44 ms·

Why the 2% inflation target? (2023)

259 points by luu 3y ago

seunosewa 3y ago
If everyone targets the same inflation rate, then currencies will tend to be stable with respect to each other.
- aspenmayer 3y ago
  I don’t think that logically follows unless we can assume or demonstrate that the factors influencing the inflation rate and other factors such as purchasing power parity of all who are targeting the same inflation rate across the board are themselves stable.
- esafak 3y ago
  What about differences in productivity?
georgeplusplus 3y ago
>> This loss of trust is a major problem. For example, if you no longer believe the Fed inflation target, then you will base your actions on what you think the inflation rate will be, which can lead to cycles of inflation. If you believe inflation will be high soon, you will buy a lot of stuff now when prices are lower. However, other people will realize this too, and then there will be a race to buy goods and services, which will lead to less supply and higher prices. This creates more demand, which leads to higher prices, creating the inflationary doom loop. Showing that losing the Fed’s credibility may not be worth the benefit of a better target. The FED is clearly in a damned if they do damned if they dont scenario. Blaming the target feels like a red herring. In the scenario they pitched would create demand and supply shocks in the short term but recession must and would is surely to follow because of the inefficiencies in the market. The real question is Who is in charge here? If the Fed was, they would and could get in front of inflation and raise rates to where inflation would not come back however, at the risk of upsetting markets, it seems they've been politicized into inaction.
- bobthepanda 3y ago
  the inflation rate setting is trying to predict human behavior and so it is always a damned if you do damned if you don't. that being said, the psychological power of central banks is very real. Brazil's real was introduced in 1994, after an intermediate period in which the prices had to be dual listed in the old and future currency, but the future currency had not been printed yet. They just never inflated the future currency, and people seemed to believe that. https://en.wikipedia.org/wiki/Plano_Real https://en.wikipedia.org/wiki/Plano_Real
- ajross 3y ago
  You understand that the paragraph you quoted was a didactic illustration[1], not a description of reality, right? In fact inflation is sitting right at 3% right now, not at the 2% target but hardly very far off. > The real question is Who is in charge here? If the Fed was, they would and could get in front of inflation and raise rates They... did? [1] Specifically of the situation where a change of target rate (which, again, is not happening) would be interpreted by the market as a loss of control.
  - Tyrek 3y ago
    Trailing 12 Mths Inflation: 3.2% (Headline) 3.8% (Core). In both cases, it's at least 50% above target. While a smaller gap than in recent years, it's still fairly sizable, all things considered.
    - ajross 3y ago
      Oh, come on. CPI inflation since 1960: https://fred.stlouisfed.org/graph/?g=rocU https://fred.stlouisfed.org/graph/?g=rocU Nothing about the current conditions are particularly abnormal. CPI was at 2.5-3 through the entirety of the dot com boom, higher than that still in the 80's, and of course between 1968 and 1982 it was almost entirely above 5%. I really don't think you're considering all the things, all things considered.
  - georgeplusplus 3y ago
    As someone else pointed out at 3% , it's at least 50% above the target I don't see how someone can consider that small. Cherry picking historical data as a way to hand wave that fact is disengenious at best. Even if for some reason you think 3% is not high, inflation is clearly starting to reverse which the fed has admitted its not gonna get better in the short term. Contrast this to Volker who made the hard decision to raise rates well above inflation not once but twice.
082349872349872 3y ago
Many things in life are like this; for instance, (from back in the days when we worked in offices) it's much more important that a group who wants to go out to lunch together all agree on the same place than that place be the theoretically optimum lunch destination.
sob727 3y ago
Yellen supposedly told Greenspan & co in the mid 90s that 2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary). It was the only way to have some flexibility there. If you admit that this is a desirable thing, this is defeated by wage negotiations (or say, benefits) than tend to be indexed to inflation. Another interesting thing that happened under Greenspan is how inflation is computed (hedonics, replacements, etc... conceptually, think "if I can't buy a porterhouse steak anymore, I'll get the lesser hanger", meaning inflation is underreported). I'm not suggesting this was intentional or coordinated, but this had the huge benefit for federal and local governments that it lowered the benefits they had to pay out that were linked to inflation. Issue is it hurts the poor more.
- jmyeet 3y ago
  That's not new or controversial (in economics circles). This really took off in the Reagan years where real wages stagnated [1]. It was from the 1980s where you started to hear statements like "wage incresaes should be tied to productivity increases" [2]. If you parse that statement, it means no cost-of-living increases ie a decrease in real wages. All of this is wealth transfer to the very rich and entirely intentional. [1]: https://www.epi.org/publication/charting-wage-stagnation/ https://www.epi.org/publication/charting-wage-stagnation/ [2]: https://www.epi.org/productivity-pay-gap/ https://www.epi.org/productivity-pay-gap/
  - adam_arthur 3y ago
    "Real" wages are driven by the "real" supply and demand of labor, not by nominal numbers. If the number of qualified workers increases significantly, you will end up with lower real wages. There were three major factors increasing labor supply around this time in the US. Immigration from Mexico, women continuing to enter the labor force, and reduction in demand/increase in (global) supply for lower skill labor via globalization of manufacturing Not casting any judgment on whether these things are good, but they are far more likely to be the primary factor than inflation.
yinser 3y ago
Incredible on such a macroscopic part of US monetary policy is a “Cloud Atlas” level special sensitivity to an off handed comment on the other side of the planet.
willio58 3y ago
> Once the bill became law, then an inflation target had to be chosen. In an off-hand remark in an interview, the former head central banker said the inflation target should be zero to 1 percent. However, Don Brash, the head of the central bank, claimed “It was almost a chance remark,” and “The figure was plucked out of the air to influence the public’s expectations ”(Irwin, 2014). They used this number as a starting point and pushed it up to 2% to give themselves a bit more room This feels like so many decisions we make day-to-day in STEM. We all love to feel like we have quantitative reasoning behind decisions but due to the organic nature of the work at some point, we just have to land on _something_ and go from there. Like qualitatively-influenced quantitative data.
- rvba 3y ago
  They could have chosen 0 or -2% but they like to reap that 2% free money premium..
  - jdsully 3y ago
    Defalation has more risk of feedback spirals, it heavily incentives you to wait to invest as tomorrow it will be cheaper than today. This is why small positive inflation rates are preferred. You could target 0% but in practice you will oscillate around it and have potentially long periods of deflation.
    - hgomersall 3y ago
      Well clearly it doesn't, because people still need to live. We have many years of evidence that people still buy shiny tech gadgets despite knowing that in a year's time they will be much cheaper.
      - borski 3y ago
        That’s not true. The issue isn’t that the same device will be cheaper in a year, but that the latest device will be the same or close to it. As a result, people are more likely to hang on to their devices (for example) if they assume that next year’s latest model will be cheaper than this year’s. A great example is the Apple Vision Pro. How many people didn’t buy it simply because the price is too high? Betcha they would if it were cheaper, which they know it will be eventually. The same is not true of phones, which don’t generally get cheaper for the flagship products.
deleted 3y ago
[deleted]
smallmancontrov 3y ago
So that it's clear when we switch from "Growth in a Time of Debt" to "The Liquidation of Government Debt"?
oldpersonintx 3y ago
[dead]
codetrotter 3y ago
> Although the idea of a more valuable dollar may sound great, many economists think it is worse than high inflation (Engeman, 2019). The problem is that the value of money would increase when people do nothing with it. This would be problematic since people would not invest or spend money to get the country out of a recession when they could just get a return from doing nothing. Yes, how terrible that would be. In reality people would still need to buy things that are actually important. Housing. Food. Heating. All kinds of stuff. And on top of that we are still gonna spend on the non-essentials as well. It’s not like I’m going to completely stop watching movies or playing games or listening to music just because I know my dollar today would be worth more tomorrow. The people that would be holding back are the ones that have hoarded all the resources in the first place. And that’s the real problem. Inflation is a bandaid to avoid things getting as bad as they would. But the reason is because of people taking too much and societies that don’t take care of their people. Incidentally the ultra rich also have a lot of clever ways of avoiding being impacted by inflation in the way that it impacts most normal people.
- vkou 3y ago
  > Yes, how terrible that would be. It would be pretty terrible if I became richer not by generating economic activity, but by sitting around with my money in a mattress. You are correct that it's a band-aid fix... But it's the best one we have.
  - codetrotter 3y ago
    What I’m telling you is that normal people would not be doing that. Not in the way that this kind of idea makes it sound like anyway.
    - vkou 3y ago
      Monetary policy isn't intended to steer the behavior of normal people[1] who have ~net-zero cash for most of their lives, it's intended to steer the behavior of investors who don't need to spend all their money on food and shelter and medicine, and who will happily choose to sit on their cash, instead of investing it, if that provides them with better returns. Everyone bitches when the price of milk goes up 8%, but nobody seems to realize that it went up because wages did. On average, if you're a worker, and you aren't saving (or trying to save) a pile of cash, inflation is net-zero for you. [1] Stimulus checks did steer the behavior of normal people, but they were fiscal, not monetary policy. They had knock-on monetary policy effects, but the juice was worth the squeeze - thanks to them and the PPP, the economy didn't entirely collapse.
mindslight 3y ago
The combination of monetary creation by the central bank to bring price inflation up to 2% combined with kayfabe austerity by the legislative/executive government is responsible for the utter hollowing out of our economy. The combo has given the centralized financial industry basically unlimited power to make highly leveraged investments for predictable things that conform to their pet models, while vacuuming real wealth away from the edges in the form of loan payments. A fundamental assumption of real working capitalism is that capital is distributed, and this combo has all but destroyed it. Even if one insists on the orthodoxy that some price inflation is necessary, the new money to create such price inflation represents a distributed taking from our society (ie a tax), and thus should be spent for deliberate purposes by the government - ideally on infrastructure and other investments aimed at creating more wealth in the future - rather than being given to the financial industry as low interest loans to bid up the asset bubble out of the reach of main street. I believe this is the core of Modern Monetary Theory, and while poised to encourage a bit more spending than I would like from an Austrian perspective, it is at least honest compared to the past several decades of the Keynesian+Reaganomics bait, switch, and squeeze.
visitor4712 3y ago
never understood this mantra of 2 %, mindlessly pound out by the msm. in twenty years your savings have lost nearly half of its purchasing power.
- kinghajj 3y ago
  0.98^30 = 0.5459, so more like 30 years. But, that's why you have to put the bulk of your savings in equities and bonds.
- smallmancontrov 3y ago
  ...if held in cash. Were you holding your savings in cash?
- tombert 3y ago
  You probably shouldn't be storing all your savings in cash. I think it's generally considered better practice to put at least some percentage into something market-based, like an index fund.
- deleted 3y ago
  [deleted]
zaroth 3y ago
I was taught two reasons in undergrad Econ; 1) Deflation is seen as much worse, because inflation encourages spending over saving, which drives growth. Targeting, e.g. 0.5% risks missing and going negative. 2) Inflation reduces the true value (cost) of debt. And with $34.5 trillion of it, that’s a big incentive to keep it around. IMO 2% is clearly too high of a target, but it’s the hamster wheel that makes everyone keep running so not surprising that government spins it too fast.
- bluescrn 3y ago
  > 2) Inflation reduces the true value (cost) of debt. And with $34.5 trillion of it, that’s a big incentive to keep it around. This is the point that a lot of people miss. Inflation is good for governments as well as businesses who can exploit high inflation to raise prices and shrinkflate products disproportionatly while lowing their wage bills in real terms. But it inflicts the most suffering on not just the working class, but the sensible/frugal ones who minimize their debt and accumulate some amount of savings rather, but who don't have enough wealth or knowledge to get serious about investing it.
  - ClumsyPilot 3y ago
    > sensible/frugal ones who minimize their debt and accumulate some amount of savings What if this is wrong and being frugal is not sensible?
    - medvezhenok 3y ago
      Obviously one can post-hoc rationalize "sensible" as whatever worked best given the circumstances that occurred. Absent government intervention in the functioning of markets, being frugal would have paid off way more than it has.
      - ClumsyPilot 3y ago
        > Absent government intervention in the functioning of markets, being frugal would have paid off way more than it has Why do you believe that to be the case? I think you are going with a gut feeling that the world should reward frugality, but if you actually examine that belief, there is no solid science behind it - but he world does not appreciate moral virtues, it does not reward kindness, and other things either.
fuoqi 3y ago
Higher inflation levels in the upcoming decades are effectively inevitable with the parabolic public debt levels and zero political appetite for reducing budget deficits. Things like quickly approaching insolvency of the Social Security program only make the situation worse. As soon as the public debt market (including repo) will see any issues the Fed will quickly ride to the rescue, inflation be damned. We've clearly seen it right before the pandemic and with UK gilts. It does not matter what the inflation target is. It's likely we will see double digit inflation spikes with "hard work" of bringing it back to target levels (be it 2% or 4%), so on average you will get anything but the target level. And before someone mentions Japan, read this: https://www.lynalden.com/economic-japanification https://www.lynalden.com/economic-japanification
- wolverine876 3y ago
  Low-tax / small-government advocates (by which they mean 'lower my taxes', and 'spend money on me only') have been arguing forever that deficits will bring economic doom. They just want to cut spending and government.
fwlr 3y ago
There are significant stabilization benefits to having a public (and binding) inflation target - all of the large economic entities / sectors like banking, government spending, corporations, etc., become more predictable to each other. For this reason, whatever number is chosen will tend to “stick”, regardless of how the actual number is chosen. Or alternatively: it is optimal to have an inflation target (compared to not having one). Once you are in the “targeted” space, there is a further optimization of deciding what the inflation target should specifically be, but the gains and losses here are small compared to the existence or lack thereof of any target at all.
- deleted 3y ago
  [deleted]
- foobarian 3y ago
  My intuition for this is to view the economy as a large number of interconnected gears driven by an input shaft. When the input is neutral (no inflation), the gears are slack and kind of spin back and forth with occasional whiplash. But with some token input spin (small inflation), the slack vanishes and all gears spin smoothly.
notShabu 3y ago
it's an "everything is awesome" schelling point at this point
npoc 3y ago
The more money the banks print, the richer they get, with the side-effect that prices rise (they make the monetary units less scarce and worth less). 2-3% just happens to be the most they can get away with in the long term without the population getting concerned. What the general population don't realise is that the value of goods and services are going down over time, due to efficiency increases, at a rate of around 5% / year. The banks can print enough money to soak that up unnoticed, and then an extra 2% just because they can. It's essentially a stealth transfer of wealth from the people to the banks and it's been going on for decades/centuries (before fiat, it used to take the form of coin shaving, impure metals etc). You really see the effect when you look at house prices. They are roughly the same price in gold as they were in the 1970s. Rather than housing going up in value since then, it has been the monetary units going down in value, due to the supply roughly doubling every decade (look up M2 USD). You can understand the incentive to print money when you realise that every year the banks are collecting interest on every dollar/euro/pound etc. in existence. And the banks don't really own any of them - they printed them out of thin air as loans and have to destroy them when the loans are repaid, but total debt only increases every year...
- silent_cal 3y ago
  Good answer. Inflation is just a euphemism for stealing from working people.
  - Wytwwww 3y ago
    Still preferable to deflation. At least the working class has something that can be stolen..
    - npoc 3y ago
      In a healthy economy, deflation (i.e. falling prices) is a good thing. Things get cheaper over time - it's the utopia we should be living in now. We've made massive increases in production efficiency across the board over the years, but the banks and government have creamed off all those efficiency gains for themselves, by printing money, creating the illusion that everything is instead going up in value, and have made themselves mind-blowingly powerful. As the world economies are so broken, if the money supply went down instead of up (i.e. deflationary supply), the real value of the already enormous debts would increase even if the nominal value didn't, causing the economies to collapse suddenly. By keeping the money supply increasing, the economies are collapsing slowly instead, ultimately ending in hyperinflation.
thehumanmeat 3y ago
There's no point in defining a "target" when the Fed has no control over the vast portion of dollar creation/destruction: https://en.wikipedia.org/wiki/Eurodollar https://en.wikipedia.org/wiki/Eurodollar
mebazaa 3y ago
Paul Krugman covers that question here (gift link): https://www.nytimes.com/2023/06/09/opinion/inflation-target-2-percent.html?unlocked_article_code=1.ek0.979y.zLAO6U1LWn88&smid=url-share https://www.nytimes.com/2023/06/09/opinion/inflation-target-... and argues that the theoretical assumptions that led to the 2 percent rate didn’t turn out to be true: > On one side were economists who believed that the essential role of monetary policy — maybe even its moral duty — was to deliver stable prices. Money, after all, is a yardstick we use to measure economic activity, and they argued that this yardstick shouldn’t be constantly changing its length. > On the other side were economists who worried that too low an inflation rate could inhibit our ability to fight recessions. The Federal Reserve and its counterparts in other countries try to manage the economy mainly through their control of short-term interest rates; but these rates can’t go much below zero, because negative rates would just lead people to accumulate stacks of $100 bills. A higher rate of inflation tends, other things being equal, to raise interest rates and makes it less likely that the Fed, faced with a recession, will hit the “zero lower bound” and be unable to cut rates further. The zero lower bound turned out to be a real problem, given the amount of years we spent at a zero percent interest rate.
- dools 3y ago
  The real problem is using monetary policy as a tool at all. We should have ZIRP forever and use fiscal policy to target price stability and full employment.
  - immibis 3y ago
    ZIRP is zero interest rate policy - were you perhaps thinking of zero inflation rate instead? Zero interest rate tends to create lots of inflation because borrowing money (i.e. banks other than the Fed creating money) is nearly free.
    - cjbgkagh 3y ago
      I’m pretty sure they mean zero interest ZIRP with regard to MMT. But people forget the second part of MMT which is confiscatory in effect even if not by name, it’s still your money but you are no longer allowed to spend it until inflation comes down, by which point your money is obviously worth less than it was and that value is in effect confiscated.
jokethrowaway 3y ago
We need inflation because it's governments' only way to keep spending like crazy, at the expense of cash holders, who are often poor, and benefiting assets holders.
- nemo44x 3y ago
  It's good for regular people too. Debt is a great thing to have in an inflationary economy, especially long term debt backed by an asset, like a home. In essence, we inflate debt away over time. In a deflationary economy debt is crippling and because we are a debt based economy we have a deadly fear of deflation and will do anything to prevent it. Hence why they desperately inflated the economy during Covid. The alternative (do nothing) would have resulted in massive deflationary pressure and would have been devastating for debt holders.
  - immibis 3y ago
    Forcing regular people to take out huge debt is not good for them.
    - nemo44x 3y ago
      Sure it is, especially when the interest rate is less than the inflation rate. But even when not, over a long enough period a fixed rate will be eclipsed by inflation making the actual cost of the debt significantly less. This is great as you’re holding an asset worth far more than what you owe and it can be used to finance more debt if you wish. Some people take on too much debt. But overall asset backed debt is a great system that lets people build wealth.
      - poorlyknit 3y ago
        Except that you're not allowed to take out a mortgage and denied credit if you're poor, which means you're stuck spending your money for necessities and therefore being poor. The system works great for people who (or whose family, circle, etc.) are already not poor.
      - 3y ago
dopylitty 3y ago
I would ask a different question. Why combine a bunch of prices into an opaque number and call it "inflation"? I'd argue that doing so masks the true causes of price rises. Prices go up because companies make the choice to raise their prices. Sometimes this is because their own inputs became more expensive but in many more cases it's because the people running the company want to increase profits. By hiding the choices made by people running companies behind this opaque number called "inflation" that people perceive as somehow controlled by the government we've allowed companies to get away with making decisions that increase profits for wealthy executives and shareholders at the expense of people who rely on the goods produced by the companies.
- drexlspivey 3y ago
  A company’s input is some other company’s output. How do you calculate inflation with your scheme?
  - immibis 3y ago
    I don't understand the objection.
- daedrdev 3y ago
  A company normally intends to charge the most profitable price. Ascribing their actions to one force or another is useless, it mainly is supply and demand that force them to set lower prices. When their input costs go up, they raise prices because they otherwise their last product produced would be unprofitable, and when prices go down it is because their customers would go elsewhere if they did not.
- vwkd 3y ago
  > but in many more cases it's because the people running the company want to increase profits source?
sega_sai 3y ago
If all the money becomes digital at some point, should we switch from inflation target to just automatically reducing every bank account balance by 0.005% per day (equivalent to 2% p.y.)
- from-nibly 3y ago
  I mean shares are all digital and that's not how we do it. I don't think it's a technology problem. It's just WAY easier to give more to someone than it is to take from everyone.
csomar 3y ago
> This would be problematic since people would not invest or spend money to get the country out of a recession when they could just get a return from doing nothing. Instead of taking a risk and investing the money, the velocity of money decreases, and there is less spending leading to higher unemployment and less growth. > The story of the inflation target is one which is much more random and less thought through than you would expect. Apart from that, the Japanese narrative is used as an argument but misses that Japan had a real-estate bubble and the burst of this bubble will force deflation. This is not a case of "deflation bad" but rather a re-adjustment of their local prices. As an anecdote, in the latest crypto "deflation cycle", activity was up. Essentially, people used their extra purchasing power and bought goods. In fact, I'd argue that this is healthier. If you know the value of your money will go up, you'll hold up buying useless stuff freeing the capacity for somebody else. People will always buy stuff when they need the stuff. On the other hand, inflation encourages unnecessary spending. You know your money will burn anyway, so you go ahead and spend it. This is bad because it de-allocates resources from people who might need them. A strong deflationary cycle will push certain capital to be spent again because it appreciated much: the economy has enough excess capacity that everything is on sale. Of course the people who benefit from inflation will sell a different narrative. And of course the above is strictly my opinion.
- orwin 3y ago
  If all money become deflationnary, countries will have to move almost all taxes to wealth taxes, which is, now that i think about it, not a bad idea. I might be convinced now :P
  - Aerbil313 3y ago
    In Islamic economy interest is forbidden, there are no taxes and every Muslim is required to give 1/40 of their wealth to the poor every year (zakah). It is collected mandatorily and distributed by the government. Non-Muslims pay an annual protection tax aka jizya, in exchange for not paying zakah and not serving in the army. Modern scholars argue that collecting tax is permissible because of modern needs and responsibilities of the government (e.g infrastructure building), but only the strictly needed amount.
albertfredrick 3y ago
[flagged]
dottjt 3y ago
One way I've been told to understand this is that money is actually growing at around 6%, which is to say that money growth is highly inflationary. Of course this is way too high, so to offset this there are deflationary measures, primarily increased productivity, technological improvements etc. The problem with this is that we end up working permanently harder and it reaches a point of unsustainability. For example, now you generally need two incomes to sustain the same lifestyle as previously, because we need more people working etc. Other deflationary measures included the opening of the Asian labor market, and then other globalisation measures.
- jokethrowaway 3y ago
  Lifestyle worsened significantly, people too poor to have a car had servants in the 50s. There's also a cultural shift caused by propaganda in the 60s which pushed women to work, increasing the supply of workers and thus lowering the value of work and thus salaries. Thanks to capitalism and innovation, at least we have some technology to pick up the slack and counteract the government and the top 0.01% stealing from everyone else through economic policies.
tareqak 3y ago
I have been thinking that with better and more frequent reporting of the statistics over the years that this inflation target of 2% could go to 1% if not zero. In my mind, central banks and the all the levels of governments should be getting weekly (if not daily) reports of hiring, job losses, house building, and rental prices / turnovers in like a Grafana dashboard.
- Alpha3031 3y ago
  Central banks do not set policy based on what they see inflation is in the past, they make projections of what inflation will be in the future.
atroxone 3y ago
The current monetary system could essentially be swapped for Universal Basic Income. If the reason 2% inflation exists is to increase money velocity then a fair distribution of money to everyone equally would accomplish exactly that and more. What about loans? People would still keep their money in banks, which would make circulate in the economy only keeping 10%, just like now.
WalterBright 3y ago
Inflation is entirely a monetary phenomenon. It is the result of the government creating money to fund the deficit. There's around a 13 month lag between the creation of the money and the inflation. It's the Law of Supply & Demand in action. More money representing the value of goods & services in the economy means each dollar is worth correspondingly less. The 2% inflation being "good" for the economy is propaganda. The propaganda around inflation is amazingly effective. How often do you hear from otherwise intelligent and education people that inflation is caused by: 1. speculators 2. profiteers 3. greedy business 4. greedy unions 5. Putin's price hike 6. supply chain shocks 7. oil companies 8. Arab cartels 9. savers 10. banks 11. wage-price spiral 12. cost-push 13. demand-pull It's all disinformation, and rather easy to refute. For example, if oil price hikes cause inflation, why do we not have corresponding deflation when oil prices go down?
- maxerickson 3y ago
  It is the result of the government creating money to fund the deficit. How does the inflation tell the difference between money created to fund the deficit and money created for other reasons?
  - WalterBright 3y ago
    Great question. When banks loan money, they create the money. But when the loan is paid back, the money is destroyed. The federal deficit is not paid back. (Oh, there's the fiction of it being paid back, but what actually happens is the government just issues more debt.)
    - maxerickson 3y ago
      But sometimes it takes much more than 13 months for the money to be destroyed. How does the inflation know the difference in those cases?
      - WalterBright 3y ago
        It all averages out among all the banks issuing loans and resolving them.
georgeecollins 3y ago
I believe it is 2% because you can't ever let inflation get near zero, because deflation is devastating to an economy. (See: Great Depression). Interest rates, particularly for very safe investments like US bonds tend to be very close to what the long term inflation is expected to be. Like, not inflation this year, but the next five to ten years. That's why it's higher than the CPI when the CPI is very low and lower when it is high. Everyone knows inflation is unpopular, so you want to keep it low. The Fed may have to "cut interest rates" (they don't do that directly, but do things with money that have that effect) to improve economic growth, particularly if there is an external shock. They want to have some wiggle room to still be able to cut the interest rate without risking it getting to the dreaded deflationary zero rate. So they have 100- 150 points of stimulus to work with in an emergency.
Socnic 3y ago
because the rich are guaranteed a return.
scottjad 3y ago
> Once the central bank said that inflation would be 2% This article is confusing. It makes it sound like NZ set a target of 2% inflation, when in actuality they set a target range of 0-2%, so 2% was the ceiling not the target. https://www.rba.gov.au/publications/confs/2018/mcdermott-williams.html https://www.rba.gov.au/publications/confs/2018/mcdermott-wil... figure 1 and table 1 makes it more clear. Naturally central bankers have been happy to turn a ceiling into a target/floor.
dennis_jeeves2 3y ago
Rather than haggle about inflation/deflating I don't see people arguing that the govt should have any authority to dictate what medium of exchange people should use.
- SubjectToChange 3y ago
  Private money has a long history within the United States, cryptocurrency is just the latest instance of it. The US Government doesn't really care how anyone conducts their transactions as long as they pay their taxes in USD.
  - tryptophan 3y ago
    This is false. You have to pay cap gains on anything against the dollar when buying with alt currencies. This intentionally kills the use of anything other than the dollar for transactions. The record keeping for this sort of nonsense presents a massive and impractical to fight burden.
    - SubjectToChange 3y ago
      This is false. You have to pay cap gains on anything against the dollar when buying with alt currencies. I'm aware. What I was saying is that the US Government doesn't care about whether or not you're using USD for your transactions, so long as you pay the appropriate taxes in USD. This intentionally kills the use of anything other than the dollar for transactions. So what other policy would you prefer the federal government to have? It's pretty much the only good solution. The record keeping for this sort of nonsense presents a massive and impractical to fight burden. It's honestly hilarious that a few IRS regulations are all it took to fundamentally break cryptocurrency. Yeah sure, if you jump through dozens of loops and practice air-tight opsec, you can get away from paying taxes. But at that point it's basically a small group of people exchanging digital beanie babies and pretending they're valuable.
rybosworld 3y ago
Many economists and policy makers would agree that a rising tide lifts all boats. So if decreasing the real value of wages via inflation sounds counter intuitive and misguided, it's because it is. The problem is capitalism only prizes selfishness. An individual (corporation) acts selfishly by paying the smallest amount to workers that it can get away with. If wages rose with inflation there'd be more money for consumers to buy products, and all else being equal that is better for the economy (and corporations). An environment where wages rise slower than inflation is a vicious cycle of workers having less money to allocate to goods, thus hurting demand, thus hurting wage growth, thus hurting demand, etc. You might be tempted to think that these situations should even out over the long run. But that ignores the psychological effect that decreased purchasing power has on workers - making them more likely to be stingy with their money (spend less).
psychlops 3y ago
And thus was born a consumer economy.
ponymontana 3y ago
study bitcoin
jmclnx 3y ago
Inflation is a tax, since almost no government will raise taxes, inflation is a way to raise revenue without calling it a tax.
- SubjectToChange 3y ago
  Inflation does not spare Government budgets. Just look at how inflation cuts into the DoD budget. ...inflation is a way to raise revenue without calling it a tax. Wow, European governments must've made a killing off of energy inflation over the last few years. Hopefully OPEC decides on another embargo, it'd pair perfectly with a Panamanian banana virus. The resulting inflation would certainly fill EU coffers to the brink. Still, nothing will compare to the impending wave of mass retirement in the developed world, government revenues will greatly benefit from the resulting wage inflation.
  - bsdpufferfish 3y ago
    The comment is referring to playing loose with the currency, not a drop in supply or an increase in demand.
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crooked-v 3y ago
It's really not that complicated: a little inflation is better for both the economy and the average person than a little deflation, and the tools available are clumsy enough that it's impossible to accurately target 0%. The end result is a target of just enough inflation to avoid deflation if the numbers swing around unexpectedly.
Entwickler 3y ago
I wonder how fast F.A. Hayek is spinning in his grave.
steve1977 3y ago
What is missing from the article (unless I missed it myself) is why inflation would be desirable in the first place. There's probably a couple of reasons, some already discussed. Like lowering wages without actually lowering wages. And inflation is a great tool for governments to "pay off" their debt. But you have to keep the rate at a level low enough not to cause upheavals. Hence the rates of like 1% or 2%.
- ImHereToVote 3y ago
  Why is it so important to lower wages and increasing the wealth of bond holders?
  - madsbuch 3y ago
    it had emperically shown to be effective for the economy. in the end the economy as a whole is a setup for work and collaboration. if the farmer does not want to work, i can't spend my earned money on their produce. inflation has shown to be an effective tool to ensure that people partake in the workforce. - lowering wages keeps people on the lookout for new skills and increases job mobility. lastly, inflation does not. increase the wealth of bond holders. only when they miscalculated their rate such that interest is higher than inflation. This has certainly not been the case the pa's 6-7 years where bond holders have lost big time.
- gorbot 3y ago
  The major reason for a base inflation this: If there was zero inflation, then keeping cash in the bank is the safest thing to do. If everyone does this, money moves less, less investment, slower economy. Sure some will still invest, but the vast majority of people will just put money in the bank, or under their mattress. With >0% inflation, you now need to do something with your money or else you lose money. If my great great grandparents buried their life savings and gave I received it now, I'd get a new laptop and that's about it. So now everyone has to invest it. 401k's, other investments, etc. This makes the economy start moving, more activity, this is the 'velocity' of money they mentioned as being a key factor in the health of an economy.
pcw7321 3y ago
An interesting and little known fact is that New Zealand is often used as a beta test site. They had ATMs in the 70s because the kiwis act like westerners, but if things go wrong, nobody notices. Similarly computer based police databases. Hopefully they can show us how UBI works...
friend_and_foe 3y ago
I always thought that it was because that's the average inflation rate of gold. Is that not right?
dventimi 3y ago
"After all, no one likes it when prices rise." Excuse me? One man or woman's "price" is another's "wage", and plenty of people like it when their wages go up.
janandonly 3y ago
I feel like it's the time of the year again to point to this website: https://wtfhappenedin1971.com https://wtfhappenedin1971.com

259 points by luu 3y ago

seunosewa 3y ago

If everyone targets the same inflation rate, then currencies will tend to be stable with respect to each other.

aspenmayer 3y ago
I don’t think that logically follows unless we can assume or demonstrate that the factors influencing the inflation rate and other factors such as purchasing power parity of all who are targeting the same inflation rate across the board are themselves stable.
esafak 3y ago
What about differences in productivity?

georgeplusplus 3y ago

>> This loss of trust is a major problem. For example, if you no longer believe the Fed inflation target, then you will base your actions on what you think the inflation rate will be, which can lead to cycles of inflation. If you believe inflation will be high soon, you will buy a lot of stuff now when prices are lower. However, other people will realize this too, and then there will be a race to buy goods and services, which will lead to less supply and higher prices. This creates more demand, which leads to higher prices, creating the inflationary doom loop. Showing that losing the Fed’s credibility may not be worth the benefit of a better target. The FED is clearly in a damned if they do damned if they dont scenario. Blaming the target feels like a red herring. In the scenario they pitched would create demand and supply shocks in the short term but recession must and would is surely to follow because of the inefficiencies in the market. The real question is Who is in charge here? If the Fed was, they would and could get in front of inflation and raise rates to where inflation would not come back however, at the risk of upsetting markets, it seems they've been politicized into inaction.

bobthepanda 3y ago
the inflation rate setting is trying to predict human behavior and so it is always a damned if you do damned if you don't. that being said, the psychological power of central banks is very real. Brazil's real was introduced in 1994, after an intermediate period in which the prices had to be dual listed in the old and future currency, but the future currency had not been printed yet. They just never inflated the future currency, and people seemed to believe that. https://en.wikipedia.org/wiki/Plano_Real https://en.wikipedia.org/wiki/Plano_Real
ajross 3y ago
You understand that the paragraph you quoted was a didactic illustration[1], not a description of reality, right? In fact inflation is sitting right at 3% right now, not at the 2% target but hardly very far off. > The real question is Who is in charge here? If the Fed was, they would and could get in front of inflation and raise rates They... did? [1] Specifically of the situation where a change of target rate (which, again, is not happening) would be interpreted by the market as a loss of control.
- Tyrek 3y ago
  Trailing 12 Mths Inflation: 3.2% (Headline) 3.8% (Core). In both cases, it's at least 50% above target. While a smaller gap than in recent years, it's still fairly sizable, all things considered.
  - ajross 3y ago
    Oh, come on. CPI inflation since 1960: https://fred.stlouisfed.org/graph/?g=rocU https://fred.stlouisfed.org/graph/?g=rocU Nothing about the current conditions are particularly abnormal. CPI was at 2.5-3 through the entirety of the dot com boom, higher than that still in the 80's, and of course between 1968 and 1982 it was almost entirely above 5%. I really don't think you're considering all the things, all things considered.
- georgeplusplus 3y ago
  As someone else pointed out at 3% , it's at least 50% above the target I don't see how someone can consider that small. Cherry picking historical data as a way to hand wave that fact is disengenious at best. Even if for some reason you think 3% is not high, inflation is clearly starting to reverse which the fed has admitted its not gonna get better in the short term. Contrast this to Volker who made the hard decision to raise rates well above inflation not once but twice.

082349872349872 3y ago

Many things in life are like this; for instance, (from back in the days when we worked in offices) it's much more important that a group who wants to go out to lunch together all agree on the same place than that place be the theoretically optimum lunch destination.

sob727 3y ago

Yellen supposedly told Greenspan & co in the mid 90s that 2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary). It was the only way to have some flexibility there. If you admit that this is a desirable thing, this is defeated by wage negotiations (or say, benefits) than tend to be indexed to inflation. Another interesting thing that happened under Greenspan is how inflation is computed (hedonics, replacements, etc... conceptually, think "if I can't buy a porterhouse steak anymore, I'll get the lesser hanger", meaning inflation is underreported). I'm not suggesting this was intentional or coordinated, but this had the huge benefit for federal and local governments that it lowered the benefits they had to pay out that were linked to inflation. Issue is it hurts the poor more.

jmyeet 3y ago
That's not new or controversial (in economics circles). This really took off in the Reagan years where real wages stagnated [1]. It was from the 1980s where you started to hear statements like "wage incresaes should be tied to productivity increases" [2]. If you parse that statement, it means no cost-of-living increases ie a decrease in real wages. All of this is wealth transfer to the very rich and entirely intentional. [1]: https://www.epi.org/publication/charting-wage-stagnation/ https://www.epi.org/publication/charting-wage-stagnation/ [2]: https://www.epi.org/productivity-pay-gap/ https://www.epi.org/productivity-pay-gap/
- adam_arthur 3y ago
  "Real" wages are driven by the "real" supply and demand of labor, not by nominal numbers. If the number of qualified workers increases significantly, you will end up with lower real wages. There were three major factors increasing labor supply around this time in the US. Immigration from Mexico, women continuing to enter the labor force, and reduction in demand/increase in (global) supply for lower skill labor via globalization of manufacturing Not casting any judgment on whether these things are good, but they are far more likely to be the primary factor than inflation.

yinser 3y ago

Incredible on such a macroscopic part of US monetary policy is a “Cloud Atlas” level special sensitivity to an off handed comment on the other side of the planet.

willio58 3y ago

> Once the bill became law, then an inflation target had to be chosen. In an off-hand remark in an interview, the former head central banker said the inflation target should be zero to 1 percent. However, Don Brash, the head of the central bank, claimed “It was almost a chance remark,” and “The figure was plucked out of the air to influence the public’s expectations ”(Irwin, 2014). They used this number as a starting point and pushed it up to 2% to give themselves a bit more room This feels like so many decisions we make day-to-day in STEM. We all love to feel like we have quantitative reasoning behind decisions but due to the organic nature of the work at some point, we just have to land on _something_ and go from there. Like qualitatively-influenced quantitative data.

rvba 3y ago
They could have chosen 0 or -2% but they like to reap that 2% free money premium..
- jdsully 3y ago
  Defalation has more risk of feedback spirals, it heavily incentives you to wait to invest as tomorrow it will be cheaper than today. This is why small positive inflation rates are preferred. You could target 0% but in practice you will oscillate around it and have potentially long periods of deflation.
  - hgomersall 3y ago
    Well clearly it doesn't, because people still need to live. We have many years of evidence that people still buy shiny tech gadgets despite knowing that in a year's time they will be much cheaper.
    - borski 3y ago
      That’s not true. The issue isn’t that the same device will be cheaper in a year, but that the latest device will be the same or close to it. As a result, people are more likely to hang on to their devices (for example) if they assume that next year’s latest model will be cheaper than this year’s. A great example is the Apple Vision Pro. How many people didn’t buy it simply because the price is too high? Betcha they would if it were cheaper, which they know it will be eventually. The same is not true of phones, which don’t generally get cheaper for the flagship products.

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smallmancontrov 3y ago

So that it's clear when we switch from "Growth in a Time of Debt" to "The Liquidation of Government Debt"?

oldpersonintx 3y ago

[dead]

codetrotter 3y ago

> Although the idea of a more valuable dollar may sound great, many economists think it is worse than high inflation (Engeman, 2019). The problem is that the value of money would increase when people do nothing with it. This would be problematic since people would not invest or spend money to get the country out of a recession when they could just get a return from doing nothing. Yes, how terrible that would be. In reality people would still need to buy things that are actually important. Housing. Food. Heating. All kinds of stuff. And on top of that we are still gonna spend on the non-essentials as well. It’s not like I’m going to completely stop watching movies or playing games or listening to music just because I know my dollar today would be worth more tomorrow. The people that would be holding back are the ones that have hoarded all the resources in the first place. And that’s the real problem. Inflation is a bandaid to avoid things getting as bad as they would. But the reason is because of people taking too much and societies that don’t take care of their people. Incidentally the ultra rich also have a lot of clever ways of avoiding being impacted by inflation in the way that it impacts most normal people.

vkou 3y ago
> Yes, how terrible that would be. It would be pretty terrible if I became richer not by generating economic activity, but by sitting around with my money in a mattress. You are correct that it's a band-aid fix... But it's the best one we have.
- codetrotter 3y ago
  What I’m telling you is that normal people would not be doing that. Not in the way that this kind of idea makes it sound like anyway.
  - vkou 3y ago
    Monetary policy isn't intended to steer the behavior of normal people[1] who have ~net-zero cash for most of their lives, it's intended to steer the behavior of investors who don't need to spend all their money on food and shelter and medicine, and who will happily choose to sit on their cash, instead of investing it, if that provides them with better returns. Everyone bitches when the price of milk goes up 8%, but nobody seems to realize that it went up because wages did. On average, if you're a worker, and you aren't saving (or trying to save) a pile of cash, inflation is net-zero for you. [1] Stimulus checks did steer the behavior of normal people, but they were fiscal, not monetary policy. They had knock-on monetary policy effects, but the juice was worth the squeeze - thanks to them and the PPP, the economy didn't entirely collapse.

mindslight 3y ago

The combination of monetary creation by the central bank to bring price inflation up to 2% combined with kayfabe austerity by the legislative/executive government is responsible for the utter hollowing out of our economy. The combo has given the centralized financial industry basically unlimited power to make highly leveraged investments for predictable things that conform to their pet models, while vacuuming real wealth away from the edges in the form of loan payments. A fundamental assumption of real working capitalism is that capital is distributed, and this combo has all but destroyed it. Even if one insists on the orthodoxy that some price inflation is necessary, the new money to create such price inflation represents a distributed taking from our society (ie a tax), and thus should be spent for deliberate purposes by the government - ideally on infrastructure and other investments aimed at creating more wealth in the future - rather than being given to the financial industry as low interest loans to bid up the asset bubble out of the reach of main street. I believe this is the core of Modern Monetary Theory, and while poised to encourage a bit more spending than I would like from an Austrian perspective, it is at least honest compared to the past several decades of the Keynesian+Reaganomics bait, switch, and squeeze.

visitor4712 3y ago

never understood this mantra of 2 %, mindlessly pound out by the msm. in twenty years your savings have lost nearly half of its purchasing power.

kinghajj 3y ago
0.98^30 = 0.5459, so more like 30 years. But, that's why you have to put the bulk of your savings in equities and bonds.
smallmancontrov 3y ago
...if held in cash. Were you holding your savings in cash?
tombert 3y ago
You probably shouldn't be storing all your savings in cash. I think it's generally considered better practice to put at least some percentage into something market-based, like an index fund.
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zaroth 3y ago

I was taught two reasons in undergrad Econ; 1) Deflation is seen as much worse, because inflation encourages spending over saving, which drives growth. Targeting, e.g. 0.5% risks missing and going negative. 2) Inflation reduces the true value (cost) of debt. And with $34.5 trillion of it, that’s a big incentive to keep it around. IMO 2% is clearly too high of a target, but it’s the hamster wheel that makes everyone keep running so not surprising that government spins it too fast.

bluescrn 3y ago
> 2) Inflation reduces the true value (cost) of debt. And with $34.5 trillion of it, that’s a big incentive to keep it around. This is the point that a lot of people miss. Inflation is good for governments as well as businesses who can exploit high inflation to raise prices and shrinkflate products disproportionatly while lowing their wage bills in real terms. But it inflicts the most suffering on not just the working class, but the sensible/frugal ones who minimize their debt and accumulate some amount of savings rather, but who don't have enough wealth or knowledge to get serious about investing it.
- ClumsyPilot 3y ago
  > sensible/frugal ones who minimize their debt and accumulate some amount of savings What if this is wrong and being frugal is not sensible?
  - medvezhenok 3y ago
    Obviously one can post-hoc rationalize "sensible" as whatever worked best given the circumstances that occurred. Absent government intervention in the functioning of markets, being frugal would have paid off way more than it has.
    - ClumsyPilot 3y ago
      > Absent government intervention in the functioning of markets, being frugal would have paid off way more than it has Why do you believe that to be the case? I think you are going with a gut feeling that the world should reward frugality, but if you actually examine that belief, there is no solid science behind it - but he world does not appreciate moral virtues, it does not reward kindness, and other things either.

fuoqi 3y ago

Higher inflation levels in the upcoming decades are effectively inevitable with the parabolic public debt levels and zero political appetite for reducing budget deficits. Things like quickly approaching insolvency of the Social Security program only make the situation worse. As soon as the public debt market (including repo) will see any issues the Fed will quickly ride to the rescue, inflation be damned. We've clearly seen it right before the pandemic and with UK gilts. It does not matter what the inflation target is. It's likely we will see double digit inflation spikes with "hard work" of bringing it back to target levels (be it 2% or 4%), so on average you will get anything but the target level. And before someone mentions Japan, read this: https://www.lynalden.com/economic-japanification https://www.lynalden.com/economic-japanification

wolverine876 3y ago
Low-tax / small-government advocates (by which they mean 'lower my taxes', and 'spend money on me only') have been arguing forever that deficits will bring economic doom. They just want to cut spending and government.

fwlr 3y ago

There are significant stabilization benefits to having a public (and binding) inflation target - all of the large economic entities / sectors like banking, government spending, corporations, etc., become more predictable to each other. For this reason, whatever number is chosen will tend to “stick”, regardless of how the actual number is chosen. Or alternatively: it is optimal to have an inflation target (compared to not having one). Once you are in the “targeted” space, there is a further optimization of deciding what the inflation target should specifically be, but the gains and losses here are small compared to the existence or lack thereof of any target at all.

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foobarian 3y ago
My intuition for this is to view the economy as a large number of interconnected gears driven by an input shaft. When the input is neutral (no inflation), the gears are slack and kind of spin back and forth with occasional whiplash. But with some token input spin (small inflation), the slack vanishes and all gears spin smoothly.

notShabu 3y ago

it's an "everything is awesome" schelling point at this point

npoc 3y ago

The more money the banks print, the richer they get, with the side-effect that prices rise (they make the monetary units less scarce and worth less). 2-3% just happens to be the most they can get away with in the long term without the population getting concerned. What the general population don't realise is that the value of goods and services are going down over time, due to efficiency increases, at a rate of around 5% / year. The banks can print enough money to soak that up unnoticed, and then an extra 2% just because they can. It's essentially a stealth transfer of wealth from the people to the banks and it's been going on for decades/centuries (before fiat, it used to take the form of coin shaving, impure metals etc). You really see the effect when you look at house prices. They are roughly the same price in gold as they were in the 1970s. Rather than housing going up in value since then, it has been the monetary units going down in value, due to the supply roughly doubling every decade (look up M2 USD). You can understand the incentive to print money when you realise that every year the banks are collecting interest on every dollar/euro/pound etc. in existence. And the banks don't really own any of them - they printed them out of thin air as loans and have to destroy them when the loans are repaid, but total debt only increases every year...

silent_cal 3y ago
Good answer. Inflation is just a euphemism for stealing from working people.
- Wytwwww 3y ago
  Still preferable to deflation. At least the working class has something that can be stolen..
  - npoc 3y ago
    In a healthy economy, deflation (i.e. falling prices) is a good thing. Things get cheaper over time - it's the utopia we should be living in now. We've made massive increases in production efficiency across the board over the years, but the banks and government have creamed off all those efficiency gains for themselves, by printing money, creating the illusion that everything is instead going up in value, and have made themselves mind-blowingly powerful. As the world economies are so broken, if the money supply went down instead of up (i.e. deflationary supply), the real value of the already enormous debts would increase even if the nominal value didn't, causing the economies to collapse suddenly. By keeping the money supply increasing, the economies are collapsing slowly instead, ultimately ending in hyperinflation.

thehumanmeat 3y ago

There's no point in defining a "target" when the Fed has no control over the vast portion of dollar creation/destruction: https://en.wikipedia.org/wiki/Eurodollar https://en.wikipedia.org/wiki/Eurodollar

mebazaa 3y ago

Paul Krugman covers that question here (gift link): https://www.nytimes.com/2023/06/09/opinion/inflation-target-2-percent.html?unlocked_article_code=1.ek0.979y.zLAO6U1LWn88&smid=url-share https://www.nytimes.com/2023/06/09/opinion/inflation-target-... and argues that the theoretical assumptions that led to the 2 percent rate didn’t turn out to be true: > On one side were economists who believed that the essential role of monetary policy — maybe even its moral duty — was to deliver stable prices. Money, after all, is a yardstick we use to measure economic activity, and they argued that this yardstick shouldn’t be constantly changing its length. > On the other side were economists who worried that too low an inflation rate could inhibit our ability to fight recessions. The Federal Reserve and its counterparts in other countries try to manage the economy mainly through their control of short-term interest rates; but these rates can’t go much below zero, because negative rates would just lead people to accumulate stacks of $100 bills. A higher rate of inflation tends, other things being equal, to raise interest rates and makes it less likely that the Fed, faced with a recession, will hit the “zero lower bound” and be unable to cut rates further. The zero lower bound turned out to be a real problem, given the amount of years we spent at a zero percent interest rate.

dools 3y ago
The real problem is using monetary policy as a tool at all. We should have ZIRP forever and use fiscal policy to target price stability and full employment.
- immibis 3y ago
  ZIRP is zero interest rate policy - were you perhaps thinking of zero inflation rate instead? Zero interest rate tends to create lots of inflation because borrowing money (i.e. banks other than the Fed creating money) is nearly free.
  - cjbgkagh 3y ago
    I’m pretty sure they mean zero interest ZIRP with regard to MMT. But people forget the second part of MMT which is confiscatory in effect even if not by name, it’s still your money but you are no longer allowed to spend it until inflation comes down, by which point your money is obviously worth less than it was and that value is in effect confiscated.

jokethrowaway 3y ago

We need inflation because it's governments' only way to keep spending like crazy, at the expense of cash holders, who are often poor, and benefiting assets holders.

nemo44x 3y ago
It's good for regular people too. Debt is a great thing to have in an inflationary economy, especially long term debt backed by an asset, like a home. In essence, we inflate debt away over time. In a deflationary economy debt is crippling and because we are a debt based economy we have a deadly fear of deflation and will do anything to prevent it. Hence why they desperately inflated the economy during Covid. The alternative (do nothing) would have resulted in massive deflationary pressure and would have been devastating for debt holders.
- immibis 3y ago
  Forcing regular people to take out huge debt is not good for them.
  - nemo44x 3y ago
    Sure it is, especially when the interest rate is less than the inflation rate. But even when not, over a long enough period a fixed rate will be eclipsed by inflation making the actual cost of the debt significantly less. This is great as you’re holding an asset worth far more than what you owe and it can be used to finance more debt if you wish. Some people take on too much debt. But overall asset backed debt is a great system that lets people build wealth.
    - poorlyknit 3y ago
      Except that you're not allowed to take out a mortgage and denied credit if you're poor, which means you're stuck spending your money for necessities and therefore being poor. The system works great for people who (or whose family, circle, etc.) are already not poor.
    - 3y ago

dopylitty 3y ago

I would ask a different question. Why combine a bunch of prices into an opaque number and call it "inflation"? I'd argue that doing so masks the true causes of price rises. Prices go up because companies make the choice to raise their prices. Sometimes this is because their own inputs became more expensive but in many more cases it's because the people running the company want to increase profits. By hiding the choices made by people running companies behind this opaque number called "inflation" that people perceive as somehow controlled by the government we've allowed companies to get away with making decisions that increase profits for wealthy executives and shareholders at the expense of people who rely on the goods produced by the companies.

drexlspivey 3y ago
A company’s input is some other company’s output. How do you calculate inflation with your scheme?
- immibis 3y ago
  I don't understand the objection.
daedrdev 3y ago
A company normally intends to charge the most profitable price. Ascribing their actions to one force or another is useless, it mainly is supply and demand that force them to set lower prices. When their input costs go up, they raise prices because they otherwise their last product produced would be unprofitable, and when prices go down it is because their customers would go elsewhere if they did not.
vwkd 3y ago
> but in many more cases it's because the people running the company want to increase profits source?

sega_sai 3y ago

If all the money becomes digital at some point, should we switch from inflation target to just automatically reducing every bank account balance by 0.005% per day (equivalent to 2% p.y.)

from-nibly 3y ago
I mean shares are all digital and that's not how we do it. I don't think it's a technology problem. It's just WAY easier to give more to someone than it is to take from everyone.

csomar 3y ago

> This would be problematic since people would not invest or spend money to get the country out of a recession when they could just get a return from doing nothing. Instead of taking a risk and investing the money, the velocity of money decreases, and there is less spending leading to higher unemployment and less growth. > The story of the inflation target is one which is much more random and less thought through than you would expect. Apart from that, the Japanese narrative is used as an argument but misses that Japan had a real-estate bubble and the burst of this bubble will force deflation. This is not a case of "deflation bad" but rather a re-adjustment of their local prices. As an anecdote, in the latest crypto "deflation cycle", activity was up. Essentially, people used their extra purchasing power and bought goods. In fact, I'd argue that this is healthier. If you know the value of your money will go up, you'll hold up buying useless stuff freeing the capacity for somebody else. People will always buy stuff when they need the stuff. On the other hand, inflation encourages unnecessary spending. You know your money will burn anyway, so you go ahead and spend it. This is bad because it de-allocates resources from people who might need them. A strong deflationary cycle will push certain capital to be spent again because it appreciated much: the economy has enough excess capacity that everything is on sale. Of course the people who benefit from inflation will sell a different narrative. And of course the above is strictly my opinion.

orwin 3y ago
If all money become deflationnary, countries will have to move almost all taxes to wealth taxes, which is, now that i think about it, not a bad idea. I might be convinced now :P
- Aerbil313 3y ago
  In Islamic economy interest is forbidden, there are no taxes and every Muslim is required to give 1/40 of their wealth to the poor every year (zakah). It is collected mandatorily and distributed by the government. Non-Muslims pay an annual protection tax aka jizya, in exchange for not paying zakah and not serving in the army. Modern scholars argue that collecting tax is permissible because of modern needs and responsibilities of the government (e.g infrastructure building), but only the strictly needed amount.

albertfredrick 3y ago

[flagged]

dottjt 3y ago

One way I've been told to understand this is that money is actually growing at around 6%, which is to say that money growth is highly inflationary. Of course this is way too high, so to offset this there are deflationary measures, primarily increased productivity, technological improvements etc. The problem with this is that we end up working permanently harder and it reaches a point of unsustainability. For example, now you generally need two incomes to sustain the same lifestyle as previously, because we need more people working etc. Other deflationary measures included the opening of the Asian labor market, and then other globalisation measures.

jokethrowaway 3y ago
Lifestyle worsened significantly, people too poor to have a car had servants in the 50s. There's also a cultural shift caused by propaganda in the 60s which pushed women to work, increasing the supply of workers and thus lowering the value of work and thus salaries. Thanks to capitalism and innovation, at least we have some technology to pick up the slack and counteract the government and the top 0.01% stealing from everyone else through economic policies.

tareqak 3y ago

I have been thinking that with better and more frequent reporting of the statistics over the years that this inflation target of 2% could go to 1% if not zero. In my mind, central banks and the all the levels of governments should be getting weekly (if not daily) reports of hiring, job losses, house building, and rental prices / turnovers in like a Grafana dashboard.

Alpha3031 3y ago
Central banks do not set policy based on what they see inflation is in the past, they make projections of what inflation will be in the future.

atroxone 3y ago

The current monetary system could essentially be swapped for Universal Basic Income. If the reason 2% inflation exists is to increase money velocity then a fair distribution of money to everyone equally would accomplish exactly that and more. What about loans? People would still keep their money in banks, which would make circulate in the economy only keeping 10%, just like now.

WalterBright 3y ago

Inflation is entirely a monetary phenomenon. It is the result of the government creating money to fund the deficit. There's around a 13 month lag between the creation of the money and the inflation. It's the Law of Supply & Demand in action. More money representing the value of goods & services in the economy means each dollar is worth correspondingly less. The 2% inflation being "good" for the economy is propaganda. The propaganda around inflation is amazingly effective. How often do you hear from otherwise intelligent and education people that inflation is caused by: 1. speculators 2. profiteers 3. greedy business 4. greedy unions 5. Putin's price hike 6. supply chain shocks 7. oil companies 8. Arab cartels 9. savers 10. banks 11. wage-price spiral 12. cost-push 13. demand-pull It's all disinformation, and rather easy to refute. For example, if oil price hikes cause inflation, why do we not have corresponding deflation when oil prices go down?

maxerickson 3y ago
It is the result of the government creating money to fund the deficit. How does the inflation tell the difference between money created to fund the deficit and money created for other reasons?
- WalterBright 3y ago
  Great question. When banks loan money, they create the money. But when the loan is paid back, the money is destroyed. The federal deficit is not paid back. (Oh, there's the fiction of it being paid back, but what actually happens is the government just issues more debt.)
  - maxerickson 3y ago
    But sometimes it takes much more than 13 months for the money to be destroyed. How does the inflation know the difference in those cases?
    - WalterBright 3y ago
      It all averages out among all the banks issuing loans and resolving them.

georgeecollins 3y ago

I believe it is 2% because you can't ever let inflation get near zero, because deflation is devastating to an economy. (See: Great Depression). Interest rates, particularly for very safe investments like US bonds tend to be very close to what the long term inflation is expected to be. Like, not inflation this year, but the next five to ten years. That's why it's higher than the CPI when the CPI is very low and lower when it is high. Everyone knows inflation is unpopular, so you want to keep it low. The Fed may have to "cut interest rates" (they don't do that directly, but do things with money that have that effect) to improve economic growth, particularly if there is an external shock. They want to have some wiggle room to still be able to cut the interest rate without risking it getting to the dreaded deflationary zero rate. So they have 100- 150 points of stimulus to work with in an emergency.

Socnic 3y ago

because the rich are guaranteed a return.

scottjad 3y ago

> Once the central bank said that inflation would be 2% This article is confusing. It makes it sound like NZ set a target of 2% inflation, when in actuality they set a target range of 0-2%, so 2% was the ceiling not the target. https://www.rba.gov.au/publications/confs/2018/mcdermott-williams.html https://www.rba.gov.au/publications/confs/2018/mcdermott-wil... figure 1 and table 1 makes it more clear. Naturally central bankers have been happy to turn a ceiling into a target/floor.

dennis_jeeves2 3y ago

Rather than haggle about inflation/deflating I don't see people arguing that the govt should have any authority to dictate what medium of exchange people should use.

SubjectToChange 3y ago
Private money has a long history within the United States, cryptocurrency is just the latest instance of it. The US Government doesn't really care how anyone conducts their transactions as long as they pay their taxes in USD.
- tryptophan 3y ago
  This is false. You have to pay cap gains on anything against the dollar when buying with alt currencies. This intentionally kills the use of anything other than the dollar for transactions. The record keeping for this sort of nonsense presents a massive and impractical to fight burden.
  - SubjectToChange 3y ago
    This is false. You have to pay cap gains on anything against the dollar when buying with alt currencies. I'm aware. What I was saying is that the US Government doesn't care about whether or not you're using USD for your transactions, so long as you pay the appropriate taxes in USD. This intentionally kills the use of anything other than the dollar for transactions. So what other policy would you prefer the federal government to have? It's pretty much the only good solution. The record keeping for this sort of nonsense presents a massive and impractical to fight burden. It's honestly hilarious that a few IRS regulations are all it took to fundamentally break cryptocurrency. Yeah sure, if you jump through dozens of loops and practice air-tight opsec, you can get away from paying taxes. But at that point it's basically a small group of people exchanging digital beanie babies and pretending they're valuable.

rybosworld 3y ago

Many economists and policy makers would agree that a rising tide lifts all boats. So if decreasing the real value of wages via inflation sounds counter intuitive and misguided, it's because it is. The problem is capitalism only prizes selfishness. An individual (corporation) acts selfishly by paying the smallest amount to workers that it can get away with. If wages rose with inflation there'd be more money for consumers to buy products, and all else being equal that is better for the economy (and corporations). An environment where wages rise slower than inflation is a vicious cycle of workers having less money to allocate to goods, thus hurting demand, thus hurting wage growth, thus hurting demand, etc. You might be tempted to think that these situations should even out over the long run. But that ignores the psychological effect that decreased purchasing power has on workers - making them more likely to be stingy with their money (spend less).

psychlops 3y ago

And thus was born a consumer economy.

ponymontana 3y ago

study bitcoin

jmclnx 3y ago

Inflation is a tax, since almost no government will raise taxes, inflation is a way to raise revenue without calling it a tax.

SubjectToChange 3y ago
Inflation does not spare Government budgets. Just look at how inflation cuts into the DoD budget. ...inflation is a way to raise revenue without calling it a tax. Wow, European governments must've made a killing off of energy inflation over the last few years. Hopefully OPEC decides on another embargo, it'd pair perfectly with a Panamanian banana virus. The resulting inflation would certainly fill EU coffers to the brink. Still, nothing will compare to the impending wave of mass retirement in the developed world, government revenues will greatly benefit from the resulting wage inflation.
- bsdpufferfish 3y ago
  The comment is referring to playing loose with the currency, not a drop in supply or an increase in demand.

deleted 3y ago

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crooked-v 3y ago

It's really not that complicated: a little inflation is better for both the economy and the average person than a little deflation, and the tools available are clumsy enough that it's impossible to accurately target 0%. The end result is a target of just enough inflation to avoid deflation if the numbers swing around unexpectedly.

Entwickler 3y ago

I wonder how fast F.A. Hayek is spinning in his grave.

steve1977 3y ago

What is missing from the article (unless I missed it myself) is why inflation would be desirable in the first place. There's probably a couple of reasons, some already discussed. Like lowering wages without actually lowering wages. And inflation is a great tool for governments to "pay off" their debt. But you have to keep the rate at a level low enough not to cause upheavals. Hence the rates of like 1% or 2%.

ImHereToVote 3y ago
Why is it so important to lower wages and increasing the wealth of bond holders?
- madsbuch 3y ago
  it had emperically shown to be effective for the economy. in the end the economy as a whole is a setup for work and collaboration. if the farmer does not want to work, i can't spend my earned money on their produce. inflation has shown to be an effective tool to ensure that people partake in the workforce. - lowering wages keeps people on the lookout for new skills and increases job mobility. lastly, inflation does not. increase the wealth of bond holders. only when they miscalculated their rate such that interest is higher than inflation. This has certainly not been the case the pa's 6-7 years where bond holders have lost big time.
gorbot 3y ago
The major reason for a base inflation this: If there was zero inflation, then keeping cash in the bank is the safest thing to do. If everyone does this, money moves less, less investment, slower economy. Sure some will still invest, but the vast majority of people will just put money in the bank, or under their mattress. With >0% inflation, you now need to do something with your money or else you lose money. If my great great grandparents buried their life savings and gave I received it now, I'd get a new laptop and that's about it. So now everyone has to invest it. 401k's, other investments, etc. This makes the economy start moving, more activity, this is the 'velocity' of money they mentioned as being a key factor in the health of an economy.

pcw7321 3y ago

An interesting and little known fact is that New Zealand is often used as a beta test site. They had ATMs in the 70s because the kiwis act like westerners, but if things go wrong, nobody notices. Similarly computer based police databases. Hopefully they can show us how UBI works...

friend_and_foe 3y ago

I always thought that it was because that's the average inflation rate of gold. Is that not right?

dventimi 3y ago

"After all, no one likes it when prices rise." Excuse me? One man or woman's "price" is another's "wage", and plenty of people like it when their wages go up.

janandonly 3y ago

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