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> The problem with this inflation is that it only exists because you cannot charge a 3% fee on cash directly. If you could do that then 0% inflation would be op

> The problem with this inflation is that it only exists because you cannot charge a 3% fee on cash directly. If you could do that then 0% inflation would be optimal. My understanding is that because the US Dollar is the reserve currency of the world we can devalue it via inflation to effectively take value from other countries by reducing the value of what they hold as well as reducing the "cost" of our debt. Since trades are conducted in dollars, dollars will still be purchased, even though they are a "poorly performing" asset? So we can effectively fund the war in Ukraine directly with inflation. A tax was levied in the form of inflation, it was tolerated because it's not a "tax," and that tax is an extremely regressive tax on liquid cash. Inflation has effectively made labor cheaper too, making it even more regressive. I guess what I'm asking is, why is 0 optimal? Isn't it more of a choice with consequences? Isn't optimal inflation probably not 0 if we are the reserve currency? (I'm definitely throwing around some ideas I barely have a grasp of).

snowwrestler 4y ago
Trade is only about a quarter of the U.S. GDP. It would be kind of silly to manage domestic inflation solely to create financial international advantage. The U.S.’s strongest international advantage is our strong domestic economy (the business that Americans do with each other). Inflation is managed to support that. Specifically, the goal of the Fed is to create stability, which major businesses need to do long term planning. It is more stable to “err” consistently on one side of the origin or the other; the Fed errs slightly on the side of inflation because it creates an incentive to invest. You can look back at historical inflation rates and see the crazy volatility that existed before the Fed: swings of as much as 10% from inflation to deflation and back again. This made it very hard for people and businesses to make long-term financial decisions.

snowwrestler 4y ago

Trade is only about a quarter of the U.S. GDP. It would be kind of silly to manage domestic inflation solely to create financial international advantage. The U.S.’s strongest international advantage is our strong domestic economy (the business that Americans do with each other). Inflation is managed to support that. Specifically, the goal of the Fed is to create stability, which major businesses need to do long term planning. It is more stable to “err” consistently on one side of the origin or the other; the Fed errs slightly on the side of inflation because it creates an incentive to invest. You can look back at historical inflation rates and see the crazy volatility that existed before the Fed: swings of as much as 10% from inflation to deflation and back again. This made it very hard for people and businesses to make long-term financial decisions.