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Inflation, as a rate of change, is dynamic. The Fed aims for it to be about 2%, but 7% is much too high so they are ramping up rates to put a stop to that. Pric

Inflation, as a rate of change, is dynamic. The Fed aims for it to be about 2%, but 7% is much too high so they are ramping up rates to put a stop to that. Prices rarely go back down (consistent falling prices would be deflation, which tends to be economically disastrous as it rewards doing nothing) but the rate can fall which is what he's referring to.

MichaelBurge 4y ago
> deflation, which tends to be economically disastrous as it rewards doing nothing Why's deflation different from e.g. sitting on treasury bonds? The money was originally printed by the government, the bonds are issued by the government, so sitting on bonds does nothing except pays you for taking money out of the economy temporarily, same as deflation. If e.g. nobody would ever buy a computer because it'd be 2% cheaper if you wait a year, you could just as well argue that if bonds yield 2% above inflation you could park your money in them and wait a year and have 2% more money so nobody would ever buy anything.
- ivalm 4y ago
  No, when you hold the bond the government uses that money to do things. With deflation people could hold cash which is truly not using it for anything.
- its_ethan 4y ago
  Isn't a treasury bond still "doing something" though? Since they are effectively loans to the government it is in theory being used to fund gov services ("doing something") so that they don't print more new money, versus sitting in a bank account where it's really doing nothing, but still increasing it's purchasing power?
  - MichaelBurge 4y ago
    It's 20x more dilutive to print $100 than to sell $105 for $100, sure. I wouldn't describe that as "funding government services" in the common sense, though you could argue that with a fixed dilution target it does counterfactually cause more spending and thus services. And similarly, somebody stuffing money under their mattress would be removing 20x the amount from circulation as they gain, with 5% deflation. So while one can easily imagine the 5% is financially equivalent to interest, the effect on the circulation isn't. "Remove money from circulation" seems different than simple funding of services, though. It's not even obvious there should be any difference there, if the money were infinitely subdivisible. I don't think using personal finance equivalents like funding goods and services is sufficient to explain the effect. An economist has probably written something in excruciating detail, making sure there's no shell games being played with the terms. So it's probably on me for not reading that instead of commenting here.
- cwkoss 4y ago
  I am similarly skeptical of the economist dogma that "deflation is economically disastrous". Feels like a spherical cows argument deeply rooted in theory, but not necessarily true in practice. I think it's bad for greedy corporations who would see their their profit margin shrink, but periods of temporary deflation every once and a while feels like it could be healthy for society.
nordsieck 4y ago
> consistent falling prices would be deflation, which tends to be economically disastrous as it rewards doing nothing I hear this all the time, and I see little evidence that it's as strong an effect as everyone says. Cars, computers, and phones are all deflationary (at last in normal times). And people seem to buy them just fine.
- its_ethan 4y ago
  I think you might be confusing depreciation with deflation? A $25,000 car becomes a $20,000 car the moment you drive it off the lot due to depreciation. But the purchasing power of $25,000 cash becomes $26,500 after a year of 5% deflation, which means you _gained_ purchasing power by doing nothing (aka not spending money) as the result of deflation.
  - zeckalpha 4y ago
    But if everyone sits on their cash, things slow to a halt.
  - nordsieck 4y ago
    I get that cars, phones and computers are verticals, whereas deflation is a general decrease in price levels. But no, I don't mean depreciation. A 2019 vehicle that sits on a dealer lot slowly loses value over time. That has nothing to do with depreciation and everything to do with newer, better vehicles coming out over time. The same thing applies to computers and phones.
- throw0101b 4y ago
  And how many people have mortgages or other sources of debt? > Deflation is terrible for debtors. Prices and wages fall, but the value of your debt does not. So you’re forced to cut spending. This applies to consumers and to governments, and it is one of the biggest issues in Europe right now. As Yale University economist Irving Fisher wrote decades ago, debtors are likely to cut spending more than creditors increase it, and this can turn into a really bad downward spiral. (The experience of Japan, though, proves that an economy can have a prolonged period of moderate deflation without falling into that downward spiral.) * https://www.brookings.edu/opinions/5-reasons-to-worry-about-deflation/ https://www.brookings.edu/opinions/5-reasons-to-worry-about-... The Great Depression is an extreme example of high deflation: > Interest rates dropped to low levels by mid-1930, but expected deflation and the continuing reluctance of people to borrow meant that consumer spending and investment remained low.[13] By May 1930, automobile sales declined to below the levels of 1928. Prices, in general, began to decline, although wages held steady in 1930. Then a deflationary spiral started in 1931. Farmers faced a worse outlook; declining crop prices and a Great Plains drought crippled their economic outlook. At its peak, the Great Depression saw nearly 10% of all Great Plains farms change hands despite federal assistance.[14] * https://en.wikipedia.org/wiki/Great_Depression https://en.wikipedia.org/wiki/Great_Depression * https://en.wikipedia.org/wiki/Great_Depression#Debt_deflation https://en.wikipedia.org/wiki/Great_Depression#Debt_deflatio... There are some arguments for good versus bad deflation: * https://www.nber.org/digest/apr04/good-versus-bad-deflation-lessons-gold-standard-era https://www.nber.org/digest/apr04/good-versus-bad-deflation-...
WalterBright 4y ago
> which tends to be economically disastrous This is the conventional wisdom, but it's rooted in propaganda put out by the government. Deflation isn't any worse (or better) for the economy than inflation. It's the yin vs the yang, so to speak. According to the government, inflation comes from profiteers, speculators, greedy capitalists, Putin, and any number of boogeymen. In reality, it comes from the government printing and spending excess cash. The government then tries to sell the idea that 2% inflation is good for you. Now, government does need to raise money to fund its operations in one way or another. Inflation is arguably a reasonable (and fair) way to do it. But let's be honest about it.
- coderenegade 4y ago
  Deflation is bad if you have debt. With inflation, the value of your debt is chipped away which makes taking on debt more attractive. In a deflationary environment, your debt burden grows over time all else being equal.
  - WalterBright 4y ago
    > Deflation is bad if you have debt And inflation is equally bad if you have cash or any assets denoted in cash. It's also bad because taxes don't necessarily index with inflation. For example, much of capital gains are illusory because of inflation, yet you get taxed on that inflated value, not the real value.
    - coderenegade 4y ago
      All true. But assets typically aren't paid for with cash, so if you want to keep that train rolling, inflation is probably necessary.
- zeckalpha 4y ago
  It can also come from consumers reprioritizing. Choosing to spend more on housing and less on cable TV, as one example.

MichaelBurge 4y ago

> deflation, which tends to be economically disastrous as it rewards doing nothing Why's deflation different from e.g. sitting on treasury bonds? The money was originally printed by the government, the bonds are issued by the government, so sitting on bonds does nothing except pays you for taking money out of the economy temporarily, same as deflation. If e.g. nobody would ever buy a computer because it'd be 2% cheaper if you wait a year, you could just as well argue that if bonds yield 2% above inflation you could park your money in them and wait a year and have 2% more money so nobody would ever buy anything.

ivalm 4y ago
No, when you hold the bond the government uses that money to do things. With deflation people could hold cash which is truly not using it for anything.
its_ethan 4y ago
Isn't a treasury bond still "doing something" though? Since they are effectively loans to the government it is in theory being used to fund gov services ("doing something") so that they don't print more new money, versus sitting in a bank account where it's really doing nothing, but still increasing it's purchasing power?
- MichaelBurge 4y ago
  It's 20x more dilutive to print $100 than to sell $105 for $100, sure. I wouldn't describe that as "funding government services" in the common sense, though you could argue that with a fixed dilution target it does counterfactually cause more spending and thus services. And similarly, somebody stuffing money under their mattress would be removing 20x the amount from circulation as they gain, with 5% deflation. So while one can easily imagine the 5% is financially equivalent to interest, the effect on the circulation isn't. "Remove money from circulation" seems different than simple funding of services, though. It's not even obvious there should be any difference there, if the money were infinitely subdivisible. I don't think using personal finance equivalents like funding goods and services is sufficient to explain the effect. An economist has probably written something in excruciating detail, making sure there's no shell games being played with the terms. So it's probably on me for not reading that instead of commenting here.
cwkoss 4y ago
I am similarly skeptical of the economist dogma that "deflation is economically disastrous". Feels like a spherical cows argument deeply rooted in theory, but not necessarily true in practice. I think it's bad for greedy corporations who would see their their profit margin shrink, but periods of temporary deflation every once and a while feels like it could be healthy for society.

nordsieck 4y ago

> consistent falling prices would be deflation, which tends to be economically disastrous as it rewards doing nothing I hear this all the time, and I see little evidence that it's as strong an effect as everyone says. Cars, computers, and phones are all deflationary (at last in normal times). And people seem to buy them just fine.

its_ethan 4y ago
I think you might be confusing depreciation with deflation? A $25,000 car becomes a $20,000 car the moment you drive it off the lot due to depreciation. But the purchasing power of $25,000 cash becomes $26,500 after a year of 5% deflation, which means you _gained_ purchasing power by doing nothing (aka not spending money) as the result of deflation.
- zeckalpha 4y ago
  But if everyone sits on their cash, things slow to a halt.
- nordsieck 4y ago
  I get that cars, phones and computers are verticals, whereas deflation is a general decrease in price levels. But no, I don't mean depreciation. A 2019 vehicle that sits on a dealer lot slowly loses value over time. That has nothing to do with depreciation and everything to do with newer, better vehicles coming out over time. The same thing applies to computers and phones.
throw0101b 4y ago
And how many people have mortgages or other sources of debt? > Deflation is terrible for debtors. Prices and wages fall, but the value of your debt does not. So you’re forced to cut spending. This applies to consumers and to governments, and it is one of the biggest issues in Europe right now. As Yale University economist Irving Fisher wrote decades ago, debtors are likely to cut spending more than creditors increase it, and this can turn into a really bad downward spiral. (The experience of Japan, though, proves that an economy can have a prolonged period of moderate deflation without falling into that downward spiral.) * https://www.brookings.edu/opinions/5-reasons-to-worry-about-deflation/ https://www.brookings.edu/opinions/5-reasons-to-worry-about-... The Great Depression is an extreme example of high deflation: > Interest rates dropped to low levels by mid-1930, but expected deflation and the continuing reluctance of people to borrow meant that consumer spending and investment remained low.[13] By May 1930, automobile sales declined to below the levels of 1928. Prices, in general, began to decline, although wages held steady in 1930. Then a deflationary spiral started in 1931. Farmers faced a worse outlook; declining crop prices and a Great Plains drought crippled their economic outlook. At its peak, the Great Depression saw nearly 10% of all Great Plains farms change hands despite federal assistance.[14] * https://en.wikipedia.org/wiki/Great_Depression https://en.wikipedia.org/wiki/Great_Depression * https://en.wikipedia.org/wiki/Great_Depression#Debt_deflation https://en.wikipedia.org/wiki/Great_Depression#Debt_deflatio... There are some arguments for good versus bad deflation: * https://www.nber.org/digest/apr04/good-versus-bad-deflation-lessons-gold-standard-era https://www.nber.org/digest/apr04/good-versus-bad-deflation-...

WalterBright 4y ago

> which tends to be economically disastrous This is the conventional wisdom, but it's rooted in propaganda put out by the government. Deflation isn't any worse (or better) for the economy than inflation. It's the yin vs the yang, so to speak. According to the government, inflation comes from profiteers, speculators, greedy capitalists, Putin, and any number of boogeymen. In reality, it comes from the government printing and spending excess cash. The government then tries to sell the idea that 2% inflation is good for you. Now, government does need to raise money to fund its operations in one way or another. Inflation is arguably a reasonable (and fair) way to do it. But let's be honest about it.

coderenegade 4y ago
Deflation is bad if you have debt. With inflation, the value of your debt is chipped away which makes taking on debt more attractive. In a deflationary environment, your debt burden grows over time all else being equal.
- WalterBright 4y ago
  > Deflation is bad if you have debt And inflation is equally bad if you have cash or any assets denoted in cash. It's also bad because taxes don't necessarily index with inflation. For example, much of capital gains are illusory because of inflation, yet you get taxed on that inflated value, not the real value.
  - coderenegade 4y ago
    All true. But assets typically aren't paid for with cash, so if you want to keep that train rolling, inflation is probably necessary.
zeckalpha 4y ago
It can also come from consumers reprioritizing. Choosing to spend more on housing and less on cable TV, as one example.