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(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

(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.
      - imtringued 5y ago
        >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! The entire point behind deflation is getting rid of that surplus. It's about trimming everything except basic cost of living. If you are a company and your profit is going down every year you are going to cut production. Cutting production also means cutting jobs. It's that simple. The savings utopia also doesn't exist because the 0% lower bound for interest rates prevents money creation to catch up with savings. If everyone saves there literally won't be any money left to save. Deflation is an economic dead end. People believe that money is infallible and the perfect risk free asset, especially if it's value is going up via deflation. The risk free assumption is just an approximation given a properly functioning economy and deflation doesn't reward a properly functioning economy.
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.

(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.
    - imtringued 5y ago
      >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! The entire point behind deflation is getting rid of that surplus. It's about trimming everything except basic cost of living. If you are a company and your profit is going down every year you are going to cut production. Cutting production also means cutting jobs. It's that simple. The savings utopia also doesn't exist because the 0% lower bound for interest rates prevents money creation to catch up with savings. If everyone saves there literally won't be any money left to save. Deflation is an economic dead end. People believe that money is infallible and the perfect risk free asset, especially if it's value is going up via deflation. The risk free assumption is just an approximation given a properly functioning economy and deflation doesn't reward a properly functioning economy.

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.