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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 a

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
    https://en.wikipedia.org/wiki/Liquidity_trap https://en.wikipedia.org/wiki/Liquidity_trap Macro, and especially inflation is largely about expectations. Central banks work very hard to maintain trust. Empirical evidence has shown that deflationary spirals can be difficult to escape.
wewxjfq 4y ago
I never understood the argument that people would delay their purchases. Most purchases can't wait, like you don't wait with your groceries when your fridge is empty. And even if the purchases can wait, would you wait 5 years for a 10% discount on a sweater? Lastly, even without deflation, many things do get cheaper over time and it doesn't stop anyone from buying them right away.
- sokoloff 4y ago
  I'm waiting on buying a used car right now. Our older daily driver is a 2005 with ~230K miles on it and starting to show significant rust from New England's salted roads. In normal times, I'd have replaced that car last year. In current times, with the used car market so screwed up, I'm waiting to delay this ~$10K purchase specifically because I expect deflation in the used car market. I don't think that my situation is particularly uncommon.
  - kleer001 4y ago
    So then the essential question is what is the ratio of delayable vs non-delayable purchases.
    - sokoloff 4y ago
      I'd guess that a pretty significant portion (at least 25%?) of durable goods purchases are delayable (which is probably what drives a lot of the volatility in durable goods purchasing). If my washing machine breaks, I don't have to buy another one immediately. I could repair it; I could use a laundromat; I could use a neighbor's; I could wash by hand.
- fomine3 4y ago
  As a younger Japanese (virtually never had experienced inflation but always deflation, until 2022), I finally understand how inflation works for buying intention. I bought items what I wanted to buy, before inflation and weak Yen rate applied.
basch 4y ago
If you look at money as a tool, and that tool only has value when it is used, and its primary purpose is to be half a liquidity pair in barter situations, to facilitate trade, having that same tool also be a store of wealth can cause a conflict of interest. As much as we try and hide it, using this tool has a cost each time, whether its a transaction fee, the management/storage/processing of cash, the physical money production itself. The convenience of everything being tradable with anything else, with only one conversion in-between is valuable. On one hand you want the velocity of money to stay up, so people use the tool frequently, and WANT to use the tool, because that's where it derives its usefulness from, from being used. On the other hand, you don't want to disincentivize savings, but may want to disincentivize hoarding. What's the difference? I've thought for a while now, that an optimal solution may be multiple currencies. In Singapore they have a savings account that acts like an HSA and you can pay rent from. Other nations have sovereign wealth funds propped up by the extraction of natural resources. Maybe it is time to have a forced checking account and a savings account and a living account trichotomy, denominated in three different currencies. Maybe the checking account is pure USD, the living account is untaxed TIPS, and the savings account is a conservative state managed investment portfolio. They can then control the exchange rate between these accounts if people need to move money from one to the other. Force point of sale systems to correctly tag what is eligible to be spent from the living account, and deduct part from each. There is room for a lot of automation, especially when you add a one month line of credit.
caeril 4y ago
> people wait to make purchases later, which results in less output This sounds like an absolute nightmare scenario. Christ, can you imagine what would happen if we actually addressed carbon emissions with monetary policy instead of just begging people to "reduce, reuse, recycle" in PSAs with teary-eyed Native Americans whilst running a monetary policy explicitly designed to redline consumption?

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
  https://en.wikipedia.org/wiki/Liquidity_trap https://en.wikipedia.org/wiki/Liquidity_trap Macro, and especially inflation is largely about expectations. Central banks work very hard to maintain trust. Empirical evidence has shown that deflationary spirals can be difficult to escape.

wewxjfq 4y ago

I never understood the argument that people would delay their purchases. Most purchases can't wait, like you don't wait with your groceries when your fridge is empty. And even if the purchases can wait, would you wait 5 years for a 10% discount on a sweater? Lastly, even without deflation, many things do get cheaper over time and it doesn't stop anyone from buying them right away.

sokoloff 4y ago
I'm waiting on buying a used car right now. Our older daily driver is a 2005 with ~230K miles on it and starting to show significant rust from New England's salted roads. In normal times, I'd have replaced that car last year. In current times, with the used car market so screwed up, I'm waiting to delay this ~$10K purchase specifically because I expect deflation in the used car market. I don't think that my situation is particularly uncommon.
- kleer001 4y ago
  So then the essential question is what is the ratio of delayable vs non-delayable purchases.
  - sokoloff 4y ago
    I'd guess that a pretty significant portion (at least 25%?) of durable goods purchases are delayable (which is probably what drives a lot of the volatility in durable goods purchasing). If my washing machine breaks, I don't have to buy another one immediately. I could repair it; I could use a laundromat; I could use a neighbor's; I could wash by hand.
fomine3 4y ago
As a younger Japanese (virtually never had experienced inflation but always deflation, until 2022), I finally understand how inflation works for buying intention. I bought items what I wanted to buy, before inflation and weak Yen rate applied.

basch 4y ago

If you look at money as a tool, and that tool only has value when it is used, and its primary purpose is to be half a liquidity pair in barter situations, to facilitate trade, having that same tool also be a store of wealth can cause a conflict of interest. As much as we try and hide it, using this tool has a cost each time, whether its a transaction fee, the management/storage/processing of cash, the physical money production itself. The convenience of everything being tradable with anything else, with only one conversion in-between is valuable. On one hand you want the velocity of money to stay up, so people use the tool frequently, and WANT to use the tool, because that's where it derives its usefulness from, from being used. On the other hand, you don't want to disincentivize savings, but may want to disincentivize hoarding. What's the difference? I've thought for a while now, that an optimal solution may be multiple currencies. In Singapore they have a savings account that acts like an HSA and you can pay rent from. Other nations have sovereign wealth funds propped up by the extraction of natural resources. Maybe it is time to have a forced checking account and a savings account and a living account trichotomy, denominated in three different currencies. Maybe the checking account is pure USD, the living account is untaxed TIPS, and the savings account is a conservative state managed investment portfolio. They can then control the exchange rate between these accounts if people need to move money from one to the other. Force point of sale systems to correctly tag what is eligible to be spent from the living account, and deduct part from each. There is room for a lot of automation, especially when you add a one month line of credit.

caeril 4y ago

> people wait to make purchases later, which results in less output This sounds like an absolute nightmare scenario. Christ, can you imagine what would happen if we actually addressed carbon emissions with monetary policy instead of just begging people to "reduce, reuse, recycle" in PSAs with teary-eyed Native Americans whilst running a monetary policy explicitly designed to redline consumption?