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To be clear, the Fed is not trying to create inflation. It's trying to prevent deflation. The extreme measures it will have to take (such as the 'helicopter dro

To be clear, the Fed is not trying to create inflation. It's trying to prevent deflation. The extreme measures it will have to take (such as the 'helicopter drop') might produce future inflation (it's not certain, as it depends on future demand for liquidity and the rate at which the Fed can recover the money it has injected), but in the choice between certain deflation and possible inflation, possible inflation will always be the right choice. In the choice between certain deflation and certain inflation, inflation would still be the right choice. Historically, inflation has not hit the lowest paid the hardest. That's because inflation causes a reasonably uniform increase in prices, which includes the price of labour. It may be that the weakening of unions means that this effect will not occur this time, but a fall in the value of the currency suggests that prices should rise across the board, so this should be our working assumption. Usually, inflation is a transfer of wealth from those with savings to those with debts. It could conceivably help the worst off. In comparison, deflation will certainly lead to mass unemployment and will hurt the poor very badly, especailly those with debts. You say that inflation will lead to higher welfare costs, but deflation will lead to far higher welfare costs due to mass bankruptcy and unemployment. Furthermore, deflation increases the real value of government debt, and the depression caused by it will destroy tax revenues. This results in a higher risk of soverign default, which potentially causes a run on the currency. In fact, almost all of the problems caused by inflation will also occur with deflation, only they will be far more severe. So that's why it makes sense for the Fed to pursue this policy. It has bad consequences, but they are minute in comparison to the deadly consequences of deflation and mass institutional failure.

nuclear_eclipse 18y ago
Why does deflation cause unemployment and bankruptcy? It would make logical sense (to me at least) that if the dollar increases in value, then that would be better than the dollar losing value?
- cchooper 18y ago
  An increase in the value of the dollar is not an increase in total wealth (and similarly, a fall is not a loss of total wealth). A change in the value of assets is always a transfer of potential wealth from one person to another. This change may stimulate wealth-creating opportunities in the economy (e.g. increasing bond values will encourage the creation of more bonds, which means more investment in productive business) or it may thwart them (e.g. the loss of value of sub-prime securities has frightened people away from lending) but the price change itself doesn't create or destroy real wealth (goods and services). If dollars were to rise in value, it would constitute a transfer of wealth away from people with debts and towards people with cash savings. The first effect is that people will no longer be able to service the increasing real value of the interest on their debts, leading to default. But the more serious secondary effect is that a rising dollar encourages people to hoard money rather than spending it, as dollars tomorrow will be worth more than dollars today. The result is a liquidity crisis, where everyone refuses to consume or invest. The liquidity squeeze makes dollars even more valuable, and so the effect is self-perpetuating, until eventually the economy grinds to a halt. The worst historical example of deflation is the Great Depression, where local communities were having to invent their own currencies to make up for the extreme dollar shortage. The Great Depression is the reason central banks have positive inflation targets. Although inflation is bad, a small amount of inflation is a fair price if it reduces the risk of self-perpetuating deflation.
  - eru 18y ago
    http://en.wikipedia.org/wiki/Freigeld http://en.wikipedia.org/wiki/Freigeld
    - cchooper 18y ago
      Negative interest rates would be a very good thing right now.
      - eru 18y ago
        I even have a thousand bills lying around of such an alternate currency that I considered starting a few years ago. The nominal value would have been held constant by inflation-adjusting the exchange rate to legal tender. But the actual bills would expire after a year and would have to be renewed against a 5% fee. (That fee only accrues once a year and is in line with what credit card companies charge merchants --- for each purchase.)
  - mindslight 18y ago
    "People with debt", by definition, don't have wealth to transfer. Debts are supposed to go up over time, which is the point of interest. The only reason I should borrow money is if I can invest it to make a better return. The situation should not be such that most people are in debt. People with wealth are free; those in debt, not so much. > a rising dollar encourages people to hoard money rather than spending it This is also referred to as conservation, frugality, delayed gratification, and saving for a rainy day. Placing value on the future is generally regarded as a good thing. The effects of deflation really are terrible. Look at the tech sector where Moore's law assures that prices on computers are always dropping. I don't think I know anybody who owns a computer - everybody is waiting for them to get cheaper before buying.
    - cchooper 18y ago
      People with debt have an income with which they service their debt. If the real value of the debt increases, the real value of the money they pay to service it also increases. Thus their future wealth is decreased. If one person hoards dollars, they are being frugal. If everyone increases their liquidity preference, real wealth is destroyed. The gratification is not delayed, but lost forever. You are committing the fallacy of composition. Moore's law is not deflation. Deflation is a persistent rise in the general price level, as measured using a representative basket of goods. Have you never delayed buying a new console because you knew the price would drop soon? I have.
anamax 18y ago
> Historically, inflation has not hit the lowest paid the hardest. That's because inflation causes a reasonably uniform increase in prices, which includes the price of labour. Inflation is not uniform. Low-income wages typically lag. (And, increasing the minimum wage leads to less employment by the marginal folks and just compresses wages at the bottom.) Moreover, "lowest paid" isn't the only folks on the low-end of the system. Poor retired folks get slammed by inflation because the don't get any benefit from wage inflation.

nuclear_eclipse 18y ago

Why does deflation cause unemployment and bankruptcy? It would make logical sense (to me at least) that if the dollar increases in value, then that would be better than the dollar losing value?

cchooper 18y ago
An increase in the value of the dollar is not an increase in total wealth (and similarly, a fall is not a loss of total wealth). A change in the value of assets is always a transfer of potential wealth from one person to another. This change may stimulate wealth-creating opportunities in the economy (e.g. increasing bond values will encourage the creation of more bonds, which means more investment in productive business) or it may thwart them (e.g. the loss of value of sub-prime securities has frightened people away from lending) but the price change itself doesn't create or destroy real wealth (goods and services). If dollars were to rise in value, it would constitute a transfer of wealth away from people with debts and towards people with cash savings. The first effect is that people will no longer be able to service the increasing real value of the interest on their debts, leading to default. But the more serious secondary effect is that a rising dollar encourages people to hoard money rather than spending it, as dollars tomorrow will be worth more than dollars today. The result is a liquidity crisis, where everyone refuses to consume or invest. The liquidity squeeze makes dollars even more valuable, and so the effect is self-perpetuating, until eventually the economy grinds to a halt. The worst historical example of deflation is the Great Depression, where local communities were having to invent their own currencies to make up for the extreme dollar shortage. The Great Depression is the reason central banks have positive inflation targets. Although inflation is bad, a small amount of inflation is a fair price if it reduces the risk of self-perpetuating deflation.
- eru 18y ago
  http://en.wikipedia.org/wiki/Freigeld http://en.wikipedia.org/wiki/Freigeld
  - cchooper 18y ago
    Negative interest rates would be a very good thing right now.
    - eru 18y ago
      I even have a thousand bills lying around of such an alternate currency that I considered starting a few years ago. The nominal value would have been held constant by inflation-adjusting the exchange rate to legal tender. But the actual bills would expire after a year and would have to be renewed against a 5% fee. (That fee only accrues once a year and is in line with what credit card companies charge merchants --- for each purchase.)
- mindslight 18y ago
  "People with debt", by definition, don't have wealth to transfer. Debts are supposed to go up over time, which is the point of interest. The only reason I should borrow money is if I can invest it to make a better return. The situation should not be such that most people are in debt. People with wealth are free; those in debt, not so much. > a rising dollar encourages people to hoard money rather than spending it This is also referred to as conservation, frugality, delayed gratification, and saving for a rainy day. Placing value on the future is generally regarded as a good thing. The effects of deflation really are terrible. Look at the tech sector where Moore's law assures that prices on computers are always dropping. I don't think I know anybody who owns a computer - everybody is waiting for them to get cheaper before buying.
  - cchooper 18y ago
    People with debt have an income with which they service their debt. If the real value of the debt increases, the real value of the money they pay to service it also increases. Thus their future wealth is decreased. If one person hoards dollars, they are being frugal. If everyone increases their liquidity preference, real wealth is destroyed. The gratification is not delayed, but lost forever. You are committing the fallacy of composition. Moore's law is not deflation. Deflation is a persistent rise in the general price level, as measured using a representative basket of goods. Have you never delayed buying a new console because you knew the price would drop soon? I have.

anamax 18y ago

> Historically, inflation has not hit the lowest paid the hardest. That's because inflation causes a reasonably uniform increase in prices, which includes the price of labour. Inflation is not uniform. Low-income wages typically lag. (And, increasing the minimum wage leads to less employment by the marginal folks and just compresses wages at the bottom.) Moreover, "lowest paid" isn't the only folks on the low-end of the system. Poor retired folks get slammed by inflation because the don't get any benefit from wage inflation.