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Ask HN: Why don’t governments target zero inflation?

• db48x 4y ago
  The size of the economy and the size of the money supply are very hard to measure; the best we can do is estimate. As the economy grows, the amount of money must be allowed to grow as well or we will have deflation. Even a small amount of deflation is widely regarded as worse than a small amount of inflation, so they try to err on on the positive side.
  • lantry 4y ago
    source: https://www.stlouisfed.org/open-vault/2019/january/fed-inflation-target-2-percent https://www.stlouisfed.org/open-vault/2019/january/fed-infla...
• vinyl7 4y ago
  To encourage growth. If money is continually losing value, you have to continually work harder to outpace the loss. This encourages workers to keep working, and encourages businesses to keep innovating.
  • Jemm 4y ago
    Growth, like any good Ponzi Scheme
    • cguess 4y ago
      Except in this case the growth comes from building and selling real things.
    • belltaco 4y ago
      Can you explain how economic growth is like a Ponzi scheme. Lets take an example, lower income people being able to afford buying computers and use them, so computer sales go up. How is that a Ponzi?
      • p0pcult 4y ago
        The finite supply of resources on earth.
        • aristofun 4y ago
          How do you prove they are finite? Were they finit 2000 years ago as well?
          • deleted 4y ago
            [deleted]
          • p0pcult 4y ago
            If there were an infinite amount of matter in a finite volume, we would be infinitely dense (well, some are anyway, but that's a different definition altogether), which would make Earth something that it is altogether not. Are you infinitely dense? (I am not; I can't prove it, but I suspect you are less than infinitely dense.)
            • aristofun 4y ago
              What matter density has to do with resources required for people? Stop spreading this shitty nonsense about limited resources please.
        • HDThoreaun 4y ago
          Luckily wealth isn't just a function of resources extracted from the earth. People create wealth.
  • datadata 4y ago
    And the law of unintended consequences gives a huge unintended consequence here.... Rather than worker harder forever, which people really want to try to avoid, things other than money will be used as a store of value, since money is by definition leaking value. Housing, stocks, gold, crypto, etc.
  • mypastself 4y ago
    And paradoxically, the much-maligned conspicuous consumption attributed to Western-style capitalism - buying things you don’t need - actually seems like a result of heavy-handed government policies such as lowered interest rates.
  • radford-neal 4y ago
    Investors look for a return after accounting for inflation. If inflation is 5% and interest rates are 10%, the return is the same as if inflation were 0% and interest rates were 5%. Although recent years have been a puzzling exception, it is typical for real interest rates (nominal rate minus inflation rate) to be positive. If someone is inclined to just live off their accumulated savings, this is just as possible with inflation as without, as long as the real interest rate is the same. It is true that the value of savings tend to be destroyed in episodes of hyperinflation, when real rates don't keep up, but hyperinflation is certainly not a road to a well functioning economy.
• sparkie 4y ago
  Zero inflation does not line their pockets
  • kayamon 4y ago
    ^ rich people create new money every day so that they'll have more money than you
  • Aachen 4y ago
    That's not a reason but a hypothesis.
    • sparkie 4y ago
      If you had a machine that printed $10 bills, would you line your pockets?
      • Aachen 4y ago
        That's still not a reason, that's an attempt to extract a counterfeiting confession! You'll not get no confession from me FBI sir no sir! I'm not sure idle speculation on corruption is what OP was asking for or helpful to anyone else for that matter.
        • sparkie 4y ago
          The central bank is doing it, they just have a license to produce counterfeits. If you could get away with it, you would too. The ~2% target they aim for is really "this is probably what we can get away without without prices exploding so fast that people notice and start protesting our policies." If they can get away with >2% they will. With a convenient excuse like COVID, they will not miss the opportunity to enrich themselves as much as possible, because its easy to shift the blame on price increases away from themselves. Can guarantee they're eagerly awaiting the next emergency where creating trillions of dollars is 'the only solution.'
• bediger4000 4y ago
  Inflation makes it less attractive to hold cash - it's worth less year over year. Experience says we want to make hoarding cash less attractive, and investing more attractive, so we want a little inflation.
  • aww_dang 4y ago
    Doesn't that incentivize speculation, bubbles and misallocation of capital?
    • cguess 4y ago
      Not at the targeted 2% it doesn't. It convinces people to buy houses. Otherwise the money would be sitting in a bank account because if it's deflationary there's no impetus to use it since it may be worth more next year. It's about balancing.
      • aww_dang 4y ago
        Sitting in a bank where borrowers could access it at a market rate of interest. Alternatively it would be invested in enterprises which generate returns above that market rate. Contrast this to the status quo of negative real rates. Speculative mania, valuations over dividends and FOMO driving investment cycles into increasingly absurd tulip bubbles. Despite increases in productivity, consumer prices continue to increase. Families have two spouses working and less leisure time. There's nothing wrong with deflation. This is the natural result of increased productivity and technological advances.
      • datadata 4y ago
        "Convincing people to buy homes" is literally an example of misallocation of capital, in the sense that monetary policy is meant to be an intervention in a free market.
• aww_dang 4y ago
  Imagine that you have the power of gov. spending. Would you want that limited or rationalized? The 2% figure is defined by government statisticians. When those figures don't suit their spending desires, they will trot out concepts like "symmetric inflation". If government statisticians measure inflation to be less than 2% for a period of time, they will claim that inflation above this rate is required to achieve a symmetric rate of 2%. Even if we accept these premises, why then is a lower rate not "symmetrically" targeted when government statisticians measure inflation to be 8%? The system is better understood as a method of rationalization for gov. spending, political favors and "stimulus". The question is a good one, but I think you would be better served by questioning some of the underlying premises before proceeding. Why not allow the market to set interest rates? Why must capital be allocated by government technocrats? How can fallible men with imperfect information determine prices better than decentralized market mechanisms? When in history has price fixing been beneficial? What were the results of emperor Diocletian's edicts on maximum prices? Also note the shifting definition of inflation itself. Price inflation vs. the original definition, inflation of the money supply.
  • TheOtherHobbes 4y ago
    You're assuming "markets" aren't at least as technocratic, open to manipulation, or just straightforwardly political. When the UK sold most of its critical infrastructure - using exactly the same arguments you're using - the reality wasn't a rational and perfectly organised free market utopia, it was an explosion of higher prices and lower service quality for customers, and huge profits for the buyers. Most of which were shipped offshore, because the new owners weren't even British. Even as we spesk privatised energy price gouging - there is no other word for it - is quite literally making electricity and gas unaffordable for anyone who isn't in the top decile of earnings. Not incidentally, it's also causing a burst of inflation which is being used as a transparently flimsy pretext to raise taxes, cut public services, and clamp down on wages.
    • aww_dang 4y ago
      It is a bit tangential, but I appreciate your response. >You're assuming "markets" aren't at least as technocratic, open to manipulation, or just straightforwardly political. Where "experts" fail in the market, they are subject to competition. The conditions where they fail upwards are generally related to non-market political largess. >When the UK sold most of its critical infrastructure - using exactly the same arguments you're using... >privatized energy price gouging There's a large gulf between neoliberalism and laissez-faire. I do appreciate that the two are often conflated and that the distinction isn't always clear as they are often maligned together in popular discourse. >the reality wasn't a rational and perfectly organised free market utopia Utopia is a high bar to achieve. I'm just suggesting that having centrally planned interest rates is akin to price fixing. Overall a market rate of interest would be less bad IMHO. Rail infrastructure is a difficult issue, but the Japanese seem to have a successful private system. Maybe another commentor who is more familiar with Japan can elaborate on that.
• incomingpain 4y ago
  >Western governments all seem to target 2% annual inflation. Why is this? When currencies operated via the gold standard. Inflation of gold was out of their control, gold mining, gold rush etc. Which tended to be about 2%. This goes back to antiquity. Roman emperors clipped metal off their coins and thus created inflation. Inflation doesn't exist in economics, inflation is a political tool. This is it though, that's why it's 2%, nobody has ever had the courage to aim at anything lower. But now that it's not gold standard, what is the 2%? This is actually government being able to print money for free. 2% of total money supply pays for quite a significant amount of government. This is compounding obviously, so it's not a long term strategy. However, this is what makes large currencies so powerful. >Why not target 0% to make financial projections simpler for businesses and households? The government has to raise taxes(not going to work) or reduce spending(very very not going to happen) So aiming for 0% isn't plausible not because of economics, but because of politicians. Something did happen in 2020, usa/canada/others no longer targeted 2%. They targeted >10%. The government printed a ton of money to pay for extreme spending. Canada for example put more debt on the books in the last few years than all other prime ministers in history combined; inflation adjusted. Someone will pay for this eventually or retirees are coming back to work.
• alexb_ 4y ago
  Zero inflation means that a risk-free way to hold on to all of your value forever is by just holding it. Inflation incentivizes people to buy/invest as opposed to just holding onto money. Holding onto money is bad because every dollar you spend, another man earns. A lack of spending from one party is a lack of earning for another. The economy functions not on people having money, but on people continually spending that money and moving it from one party to another to incentivize work being done and problems being solved.
  • _Algernon_ 4y ago
    What does inflation accomplish that a wealth tax of 2% doesn't accomplish. Such a wealth tax would be more honest and transparent (ie. politicians would have to justify it, they couldn't just outsource the PR hit to an unelected central bank), and could additionally be more nuanced (eg. marginal tax rates). Inflation mostly hits the relatively poor, because they are the only ones holding a large proportion of their wealth as cash.
    • WJW 4y ago
      Inflation is much easier to sell from a PR perspective. New taxes typically lead to lots of protests and are politically difficult, while inflation has no such problems. In addition inflation benefits entities with lots of debt, such as homeowners and governments. Since homeowners are often a significant voter block in most democracies and governments are, well, governments, it is easy to see why appeasing both those groups would be appealing to politicians.
      • _Algernon_ 4y ago
        To your second point: I'm not convinced that that is true. If inflation is predictably 2%/year, you'd expect that to be priced into the interest rate on loans. A bank selling a loan would pass the inflation cost to the borrower by increasing the interest rate appropriately.
    • sokoloff 4y ago
      A wealth tax hits assets and currency equally. Inflation hits primarily currency while supporting assets (or leaving them relatively untouched). Further, the administrative effort of any wealth tax is enormous (if you're trying to reach the equivalent effect of taking 2% of the purchasing power away from the money that's literally in my jeans pocket) and subject to substantial judgment (what is my family pizza place really worth?). Inflation has no judgment required and no per-person book-keeping, reporting, nor auditing effort required.
• llimos 4y ago
  I'm not sure I'm cynical enough to say it's the reason, but inflation helps governments by reducing the real size of their enormous debts.
  • SideburnsOfDoom 4y ago
    > inflation helps governments by reducing the real size of their enormous debts What is the reason that you think that governments care about the size of their debts? Do not assume that "government debt" is anything like "household debt".
    • bluGill 4y ago
      Because governments still have to pay back their debts at sometime. While they can default that doesn't work out very well - local residents get mad about losing their investments, and foreign rich people learn their lesson and won't borrow more money for a while (at least not on good terms). There are significant differences, but in the end governments also pay back debt.
      • SideburnsOfDoom 4y ago
        I see you're not the parent poster. Your response just restates the premise that it matters, implicitly assuming (falsely) that it is fundamentally similar to a household. https://www.forbes.com/sites/francescoppola/2018/04/30/governments-are-nothing-like-households/?sh=4098ebf54f8b https://www.forbes.com/sites/francescoppola/2018/04/30/gover... The alternative is not "default" that pathological case is not what anyone was talking about at all, the alternative is a government continuing to be in debt, servicing it and rolling it over. Public debt is private wealth, that's who holds the bonds. > There are significant differences, but in the end ... But in the end, "The analogy has been characterized by economists as misleading and false, as the functions and constraints of governments and households are vastly dissimilar" https://en.wikipedia.org/wiki/Government-Household_analogy https://en.wikipedia.org/wiki/Government-Household_analogy
        • 4y ago
• Blackstone4 4y ago
  Because zero is too close to negative which freaks people out with bad headlines...
• helsinkiandrew 4y ago
  What they're really targeting is not to have negative inflation/deflation. It's traditionally thought that if prices are going down the economy will stagnate as people wait to make purchases later, which results in less output and a recession. Because reaching a steady level of inflation is hard due to the nature of the markets, economy and the tools available to central banks they aim for 2% so it can wiggle around that - rather than around 0% It's interesting that more recently economists have started to disagree that a little deflation is a bad thing - for example Switzerland last decade (but Switzerland is a small very stable economy). https://www.investopedia.com/articles/markets/111715/can-deflation-be-good.asp https://www.investopedia.com/articles/markets/111715/can-def...
  • isleyaardvark 4y ago
    The argument I’ve read is that deflationary spirals are much more difficult for governments to deal with than high inflation.
    • kneebonian 4y ago
      That may have made sense before fiat currency, but I literally can't think of what could be simpler than print more money* The real problem is economics isn't a science, it is more akin to reading pig entrails or sheep's bones than anything that is scientific. * I know it's not actually printing money, it's changing the reserve rate, playing with interest rates etc.
      • tablespoon 4y ago
        >> The argument I’ve read is that deflationary spirals are much more difficult for governments to deal with than high inflation. > That may have made sense before fiat currency, but I literally can't think of what could be simpler than print more money If it were actually that simple, I'm sure governments would act differently (especially since helicopter money is in no way a novel idea). Since they don't, it's almost certainly more complex.
      • HDThoreaun 4y ago
• naveen99 4y ago
  too much inflation people waste too much energy calculating prices. Too little inflation people don’t spend enough time on calculating prices. same with employee churn, up or out policies.
• aliqot 4y ago
  As money wears out, gets lost, destroyed stolen, the total supply drops, pushing atomic value higher. It's hard to buy bread when 1 penny buys a Lexus. Also, the more money you print tomorrow, the less today's debt is worth.
  • Aachen 4y ago
    > As money wears out, gets lost, destroyed stolen, the total supply drops, pushing atomic value higher. Indeed, this situation as described would be deflationary. OP asked about targeting zero rather than negative.
    • aliqot 4y ago
      It's not just the supply of money, if the supply of products go up this also affects the purchasing power of 0-inflated money.
• kgwgk 4y ago
  Something that I don’t think it’s been mentioned is that it gives economic actors some room to adjust prices/wages down in real terms without requiring a nominal decrease.
  • _Algernon_ 4y ago
    Why is this a good thing? Especially for wages?
    • sokoloff 4y ago
      A good thing for employees? It's not. A good thing for government policy makers and employers? It is. Conclude from that what you will.
    • tareqak 4y ago
      It is a good thing for the rich/capitalist classes and for those in the immediate periphery because they can then buy more in real terms. It is a bad thing for the poorer working class because their labour gets devalued in real terms.
    • deleted 4y ago
      [deleted]
    • kgwgk 4y ago
      It adds some slack to a complex system. Rigidity won’t be necessarily better.
    • HDThoreaun 4y ago
      It stops being from being fired. Pay everyone 2% less or fire 2% of the employees.
• belltaco 4y ago
  To have a larger amount of money in circulation because of population and wealth growth.
  • Aachen 4y ago
    You can have ten trillion per capita in circulation and still not have population and wealth growth. The absolute number has no meaning, or hyperinflation would be desirable. This is not the reason.
  • datadata 4y ago
    The 2% inflation target is for price inflation (the cost of a basket of goods), not monetary inflation (the amount of money). Only monetary inflation is needed to support a growing population, so this does not explain having a target of price inflation.
• arcbyte 4y ago
  The economy naturally grows as we have more children. If the money supply is unchanged, this will cause deflation. Is 2% a good target? Probably not. Probably there should be a better connection to the population growth rate. Ultimately the goal is price stability.
  • misja111 4y ago
    > Ultimately the goal is price stability. I take it you're not living in the EU?
  • radford-neal 4y ago
    Printing more money to handle the increased need for it just due to population growth (or growth in the economy) would lead to 0% inflation, not 2%. By definition, 2% inflation is not "price stability".
• nivenkos 4y ago
  You want some inflation to allow for economic growth - it discounts prior debt, and encourages investment. But it must be tied to growth.
• misja111 4y ago
  Governments create inflation by generating (aka 'printing', but nowadays it's ofc all digital) money. The more money they print, the more income is generated to finance government spending. > Western governments all seem to target 2% annual inflation 2% is seen as a sweet spot: it still allows governments to print extra money but the inflation rate is not so high that it would lead to an inflation spiral that would run out of control.
• oli5679 4y ago
  There isn't really a strong theoretical reason. A few I've seen: (1) it seems to be difficult for central banks to implement negative nominal interest rates (cash can go under the matrress), and so a positive inflation target will allow a government a bit more scope to cut interest rates during a recession without running into a 'zero lower bound'. (2) 0% nominal pay rises seem to be a focal point in wage negotiations, and so positive inflation will allow nominal wages to fall in a recession. There are other arguments I have seem, but all seem quite weak. I don't think there is some definitive justification for 2% vs 5% vs. 0% that can be derived from first principals. Milton Friedman actually pointed out some theoretical benefits of negative inflation [1]. https://en.wikipedia.org/wiki/Friedman_rule https://en.wikipedia.org/wiki/Friedman_rule
  • HDThoreaun 4y ago
    Deflation causes real interest rates to rise. There is a lower bound for nominal rates because of risk and cost to service loans. No bank will give out loans for less than 2% since they'll end up with less than they started with, so no inflation means minimum real rate of 2% which is higher than real rates have been for decades.
• radford-neal 4y ago
  The usual justification is that wages are "sticky" - that people really don't like it when their employer decreases their wage, taking it as a comment on their worth, leading to a bad work environment, etc. So when a business finds that their product isn't selling as well at the moment, they can't easily avoid bankruptcy by just cutting their employees' wages. Similarly, when a worker is becoming less productive with age, cutting their wage to make employing them still profitable is hard to do. Solution: Just have everyone's real wage go down 2% a year, unless the employer specifically raises the wage to compensate for inflation. Supposedly, people are too dumb to realize that not raising their wage when there is inflation is the same as decreasing their wage when there is no inflation. Maybe they are that dumb - I haven't looked at the data.
  • vinyl7 4y ago
    It's a similar situation to taxes in the US. If people actually had to write a check to the government for how much taxes they owed...they'd be absolutely appalled and rioting in the streets. However because it gets taken out of the paycheck before the person see's it, it's like it was never there in the first place....and so they are none-the-wiser.
• datadata 4y ago
  A simple answer is that it is a highly effective tax. It dilutes our purchasing power and channels the upside of that dilution to those who control the money supply (or those close to those who control it [0], or own dollar denominated debt. I do not think a government would be willing to give up a tax opportunity, especially if it is not politically objectionable. [0]: https://www.investopedia.com/terms/b/biflation.asp#toc-the-cantillon-effect https://www.investopedia.com/terms/b/biflation.asp#toc-the-c...
• rich_sasha 4y ago
  One thing to point out is that we sort of have empirical evidence that this is good. High (hyper) inflation is very bad, and hard to escape. It can also happen to developed economies. Even if you discard 2022 energy-induced inflation, look at Turkey. Deflation - less examples, but Japan comes to mind. Deflation is associated with economic stagnation (others are commenting on causation, I'll leave it be). There's another argument, as to whether we need GDP growth. Japan doesn't have any, and seems like a pleasant place to live, if you're Japanese at least. I'm not convinced, but the basis is, inflation around 2% is seen as a kind of prerequisite to GDP growth, which is assumed be good and necessary.
• BirAdam 4y ago
  Many people here seem to have rather generous views for governmental motives. I don’t. Inflation is a hidden tax on the population. Instead of taking the numbers out of their bank accounts or dollars out of their hands, they can just print the money. This erodes purchasing power of individuals but also allows the government to spend more than they could from traditional tax hauls alone. The people think that they’re getting something for nothing, and politicians get re-elected. Additionally, such a scheme allows for the military actions that the USA loves to engage in. Without inflationary spending, the taxation becomes onerous enough that people wouldn’t passively accept it. The other reason is “growth”. With low interest rates and a decent amount of printing, you get two major effects. First, lenders are more willing to lend because they’re not paying high interest. The price of money is lower, and therefore money is easier to part with. The second reason is a follow on from that, monetary velocity increases. Monetary velocity generally helps your local government as sales taxes get paid. The problem with low interest and moderate inflation is that the lenders do not scrutinize things very well (because money is cheaper), so you get a lot of investments that don’t play out as a consequence. Likewise, the inflation is typically tied to assets at first (land, equities, metals) but eventually it does hit product prices and this results in moments of severe inflation. This usually occurs when the P/E ratios get bad enough and the equities markets crash. It also creates problems like 2008 given a long enough cycle. Every time these crashes occur, governments usually try to assume more power as they advertise themselves as the saviors for the problems that their own monetary policy created. Full disclosure, in a philosophical sense I consider myself a bit of an anarchist (just straight black flag, non-aligned), but in a practical sense I consider myself a mildly left but small government person. For example, I would happily trade constant war and standing armies for a public health care option, or even trade the war on drugs for a national rehab service. Due to the realities of finance, however, I do not believe that everything can be had, and giving the most corrupt people in a society (the politicians) unlimited power is Avery bad idea imho.
• spiffytech 4y ago
  The justification given in my macroeconomics class is the government wants money to circulate through the economy (lending and investing, leading to growth) rather than sitting stagnant in someone's savings account. So they need to make money worth less over time if you just hold onto it.
• majinuub 4y ago
  I'm seeing some rather naïve explanations here like it incentivizes spending and encourages economic growth. There's absolutely no need to artificially incentivize spending. Humans naturally require and desire goods and services. Allowing people to store their economic energy without risk of devaluation would actually help bring people out of poverty. Inflating the money supply incentivizes high time preference behavior like excessive spending and borrowing. This leads to boom and bust cycles, and an increasingly growing wealth gap. All inflation does in terms of growth is increase the nominal value of things in the economy. It does not encourage the growth of real wealth. The increase of wealth we experienced is due to the markets functioning despite an inflationary monetary policy and excessive regulation. The real reason why the government is in favor of a "slightly inflationary" monetary policy is because they're incentivized to do so. They can spend it before price adjustments due to the new inflows of cash can happen in the wider economy. Its essentially a hidden tax. Governments, central banks, and their political/economic allies can benefit from this effect at the expense of everyone else in the economy. https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_theory https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_the...
• mrich 4y ago
  Here's a great piece explaining how governments benefit from inflation (and an argument why we will see continually high inflation in the coming decade) https://archive.ph/Y5tvm https://archive.ph/Y5tvm
• teekert 4y ago
  All money is created as debt. With inflation at least we decrease some of that burden over time.
• bradgranath 4y ago
  “Growth”. It’s how Consumer Capitalism is thought to work.