7 ms·

> 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

> 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.
      - laserlight 3y ago
        > 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. I can't see how this is not a matter-of-degree of what GP comment said. If the latest-tech device is going to be cheaper next year, I will still have to use the old tech for another year before I upgrade. I don't think the equation changes at all.
        borski 3y ago
        You misunderstood, I think. If the iPhone 5 is the latest and greatest this year and is $1000, next year it may be $600. But the iPhone 6, which only exists next year, will be at or around $1000. Therefore, there is no benefit to waiting until next year, as it is unlikely that the latest device (which is the device most people buy) is going to drop in price.
        ndriscoll 3y ago
        Of course there's a benefit; you can buy the iPhone 5 for $600. If you would be happy with it this year, you'll be happy with it next year too. The existence of an iPhone 6 doesn't make the iPhone 5 any worse.
        laserlight 3y ago
        I agree. And if I decide to wait a year, I'll be using iPhone 4 for the next year, regardless of which model I'll choose.
        borski 3y ago
        I understand this. But most people do not, and will buy the most recent one and wait two or more years before buying the next one. They buy the most recent one, aka the most expensive one, because they believe (correctly) it will last them the longest. But the price changing doesn’t affect their decision.
      - 3y ago
    - jncfhnb 3y ago
      Consuming is not investing
      - laserlight 3y ago
        Can you elaborate how they are different?
        jdsully 3y ago
        I pay $1 to buy an apple and eat it. It is gone and tomorrow I will have no Apples unless I buy more. Instead I buy (invest in) an apple tree and now I have apples continuously. The difference is the spending for a one time use vs production of new goods.
        laserlight 3y ago
        In the context of the thread, both investment and consumption are spending though. Whether one buys a shiny new gadget or a tech stock that pays dividends doesn't matter, because cost of doing either will be less tomorrow in a deflationary economy.
        jncfhnb 3y ago
        Consumption is concerned with your actual wants and needs. Investing is purely a financial measure with your excess cash. If you assess that it is financially savvier to not invest you will not invest. Investment is the concern of the large amount of excess money that wealthy people have that drive new projects. But you’re still going to want and need things to consume. Much, much less sensitive to inflation.
    - jandrewrogers 3y ago
      The issue is investment, not consumption. When deciding what to invest in, expected returns are calculated net of taxes, inflation, and risk. Capital generally flows to the investment with the highest expected net return at every risk level. In a deflationary environment, sitting on investable cash grows risk-free and tax-free, which makes it an attractive "investment" for many category of investor instead of putting that capital to work.
      - ndriscoll 3y ago
        Isn't that a self-correcting problem? If the money supply were held constant, and people didn't invest, then production efficiency would not improve, and there won't be deflation, right? Even for "risk-free" assets like cash/bonds, inflation risk always exists. It's essentially a risk that you don't have a counterparty willing to trade the things you want.
        lupire 3y ago
        "self correcting" is a funny way to label macroeconomic shutdown. The goal of inflation is to motivate productive work before the opportunity is lost due to idlenss.
- SubjectToChange 3y ago
  Slight inflation encourages money to be put towards productive use and punishes hoarding. Choosing a deflationary monetary policy is unconscionable, just think for a moment what the consequences would be.
  - immibis 3y ago
    Disagree. A lot of people trot out the argument that you'd just save money instead of spending if there was deflation. But electronics are deflating, and how often do people save money instead of spending on electronics? People still buy electronics because, simply, they want the electronics. Purchases may be pushed back a little, perhaps until the next generation of device comes out, but this doesn't have much of an effect overall. The money still gets spent. And in an inflationary world, you can just park your money in government bonds (effectively returning it back to the Fed) to beat inflation most of the time. Inflation doesn't force you to spend your money productively.
    - SubjectToChange 3y ago
      But electronics are deflating,… Electronics have become cheaper through gargantuan investments of capital. Such investments are actively discouraged by deflation. And in an inflationary world, you can just park your money in government bonds (effectively returning it back to the Fed) to beat inflation most of the time. Inflation doesn't force you to spend your money productively Putting your money in government bonds or an interest earning savings account is by definition, putting your money to work. Sure, you aren’t doing anything with it, but whoever is paying you interest is only doing so because they expect to make more money than they borrowed.
      - immibis 3y ago
        This comment avoids responding to the actual point about electronics, which is that deflation is alleged to cause certain effects, and when we observe deflation, we don't actually observe those effects, so why is that?
  - mitthrowaway2 3y ago
- Wytwwww 3y ago
  > -2% Would be pretty awful though. Very slow or no GDP growth, if you have any significant amounts of debt you're basically permanently screwed (if you're rentier and can just live on interest from low-risk bonds without doing anything productive you're set though...)
- throw0101d 3y ago
  > They could have chosen 0 or -2% but they like to reap that 2% free money premium.. If you think negative inflation (deflation) would be a good choice to make, perhaps look at the 1930s.
Workaccount2 3y ago
A pivotal moment in my career was realizing how much "winging it" was going on even at the highest levels of the craft. Yes, there is a lot skill and intuition behind it, but its still pretty off the cuff.
- taneq 3y ago
  I had to double check to make sure this wasn't my comment because I'm getting amazing levels of deja vu right now. Everybody's winging it, nobody knows what they're doing, and the higher you climb the chain the more terrifying this fact becomes.
  - gretch 3y ago
    > Everybody's winging it, nobody knows what they're doing I’ve seen this comment a lot in recent years and I think there’s a lot of nuance here that is unappreciated. When taken literally, it is used as a weapon of anti-intellectualism e.g. the doctors don’t know what they are doing when it comes to vaccines. What it actually should mean is that the experts know there’s only a small slice about the universe/society that we understand, and thus proposal represents the best of our knowledge. It cannot guarantee success. But by god, it’s a lot better of an attempt than the opinion of some guy off the street
  - wolpoli 3y ago
    For me, it comes from the confidence that while I don't know the outcomes, I do have the ability to handle any of the possible outcome.
  - willismichael 3y ago
    I'm so glad we're having this conversation. Early in my career I kept waiting for that moment when I would feel like I really knew what was going on... and the last several years I keep feeling like a fraud. I've been at it for two decades, but I'm afraid eventually people will figure it out and then how will I earn any money?
  - lioeters 3y ago
abdullahkhalids 3y ago
I was listening to this podcast [1] by a previous head of the IMF, who basically said the same thing. [1] https://josephnoelwalker.com/151-raghuram-rajan/ https://josephnoelwalker.com/151-raghuram-rajan/ Search for 2% in the transcript

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.
    - laserlight 3y ago
      > 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. I can't see how this is not a matter-of-degree of what GP comment said. If the latest-tech device is going to be cheaper next year, I will still have to use the old tech for another year before I upgrade. I don't think the equation changes at all.
      - borski 3y ago
        You misunderstood, I think. If the iPhone 5 is the latest and greatest this year and is $1000, next year it may be $600. But the iPhone 6, which only exists next year, will be at or around $1000. Therefore, there is no benefit to waiting until next year, as it is unlikely that the latest device (which is the device most people buy) is going to drop in price.
        ndriscoll 3y ago
        Of course there's a benefit; you can buy the iPhone 5 for $600. If you would be happy with it this year, you'll be happy with it next year too. The existence of an iPhone 6 doesn't make the iPhone 5 any worse.
        laserlight 3y ago
        I agree. And if I decide to wait a year, I'll be using iPhone 4 for the next year, regardless of which model I'll choose.
        borski 3y ago
        I understand this. But most people do not, and will buy the most recent one and wait two or more years before buying the next one. They buy the most recent one, aka the most expensive one, because they believe (correctly) it will last them the longest. But the price changing doesn’t affect their decision.
    - 3y ago
  - jncfhnb 3y ago
    Consuming is not investing
    - laserlight 3y ago
      Can you elaborate how they are different?
      - jdsully 3y ago
        I pay $1 to buy an apple and eat it. It is gone and tomorrow I will have no Apples unless I buy more. Instead I buy (invest in) an apple tree and now I have apples continuously. The difference is the spending for a one time use vs production of new goods.
        laserlight 3y ago
        In the context of the thread, both investment and consumption are spending though. Whether one buys a shiny new gadget or a tech stock that pays dividends doesn't matter, because cost of doing either will be less tomorrow in a deflationary economy.
        jncfhnb 3y ago
        Consumption is concerned with your actual wants and needs. Investing is purely a financial measure with your excess cash. If you assess that it is financially savvier to not invest you will not invest. Investment is the concern of the large amount of excess money that wealthy people have that drive new projects. But you’re still going to want and need things to consume. Much, much less sensitive to inflation.
  - jandrewrogers 3y ago
    The issue is investment, not consumption. When deciding what to invest in, expected returns are calculated net of taxes, inflation, and risk. Capital generally flows to the investment with the highest expected net return at every risk level. In a deflationary environment, sitting on investable cash grows risk-free and tax-free, which makes it an attractive "investment" for many category of investor instead of putting that capital to work.
    - ndriscoll 3y ago
      Isn't that a self-correcting problem? If the money supply were held constant, and people didn't invest, then production efficiency would not improve, and there won't be deflation, right? Even for "risk-free" assets like cash/bonds, inflation risk always exists. It's essentially a risk that you don't have a counterparty willing to trade the things you want.
      - lupire 3y ago
        "self correcting" is a funny way to label macroeconomic shutdown. The goal of inflation is to motivate productive work before the opportunity is lost due to idlenss.
SubjectToChange 3y ago
Slight inflation encourages money to be put towards productive use and punishes hoarding. Choosing a deflationary monetary policy is unconscionable, just think for a moment what the consequences would be.
- immibis 3y ago
  Disagree. A lot of people trot out the argument that you'd just save money instead of spending if there was deflation. But electronics are deflating, and how often do people save money instead of spending on electronics? People still buy electronics because, simply, they want the electronics. Purchases may be pushed back a little, perhaps until the next generation of device comes out, but this doesn't have much of an effect overall. The money still gets spent. And in an inflationary world, you can just park your money in government bonds (effectively returning it back to the Fed) to beat inflation most of the time. Inflation doesn't force you to spend your money productively.
  - SubjectToChange 3y ago
    But electronics are deflating,… Electronics have become cheaper through gargantuan investments of capital. Such investments are actively discouraged by deflation. And in an inflationary world, you can just park your money in government bonds (effectively returning it back to the Fed) to beat inflation most of the time. Inflation doesn't force you to spend your money productively Putting your money in government bonds or an interest earning savings account is by definition, putting your money to work. Sure, you aren’t doing anything with it, but whoever is paying you interest is only doing so because they expect to make more money than they borrowed.
    - immibis 3y ago
      This comment avoids responding to the actual point about electronics, which is that deflation is alleged to cause certain effects, and when we observe deflation, we don't actually observe those effects, so why is that?
- mitthrowaway2 3y ago
Wytwwww 3y ago
> -2% Would be pretty awful though. Very slow or no GDP growth, if you have any significant amounts of debt you're basically permanently screwed (if you're rentier and can just live on interest from low-risk bonds without doing anything productive you're set though...)
throw0101d 3y ago
> They could have chosen 0 or -2% but they like to reap that 2% free money premium.. If you think negative inflation (deflation) would be a good choice to make, perhaps look at the 1930s.

Workaccount2 3y ago

A pivotal moment in my career was realizing how much "winging it" was going on even at the highest levels of the craft. Yes, there is a lot skill and intuition behind it, but its still pretty off the cuff.

taneq 3y ago
I had to double check to make sure this wasn't my comment because I'm getting amazing levels of deja vu right now. Everybody's winging it, nobody knows what they're doing, and the higher you climb the chain the more terrifying this fact becomes.
- gretch 3y ago
  > Everybody's winging it, nobody knows what they're doing I’ve seen this comment a lot in recent years and I think there’s a lot of nuance here that is unappreciated. When taken literally, it is used as a weapon of anti-intellectualism e.g. the doctors don’t know what they are doing when it comes to vaccines. What it actually should mean is that the experts know there’s only a small slice about the universe/society that we understand, and thus proposal represents the best of our knowledge. It cannot guarantee success. But by god, it’s a lot better of an attempt than the opinion of some guy off the street
- wolpoli 3y ago
  For me, it comes from the confidence that while I don't know the outcomes, I do have the ability to handle any of the possible outcome.
- willismichael 3y ago
  I'm so glad we're having this conversation. Early in my career I kept waiting for that moment when I would feel like I really knew what was going on... and the last several years I keep feeling like a fraud. I've been at it for two decades, but I'm afraid eventually people will figure it out and then how will I earn any money?
- lioeters 3y ago

abdullahkhalids 3y ago

I was listening to this podcast [1] by a previous head of the IMF, who basically said the same thing. [1] https://josephnoelwalker.com/151-raghuram-rajan/ https://josephnoelwalker.com/151-raghuram-rajan/ Search for 2% in the transcript