For a long time the Fed has had a target of 2% PCE inflation (which is a bit higher than 2% CPI inflation), but in the past decade it’s averaged 1.5% or so. This damages central bank credibility, a very important asset for monetary policy. Thus, policymakers are comfortable running 3% or so PCE inflation for a while to try and bring up the long run average to the 2% stated target.

imNotTheProb 5y ago

I think it has been politicized but rather in favor of whatever the ruling party says. The federal reserve benefits from a long ledger so they are more than happy to let inflation run rampant.

addicted 5y ago

Inflation isn’t a bad thing.

imNotTheProb 5y ago
To my 1 year old with $1000 it is. To a college kid with savings from teenage jobs, it is. To people who's wages didn't go up, it is.
- caycep 5y ago
  context is always important. It's bad if wages are also kept stagnant (and maybe artificially so by whoever's employing those people). For your 1 year old, it's not a problem if that $1000 is invested in say an S&P fund If you hold a mortgage, it can potentially be good...
  - BitwiseFool 5y ago
    It's not like the banks and lenders aren't wise to the idea of mortgage's getting reduced by inflation. They calculate and compensate for inflation and make offers accordingly.
    - AlexandrB 5y ago
      I think this has cause and effect somewhat backwards. Often mortgage rates are based on the interest rate set by the central bank ("prime"). So if inflation is rampant and the central bank increases the prime rate to try to reduce inflation, variable mortgage interest rates will also increase. In the US, however, it's possible to get 25 year fixed rate mortgages. With the prime rate being so low, these can be had for 2-3%. This is very low! If many on HN are to be believed regarding a coming inflationary crisis this kind of mortgage will be hugely advantageous to those that have one because the debt will be massively devalued by rampant inflation.
    - mason55 5y ago
      It's an interesting relationship. The banks take the current interest rate from the Fed into account and base the mortgage rate on that. They can try to project out and add some percentage for risk + inflation but if they add too much then there are 100 other banks ready to undercut them. So you get a fixed-rate mortgage based on the current interest rate from the central bank. And the amount of money that your mortgage covers (basically the price of your house) doesn't change. Which means that every year, as inflation causes wages to go up, you are paying for a house that cost whatever it cost when you bought it. But! Most people shop for houses based on what they can afford as an all-in payment. To put it another way, people can afford $x/month on housing, and it doesn't matter to them really how much is going to the price of the house and how much is going to interest. If interest rates rise (which happens along with inflation) then that means the percentage of someone's monthly payment that goes to the price of the house goes down, which has a depressing effect on housing prices. So your house payment becomes more affordable but the amount you can expect to get when you sell your house goes down (or rises more slowly).

bluGill 5y ago

If inflation is good or bad depends on where you are in life. If you just bought a house that is just barely affordable, then you want massive inflation because your house payments won't go up with time, while inflation means you get large raises. Even if your raises don't keep pace with inflation, (they often don't catch up for a few years), after just a couple years you are still way ahead because your largest cost of living is staying still. By contrast, if you are retired your probably get a lot of your income from fixed incomes that won't go up over time. As such you end up having less and less worth to spend every month. There are a lot more situations, and everyone is in a different situation.

2bit_pointer 5y ago
> while inflation means you get large raises Wages haven’t kept pace with inflation in the US for some time. https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/ https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us... They’re only starting to rise because of labor pool constraints from the pandemic. Inflation would be very bad for most low to median wage workers, especially those in urban center where housing crises are rampant, especially if business interests continue to succeed at putting downward pressure on them by blocking things like minimum wage hikes.
- imtringued 5y ago
  Investment is up since the pandemic. It was going down beforehand. Real wages are stagnating because that is how macro economics works. When everyone has a saving preference and only spends the bare minimum the economy is optimizing for "efficiency" while staying the same or shrinking. More efficiency primarily means squeezing out low wages out of workers. Given enough inflation there will be an decrease in the saving preference and the problem will resolve itself.
- xapata 5y ago
  It's not clear that the labor pool constraints will subside along with the pandemic.
5y ago

splitstud 5y ago

I don't have any love for the Fed, but it's not the Fed that spent without any regard for the budget for the past 40 years.

imtringued 5y ago

The Fed only did the things that the US government forced it to do. It happens very indirectly through inaction. Loans are pull based money creation. QE is push based money creation. If the private sector, public sector and consumers aren't doing anything then the central bank has to pull us out of the clown world we desperately want to live in.

errantmind 5y ago
How are they pulling us out of a clown world? If they use QE but the money goes towards assets / consumption instead of business development, all we end up with is more inflation without improving the economy. Window guidance could likely fix this but that is taboo