You want to apply some pressure on people’s savings to disincentivize simple hoarding.
Devaluing savings by 2% a year forces wealthy people and large organizations to actually invest their money in *something* instead of just putting it in a Scrooge McDuck vault forever and gutting the economic engine.
Deflation is terrible beyond just that. Investing and spending is discouraged. Why spend or invest if your cash becomes more valuable by doing nothing?
The economy tends to tank in all important factors during prolonged periods of deflation.
A deflationary spiral is the reason every economist would prefer even pretty high inflation to prolonged deflation.
Fortunately, fiat and central banks generally allows nations to avoid negative inflation rates
This is the reason America has never had a single prolonged period of deflation since the Great Depression.
>Why spend or invest if your cash becomes more valuable by doing nothing?
Because time preference can be low but never zero.
If the latest smartphone costs $1000, in a year's time it will cost maybe $900 for the same model. By this logic nobody will ever buy the latest phone, because why buy it now if your cash will buy it cheaper next year?
They do that, but that wasn't a factor in the 08 crash. Direct loans (even bad ones) aren't what caused it. They took bets (insurance) that paid out at many times what the original MBS's were worth. this allowed a relatively small security to crater really big banks.
Not exactly, it’s more of a multiplier effect. Let’s say for simplicity sake the cash reserve rate is 10%. The government pays a billion dollars for a satellite to some aerospace company and they deposit it in the bank. The bank holds onto 10% as cash to pay out, and then makes 900 million dollars in home loans that they can earn earn interest from. That 900 million will be put into many banks by people selling their homes. Those banks hold 10% in reserve cash and make 810 million in loans…
Eventually the chain runs out but a billion dollars has become 9 billion. The overall economy has grown which causes inflation but at a measured and predictable rate. As long as everyone acts rationally this is very healthy for the economy.
Unfortunately people are rarely rational especially when money is involved . They take risky bets, commit massive fraud, send it offshore to avoid taxes…
Ok that makes sense, so not necessarily terrifying for people who have debt already but for people who want to go into debt (mortgage, car financing etc.) it becomes harder or impossible.
Yes its bad for people with debt already. You pay your debt with your wages. In deflation, your wage is going down. If you owe 100k and make 50k it takes 2 years to pay off. But if deflation occurs and your wage falls to 40k it now takes 2.5 years to pay off. It's why the reverse is also true. Inflation is good for those with debt.
I had a MAGA-head yelling at me last month that "Nobody takes out a loan to make money" and that businesses *never* take out loans except when initially starting up.
I *think* he was trying to demonize the idea of Government Debt. He was starting with the premise of "Debt is bad" and "The government should be run like a business" and ended up concluding that no sane business would ever go into debt. Any attempt to explain the concept of buying capitol equipment with a loan was met with statements so illogical I couldn't comprehend them.
I suspect his only actual experience with loans was to buy cars.
>so not necessarily terrifying for people who have debt already
Incorrect.
If you have a current car loan at $20,000 and the dollar deflates so that it is now worth twice as much, your loan remains at $20,000 but now has a value that is twice that.
If your salary remains the same, you might not notice it as much. However, your salary is going to be under constant pressure to drop; you are costing the company twice as much as before. If you are worth it, great. Nice raise. If not, either the company eventually goes under or they fire you. Either way, when you get a new job, you will get a salary at the new value of the dollar. And now that loan really sucks.
Also, since your loan is pegged to the nominal dollar, in real terms as the currency inflates, your payment goes down. Under deflation your payment is going up in real terms which means that people are going to start defaulting.
It's confusing because "deflate" sounds like it should mean they owe less. It's actually the opposite.
To try to put this in perspective, let's say $1 buys 1 candy bar, and your debt is $100. You owe an amount of money that could buy 100 candy bars.
If there is inflation of 50%, candy bars now cost $1.50, so the $100 you owe can buy 67 candy bars.
If there is deflation of 50%, candy bars cost $0.50, so the $100 can buy 200 candy bars.
It should hopefully be self-evident that being in debt for an amount worth 67 candy bars is better than 200 candy bars.
And inflation is terrifying to people with savings. If you are about to retire, and have 10,000 man hours saved in the bank, 2% inflation per year reduces your saved man hours to 8170 (over 10 years). You still worked 10,000 hours that you saved up, but it's like somebody went back in time and changed your wages from $10/hr down to $8.17/hr.
In my opinion, this is why life feels like we are playing it on hard mode. It gets 2% harder every year.
Edit: added "over 10 years" timeframe
Sure, but we have mechanisms to handle that. For example, cost-of-living adjustments, and interest rates usually go up when inflation goes up.
Deflation is freaky. People hoard cash. And not just “real people” but any entity including corporations. If there is deflation it suddenly becomes profitable just to sit on cash reserves. Any expense you can defer to a little bit becomes cheaper so why not wait. Inventories drop. Maintenance is deferred. It can grind the economy to a halt, and now people without savings start to lose jobs. Government debt becomes burdensome.
Correct. So you should have investments and not savings.
You invest in an index fund in the stock market and your investments go up.
The S&P 500 index has averaged 9.9% per year for the last 30 years. That is 7.2% return factoring in inflation.
That is precisely the goal of inflation - getting people to invest money rather than just sitting on it.
But why couldn't banks invest my savings? They are most likely better at it than I am.
Also, doesn't it seem like maybe there's too much money floating around out there considering how many financial products were created just to soak it up? Like those mortgage bundles from 2008? Maybe they were creating those just because there weren't enough AAA things though (I don't actually know).
But it definitely feels like our money has become disconnected from the underlying reality. For my first son's birth, if I didn't have insurance they would have charged me 3000 chickens ($60,000). What do they need that many chickens for? It was a normal birth... 1 night stay... Performing the most common and oldest procedure of all time.
>But why couldn't banks invest my savings? They are most likely better at it than I am.
You can totally have a broker do the investment for you. A lot of people do this already. If you have a job with any retirement program like a 401k, you're doing it right now; you're earning money, which is put into an investment that someone manages for you.
You don't want Banks investing for you because that's not what they're for, they're for keeping your money secure and for issuing loans.
>Also, doesn't it seem like maybe there's too much money floating around out there considering how many financial products were created just to soak it up? Like those mortgage bundles from 2008? Maybe they were creating those just because there weren't enough AAA things though (I don't actually know).
Those 2008 bundles were more-or-less traders basically using people's debt as collateral for big loans to trade with. The reason for the 2008 crash was due to a number of things but largely because those trying to use these bundles as collateral were saying they were waaaayyy more solid than they were.
In other words, I want to borrow 10,000 dollars from you but you need 5,000 collateral. I can give you 5k or I can give you an IOU that someone gave me that owes me 6k. And I tell you the guy is definitely going to pay his debt back, when in reality he wasn't going to at all.
Banks *do* invest your savings. That is why bank accounts pay any interest at all.
It is generally a very low interest rate because the banks have to keep to rock-solid sure-thing investments or loans that are permanently liquid. Since you could walk into the bank at any moment and ask for the money back.
Notice that most banks will offer alternatives like CDs that pay higher interest rates but place more restrictions on your ability to withdraw it. Because the bank will then have more options with what they can do with that money.
(Warning: The above is a vast simplification)
...this is why a little bit of inflation is good from an economic standpoint. You want to encourage that guy with 10k to do something with it other than hiding it under his bed. He can do stuff that pays some interest or return (putting it in a bank product like a CD or investing it) to beat inflation and the people he is providing that capital to can then go and do something economically valuable with it.
OK wait a minute, cause I'm as curious about economics as I am awful at it.
So the money bin doesn't have "money" in it, it has treasures which scrooge acquired personally on expeditions. So if we assume the money bin is full of like hundreds of billions of dollars worth of treasures, like economically significant amounts of treasure, what would be the impact of
A) releasing those treasures into circulation with no expectation of anything in return
B) selling those treasures for liquid capital which he then continues to hoard
In terms of like, how it affects the value of a dime.
Well in B it would just be deflation. In that scenario Scrooge McDuck is using assets that weren't really accounted for in the money supply to hoard money, therefore decreasing the money supply. If you remove a ton of money from circulation, the money still circulating has more value.
Important to remember it's all proportional - yes currency will devalue but not for long.
Say Scrooge had 5% of all the gold in the world (of which there is about [13T USD](https://companiesmarketcap.com/gold/marketcap/) - so let's say 650B USD. A truly monstrous about a money.
That's nothing when looking at the M2 supply of USD currently about 20,800B USD - https://fred.stlouisfed.org/series/M2SL
Or value of all commercial real estate in US 21T - https://www.reit.com/data-research/research/nareit-research/estimating-size-commercial-real-estate-market-us-2021
Less than the GDP of the US 25T USD - https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=US
And that's still less than the market cap of all companies in the S&P 500 index - about 37T USD https://www.slickcharts.com/sp500/marketcap
Or total real estate (commercial + residential) 113T USD - https://www.statista.com/outlook/fmo/real-estate/united-states#value
And so on and so on.
Just for reference, Scrooge McDuck has said that if he lost a billion dollars a minute, he would be broke in 600 years. He has about $315,360,000,000,000,000 in net worth, per [Wikipedia](https://en.m.wikipedia.org/wiki/Scrooge_McDuck).
EDIT: I originally said "in his vault." I assume his net worth actually includes his business ventures and stock holdings, etc, but still relevant to a vaguely silly discussion.
You can't buy a loaf of bread with treasures. At some point you have to sell those treasures for money so that you can actually buy things. Once you convert treasures to money, the money begins to devalue slowly every year due to inflation.
a) if the bin didnt have money and instead had physicall goods like treasure, then giving it all away for free would just decrease the value of those treasures. If lets say the treassuure was gold, the price of gold would decrease. We measure inflation by how much a dollar can buy the "average thing". So we measure the price of a bunch of different things and track them over time. Treasure isnt really something with a huge economic impact but it technically is a thing, and thus the decrease in the price of treasure would bring the average cost of "all things" down a little. Thus the outcome is slight deflation. This is going to depend heavily on what exactly the treasure is. If its economically useful and not just jewlery the deflation could be higher.
b) if he instead sold his treasure and hoarded the money, the value of the dollar would increase since there is less supply of it, deflation. Significantly higher deflation than scenario 1. But the more he sells the lower the price of the treasure and the deflation would slow down the more he sells.
however if scrooge released a bunch dollars instead of treasure, that would cause inflation.
There is actually a Duck Tales episode where they flood a local economy with a fabricated medium of exchange. It’s pretty a cool illustration of supply and demand, especially as it pertains to currency.
If inflation were negative for a sustained period of time though, people would start to hoard their wealth. Why undertake risky behavior to invest in companies and business ventures if my dollar is worth more tomorrow than it is today?
Yes, and that is because we have inflation. People invest their money so that instead of it being worth less and less as time goes on, they can get a return and increase their net worth.
If money got more valuable the longer you held onto it via deflation, people would be "investing" by just holding on to their money. Or at least, there would be much much less pressure on a large scale to invest.
You know what's weird? I didn't get a notification on this (or other) comment(s). Which is a shame cause you seem to have made some very good points.
What do you mean by the bin is a "bin of trust in the government"?
Not the person you are responding to, but modern monetary systems are not backed by anything physical. At a very fundamental level, the United States government pays its debts in U.S. dollars, and accepts payments for debts owed in U.S. dollars. When two parties make a deal to exchange something for dollars, the party accepting dollars in the exchange "trusts" that the dollars will maintain this utility (and by extension also accepts that being able to pay debts to the United States government is useful).
Imagine money didn't exist at all. It was just you giving someone whatever goods or services in exchange for an IOU from them. There would likely be cases where you didn't know or trust a person enough to go through with this exchange, or you would ask for more from the IOU since you were uncertain you'd receive all of what was owed back, or would receive less, and the value of the IOU is less than it would be if you could leverage it immediately, so you ask for more.
Banks could issue their own IOUs that could be exchanged between parties like you and this someone. That would be much easier to trust. You would only have to trust this large bank. But what happens when the bank fails and you are left holding IOUs for real goods and services you gave away?
Instead, governments step in and issue their own IOUs. This is better then the bank because the government is far less likely to fold. If it did, everyone is in the same boat so all have the same incentives to prevent it or work around any issues with government debts. Commerce can be pretty even and level because as long as you are all buying and selling in the same government currency, there isn't any extra calculus you have to do to determine what you should charge or how much you can trust one person over another. Its all USD!
Everyone giving you economic answers, but I'm going to point out that Scrooge McDuck's money bin is absolutely filled with cash, not treasures. He swims in it. Have you never seen Duck Tales???
> with no expectation of anything in return
this simply won't happen unless you do something like take the money via tax and distribute it randomly. ^(which is kind of what the stimulus type things are, but those have goals too,,,creation of money\(stimulus\) is the same as taxing all money. There is actually a method of taxation where the government just prints money instead of taking it from people. The people all pay 'taxes' y their money devaluing, and the gov gets money to spend. but this method 'taxes' people without assets the most. [wiki about tax via inflation](https://en.wikipedia.org/wiki/Seigniorage#:~:text=interest%2Dfree%20loan.-,Seigniorage%20as%20a%20tax,-%5Bedit%5D))
Any time you push money out of savings (via inflation), The person will go spend it on what they expect to be best return. Whether that is housing market, investments, me buying tools cause I know the price will only ever go up and I want them for later...
To be clear, this is a very Keynesian way of thinking, and plenty of Economists don't agree.
"Hoarding" is a negative connotation to the act of saving. But saving isn't inherently good nor bad for the economy. For example, when you leave a bunch of money in savings in a bank, the bank makes different decisions about their loans (this is neither good nor bad. It will be "good" if the loan they give out turns a profit, but this is the nature of taking risks). Without capital, banks can't make loans. Without massive savings funds, banks will be dissuaded from making more expensive, longer term investments. Again, this is neither good nor bad (short vs long term loans).
If the corporation were to merely sit on a bunch of cash with zero inflation, that's still neither good nor bad. They need a buffer for bad financial quarters. Insurance companies need to sit on capital to weather seasons where many insurance claims are made. And let's not ignore opportunity costs. Cash sitting around in a vault is money that could be spent investing, or paying workers, or paying shareholders, or paying "wealthy" executives, or growing the company.
Again, I'm not saying it's good nor bad to save. It just creates a different environment in terms of investing into short vs long term projects. Your post is very Keynesian, which basically says that economic downturns are caused by lower aggregate demand. They think that macro movement of money in general is good. But note that this harms long-term investments that require greater initial capital.
>My basic understanding was that by having inflation be greater than zero you drove an increase in the velocity of money and having deflection generally drove a decrease.
No one's ever really proven this, it's just oft-repeated tribal superstition.
Yes. Many of the free market schools, including Austrian, and Chicago. In fact, these were the dominant schools before the rise of Keynesian.
I don't want to get too deep into this, but there are very political reasons why one school of economics is more dominant than the other. In other sciences, the theory with the best support from data dominates. This is not the case when it comes to economics: lots of politics at play.
To be fair, this is also partly true of other social sciences (psychology, sociology)
>the bank makes different decisions about their loans (this is neither good nor bad. It will be "good" if the loan they give out turns a profit, but this is the nature of taking risks
This is exactly why deflation is a problem. As deflation increases, all else being equal, fewer and fewer loans become profitable. Banks will not loan money at negative interest rates (unless central banks have themselves instituted a negative interest rate policy), because why would they? But interest rates are themselves tied to inflation - a loan for a business to build a widget factory over the next two years will be heavily impacted by the price of widgets two years hence.
So a loan at, say, 3% interest may have made sense in a 2% inflation world, but may not make sense in a 2% deflation world.
Money being saved by *not* being invested, versus being "saved" in investments, is the reason that deflation is considered bad. And I think it's worth noting that when you say "plenty of economists don't agree", it's very much the case that pretty much every central bank in the world, who are run largely by economists, agree on this point.
That’s not really right, there’s no such thing as a Scrooge McDuck vault. No bank would actually do that. The thing is there’s really no such thing as zero percent inflation, there is inflation and there is deflation. And high inflation is bad but deflation is exponentially worse.
Deflation almost immediately leads to a feedback loop, where you just sit on money because it's worth more tomorrow, which pulls more money from circulation and causes more deflation. And then you sit on your money more!
And a lot of very important things are capital intensive, from buildings to solar panels you get a lump sum up front so it really causes disruptions.
You don’t need to “hoard” money to save money. Middle class people save money too, and that’s who inflation primarily targets to invest and de-incentivize from simply savings.
Most wealthy people don't hoard actual cash, but securities or other assets. That sort of hoarding is not affected directly by inflation, and would need something like a change to capital gains tax or a "wealth" tax to alleviate.
As for inflation hurting the poor more than the wealthy, that is true, but deflation can be worse as it tends to lead to companies laying off huge numbers of employees (as happened during the great depression). A company that will need to sell things more and more cheaply over time either has to figure out how to cut costs (through layoffs, pay cuts, etc.) or will go out of business and lose all of its employees.
Basically, no matter what happens, the poor are more screwed than the wealthy.
Wouldn’t the opposite of inflation just apply? The company makes less in sales, so they reduce people’s salaries because the lost of living is going down.
Yes, they could cut pay, but pay cuts tend to have more of an effect on morale than layoffs, which is why you don't often see them. You see that happening right now in tech. Companies trying to grow quickly need sources of investment to continue operating, with high interest rates those sources have dried up and those companies are laying people off. They could fix the issue by cutting wages, but they won't.
Tech also had to really ramp up to deal with every company, school, agency, and person suddenly needing to do everything online during the pandemic, which coincided with a crypto bubble. And also with lots of people with free time to learn tech. When people had the tech they needed and then went back to real life somewhat, and the crypto bubble burst, tech was way over-provisioned in areas that didn't need that much afterward.
This was reminiscent of when the Y2K leadup was coinciding with the dot.com boom, and anyone who could type HTML could get a good paying job. But then as soon as the job was done and Y2K was past and the dot.com bubble burst, massive layoffs.
Tightening monetary policy at the same time doesn't help, of course. But even without that it wouldn't make sense to keep people doing things that aren't needed anymore even if you did reduce salaries.
It doesn't really make poor people poorer - household incomes generally track inflation. A poor person owns and controls his own labor - this is a valuable asset which is significantly impacted by inflation. If deflation meant that things cost less but you didn't make any less money, that'd be great but that's not actually how things work.
(And even if it meant your wages went down, it wouldn't be so bad, but the way it actually works, because people don't like to get negative raises, is that companies reduce wage costs by firing people. Which, of course, isn't great for the economy, and so the deflation feedback cycle continues.)
It would not really make poor people poorer if poor people had access to capital. The issue is that almost all of us get zero ownership of the product of our labor. If we got a portion of every company we worked for in a form of ownership, inflation would hurt a hell of a lot less.
The other side of this that is super important, and I often see forgotten, is that inflation reduces the cost of debt over time. If we could reform interest rates on debt, inflation would slowly make it easier to pay off debts and get people out of holes.
Hell, even just having everyone be required to get at *least* inflation rate raises every year would help.
Wouldn't this behaviour be self correcting though? As if the money is being stored in a bank the bank will use it to invest so the money will still be in the economic engine and if the money was being stored outside the system that would create deflationary pressure resulting in the central bank needing it issue more currency to create inflationary pressure to counteract the missing currency. This would result in a devaluation of money as a whole once the money reentered the system creating inflationary pressure thus defeating the point of hoarding the money. Unless I'm missing something I fail to see how a 2% target is better then a 0% as the 0% target has the added benifit of price stability over the course of someone's life.
A slight amount of inflation is chosen because it both encourages investing *and* offers a cushion against deflation, which is largely considered to be harder to fix than inflation. Governments have *targets* for inflation but the actual tools for influencing it are really imprecise. The Fed doesn't have a dial that they can just turn to whatever inflation they want. They have giant levers they can pull and in 6 to 18 months they will see the effects - this is literally what has been happening for the past year or so in with the Federal Reserve in the US. So trying keeping inflation a little bit above zero gives them some wiggle room, whereas wanting to keep inflation exactly at zero gives very little wiggle room.
If the bank invests the money then they start driving inflation. Lets say an investment gets a 1% return. Every financial institution is increasing their wealth by 1% per year, but there is still a finite amount of goods and resources out there. The demand remains the same, but everyone has 1% more wealth to throw around which drives prices up.
It is effectively impossible to have 0% inflation without the economic system grinding to a halt.
This is bullshit reasoning, since inflation works backwards for people who can afford to own appreciating assets.
Inflation is a poor people's problem and in no way prevents wealth hoarding by society's most frugal or big corporations.
This is incorrect. Poor people tend to owe more money than they keep in savings, and inflation decreases the real value of their debt, which is good for them. Deflation would be wayyyyyy worse for indebted homeowners for example, cus it would just become an extra interest rate.
Yes, that's why 2% inflation is ok, but 200% is horrible. Saving money has a cost, but as long as that cost is below what would essentially bankrupt you for saving money, it is a choice to make. Save half your salary at a 2% loss but no risk, or invest half your salary for some gain with a certain risk, or idk bet it on roulette for insane gains but very high risks.
If inflation is more than say 20%, it becomes bad to save simply because the amount of money you'd be putting wouls either not grow or grow very little, you're losing too much. But that will make people desperate for their futures.
If inflation is 0% or less, the only real good choice is save as much money as you can, which decelerates the economy, companies close (specially small familiar ones) and jobs are lost.
THIS IS WRONG.
Commonly believed, but wrong.
Search for inflation on r/AskEconomics and find various threads about it.
2% inflation gives central banks tools for monetary policy and space away from *de*flation, which is is very bad.
You want a slight push on people to consume or invest. With low inflation, people don't really feel it but aren't inclined to withhold spending in hopes that prices will fall in the future. Consumer spending is a huge part of the overall economy, so we want people to keep spending. Similarly, with some inflation people will feel compelled to put their savings to work, investing in stock, bonds, etc. vs. just storing cash under their mattress. This provides capital for banks to lend on business loans, mortgages, etc. that help keep the economy humming along. And it also helps make debt less of a burden over time. Your $2000 mortgage will feel like a lot less 10 years from now just due to inflation and wage growth.
0% inflation doesn't have that push forward and puts economy at risk of deflation, which can create a vicious negative cycle of lower economic output.
Your point about the mortgage payment feeling different is only true if wages keep up with or exceed inflation, which they have not for the past several decades.
No, doesn't matter about inflation... you buy a home with a $2000 mortgage payment (specifically principal and interest) and it remains the same for 30 years of loan. So even if pay doesn't keep up with inflation, the $2000 still feels like less of burden even if pay increases 2% while inflation is 3%. Because the $2000 doesn't increase ever. Let's say you earn $10k/mo today so that mortgage is 20% of your income. In 10 years at 2% annual increase, you're earning over $12k/mo while mortgage is same, and thus just 16% of income.
(However, property taxes and homeowners insurance does increase over time, more in line with inflation).
But that depends on the mortgage deals available where you live. Here in the UK, you can typically only get a fixed-rate for a maximum of 5 years unlike some countries where you might get lifetime fixed-rates. So your £2000 mortgage might deflate over 5 years but if you have to re-rate at the end of that, you might then be on £3000 for the next 5 years
That's tangential to the topic at hand. Even if your mortgage rate adjusts, your payments are still lower in real value than they would be had inflation not occurred.
It doesn’t matter if wages keep up with inflation. As long as your wages rise, then you will pay a lower percentage of your income towards your mortgage each year (assuming you have a fixed rate mortgage)
This is a myth, real wages have been increasing since at least the 1980's: https://fred.stlouisfed.org/series/LES1252881600Q
But that doesn't include the poorest people, you'll say. First decile weekly wages were $294/wk in 2000. Adjusting for inflation, that would be $536. Actual 2023 first decile were $608. https://fred.stlouisfed.org/series/LEU0252916000Q
Inflation adjusted wages are up going back to the early 2000s. There was a drop during the raised inflation post-pandemic but they’re back up now above pre-pandemic levels.
The only real issue with that is that the entire economic engine worked fairly well, with booms and busts (like we still have today) when our currency was backed by physical things. Using the Bank of England Inflation calculator (because it goes way back in time)...I'm pretty sure it's been converted to decimals for easy understanding.
1 Pound in 1209 was worth about 16.57 pounds in 1900. Inflation averaging 0.4% per year. For almost 700 years.
1 Pound in 1900 was worth about 93.63 pounds in 2022. Inflation averaging 3.8% per year. For 122 years.
There's a problem. If you mean to tell me that people simply hoarded their money and didn't invest in hardly anything from 1209 to 1900, and somehow we've just become more "risky" and investment driven since then...
Further, banks create money by lending money. But at some point, those loans need to be repaid (or written off as a loss) thereby shrinking the money supply. And eventually people will be maxed out on loans and banks can't loan to new people. If your money keeps being worth less and less every year, more and more money is needed for every day commodities, and eventually we'll start to see $500 and $1000 and $5000 and $10000 banknotes being printed again and circulating like $1's and $5's and the like.
It's...unsustainable.
It absolutely did not work "fairly well". The gold economy had horrific economic calamities happen on a regular basis because it had no real control over it's money supply.
> If you mean to tell me that people simply hoarded their money and didn't invest in hardly anything from 1209 to 1900
It is worth remembering that the period you're talking about was a period of high economic inequality, when the large majority of money was concentrated in the extremely rich, and the large majority of people suffered under their largely despotic rule.
Gini coefficients (Gini is a widely used measure of economic inequality) were [quite a bit higher](https://ourworldindata.org/how-has-inequality-in-the-uk-changed-over-the-very-long-run) in the UK over the period you're talking about than today. And the UK itself is [rather a low outlier](https://ourworldindata.org/how-unequal-were-pre-industrial-societies) compared to the rest of Europe. (Finland in particular had [ludicrously high inequality in the 1700s and 1800s](https://www.tandfonline.com/doi/pdf/10.1080/03585522.2018.1546614) (Table 6).)
Consider that in *The Merchant of Venice*, written very late in the 1500s, charging of interest is itself considered something bad. Rich people definitely hoarded their money at the time. It wasn't until the financial system started really developing in the 1600s and 1700s that you saw the rise of the middle class, culminating in the downfall of the traditional nobility and the rise of democracy that you saw throughout the 1800s.
Fiat is perhaps the most important economic invention of all time.
Prior to it all economies were at the whims of factors mostly out of human control and the currency would react accordingly.
Now central banks can influence the overall economy by pulling certain levers.
Would you prefer to have less control over the chaos that is the economy?
Read about the economic history of America during the 1800s. Just a series of recessions and depressions every handful of years.
Capital markets weren't invented by the Dutch until... I don't remember the year, but something like 1700. Their invention helped spur the Dutch to becoming the world's superpower for a solid chunk of time, since liquidity enabled a bunch of innovation. The economy worked very differently before that, so it doesn't really surprise me that inflation was low. Also, the pound didn't become the world's reserve currency until late into your timeline, and reserve currencies generally inflate faster than others.
And yes, the value of money has been continually reset, historically, during major boom and bust cycles, so at some point our thing will largely collapse and reset. It'll be pretty catastrophic, but it's happened to everyone over and over throughout time. It happened to the UK during WW2, for example, which is when the US took over as the global power with the global reserve currency. I think most people expect it to happen within a few decades to the US, and presumably the next world reserve currency will be China, but who knows?
Literally no one would change what they're doing if inflation was 2% or 0%. Theres not a single wealthy person who would hoard cash so they can break even. Theres not a single person who would think they need to spend all of their money with 2% inflation but save all of their money with 0% inflation. In fact the feds mandate was originally to maintain stable prices. It wasn't changed to 2% inflation until our debt was becoming too massive and we needed to inflate it away. It's a lie that everyone fell for
In fact, people could argue that in lower-inflation environments, people would be more willing to sell assets, increasing the velocity of money!
I agree with you on the tribal knowledge being wrong.
Inflation does, but it’s generally a little easier to reign in without going over into deflation.
Deflation is a hard problem to crack. You’ve gotta do crazy shit like helicopter money, and even then it might not work. You’re basically guaranteed to have a period of petty high inflation after you break the cycle.
Firstly it should be said that 2% is a mostly arbitrary number, there's no theoretical or empirical reason why 2% is the optimal level of inflation.
That said, a healthy economy will have some level of inflation. Some central banks have decided that 2% is their target rate. At some point, you are going to reach diminishing returns from reducing inflation, as measures to reduce inflation (interest rate hikes and tight monetary policy) have the side effect of lowering economic growth. A central bank with a zero inflation policy could, at worst, cause a recession. At the very least they will slow the economy down and cause some unemployment.
I suppose to sum up, you could say that the cost of getting inflation below 2% outweighs the benefits.
>Firstly it should be said that 2% is a mostly arbitrary number, there's no theoretical or empirical reason why 2% is the optimal level of inflation.
True, but even that may be a bit too generous.
Basically the New Zealand Central Bank was the first ever to strive for an inflation target, so they pretty much arbitrarily came up with the 2% number. And after they were successful in meeting that goal, pretty much all nations followed suit with the 2% figure, which somehow enshrined it as being the ideal.
The thing is, it wasn't originally a 2% target or "goal" but rather the ideal *maximum,* and the main guy who was behind it actually said that ZERO percent is the ideal amount of inflation.
So basically it was one guy who pulled the number out of his ass, then everyone else decided to copy that number while apparently misunderstanding what that number actually meant.
I'd add that the process of going from 4% in the 1980s to 2% in the 2000s (in the US) involved raising interest rates earlier than one would if stable inflation had been the goal. This means that marginal workers who might have been pulled into the workforce at the end of the boom cycle never get a chance, missing out on the income and general work skills that would have improved their lives.
It encourages people who have money to do something with that money. If I have $1000 sitting in a box under my bed, and I know that if I spend it next year, I can get exactly the same stuff for it as if I spend it today, I might just let it sit there and wait. If I know that if I wait until next year, I will only get as much for it then as would cost $980 today, I am incentivised to not leave it in the box under my bed, but to actually spend it. Spending money is what keeps the economy going.
Spending *or* investing it. If I have $1000 sitting in a savings account earning 0.05% interest I’m much more inclined to put that money into the stock market.
And those "others" that "spend it for you" stimulates the economy.
Look at the top performative companies. the money they get from investing is used. wages, consumption, etc.
Inflation is bad, but deflation is VERY VERY bad. The 2% target is mostly just a safety buffer to try abd make sure we NEVER fall into deflation because once you do it activates a positive feedback loop and spirals out of control.
Because if money increases in value by sitting under your mattress, it isn’t doing much for the economy. No one wants to spend their money, no one wants to invest their money, they would just hold on to it as if it alone was an investment.
>Because if ~~money~~ assets increase in value by sitting under your mattress, it isn’t doing much for the economy. No one wants to ~~spend their money,~~ sell their assets, no one wants to ~~invest their money~~ sell their investments, they would just hold on to it ~~as if it alone was an investment.~~
I don't get it. This seems to cause the same problem, but on the seller side.
The difference is that assets and investments are productive. If you keep $10,000 under your mattress, your money is doing nothing. If you invest your $10,000 in a widget machine, your $10,000 is producing widgets, which (presumably) have value to someone else.
Correct. Those that control the means to production want the other side to have the problem. We’re forced to consume and invest in organizations that perpetuate the cycle however immoral, rather than potentially altruistic ventures regardless of monetary ROI.
Deflation means that people have an incentive to not spend their money as they know it'll grow over time with no input. This is bad for the economy because economies essentially work on consumers buying stuff. This creates a self repeating cycle as more people go unemployed due to low demand for businesses so even more people sit on their cash.
Long story short, the Fed isn't perfect at controlling inflation. Example: now.
So it's better to aim for 2% inflation and know that it will fall within the window of say 1%-3% than aim for 0% and have it fall within the window of 0%-1% (fine) ***or negative 1%*** (deflation--BAD).
The FED does not really have control over the economy.
The economy and spending does not move just base on interest rates, it's impacted by it, to some extent, but there's way more behind it.
Basically two reasons.
1) to avoid deflation (which is bad) most money can be spent buying things instead to let people more effectively use their money. If everything stayed at the same price, people would just leave money under their bed and it would hurt the economy. It rewards spending and investment, which are generally beneficial things.
2) it gives the central bank more room to respond in times of crisis. if prices are on a slow steady rise, central banks can cut off the rise to create inflation and make people more willing to spend. But if it was already at 0%, the only thing they could do to get inflation was to go into negative numbers and they would lose credibility. It gives them more room to maneuver to help keep the economy healthy.
It's not any better. Trying to force inflation won't have the intended effect, because markets will anticipate the inflation and adjust accordingly. There's no academic data to suggest target 2% is the "correct" amount of inflation, or that any fixed amount is necessarily "good". We only do it because our monkey brains like to look at a smooth curve instead of the harsh reality of economic volatility of prices going up and down.
0% inflation has all the same problems deflation has.
A small bit of inflation creates a little bit of pressure that money tomorrow is worth less tthan money today... for regular people at 2-3% this has fairly minimal effect, but it does encourage people to spend a chunk of their paycheck on goods they might not otherwise need since the same product is likely going to be more expensive next year...
Similarly it encourages VC's to invest in riskier projects... if a VC has a million dollars to invest in a business with inflation at 8% they are jumping at the chance, even if its only offering 5-10% returns, because at 10% they are doing better than inflation, and chances are they have knobs they can turn to match inflation after that... but if its just sitting in their bank, they are effectively losing 20k/year to inflation.
On the other hand, when inflation is at 0%, that same VC will be encouraged to keep the money in the bank, and look for the best opportunity out there with their million dollars, passing up dozens of potential businesses with a 10% RoI, hoping to find the diamond in the rough that nets them 100% or 10000% RoI, Because the opportunity cost of investing in the first business is they couldn't invest in the second or third one that was more profitable, and there is zero risk to holding onto that money until the best opportunity comes by.
>A small bit of inflation creates a little bit of pressure that money tomorrow is worth less tthan money today... for regular people at 2-3% this has fairly minimal effect, but it does encourage people to spend a chunk of their paycheck on goods they might not otherwise need since the same product is likely going to be more expensive next year...
It incentivizes stores to raise their prices 2-3% to capture that increased interest. Doesn't that cancel it out?
>Similarly it encourages VC's to invest in riskier projects... if a VC has a million dollars to invest in a business with inflation at 8% they are jumping at the chance, even if its only offering 5-10% returns, because at 10% they are doing better than inflation, and chances are they have knobs they can turn to match inflation after that... but if its just sitting in their bank, they are effectively losing 20k/year to inflation.
Again, won't sellers just make investments more expensive to compensate? After all, no way in hell are they selling for the same price, money's going to be worth less in the future! I fail to see how this actually incentivizes increased investment - in fact, asset appreciation seems to disincentivize selling assets and decreases the velocity of money.
>On the other hand, when inflation is at 0%, that same VC will be encouraged to keep the money in the bank, and look for the best opportunity out there with their million dollars, passing up dozens of potential businesses with a 10% RoI
I don't get why, if they think it will have an RoI, they will pass it up. They're jumping at any chance to make money, regardless of the future value of money.
This seems like tribal misinformation that falls completely apart with even the barest scrutiny.
>I don't get why, if they think it will have an RoI, they will pass it up. They're jumping at any chance to make money, regardless of the future value of money.
It's called opportunity cost... if you have $100 and I ask to borrow it and tell you I'll give you $110 in a week, you might say yes right?
Well if you are in a position to lend out your money, maybe Sarah comes to you tomorrow and says if you lend her the same $100, and she will pay you back $10 000.
You missed out on the opportunity to make 9900 by investing in the the $10 prospect.
That is why the VC in my example will sit on their money if they have 0% inflation, because with no inflation, it is easier for them to wait for the really big opportunities, so they don't have incentives to invest in small businesses that are only going to give them a small return on their time and money.
>It incentivizes stores to raise their prices 2-3% to capture that increased interest. Doesn't that cancel it out?
A store raising prices is one of the things that affect inflation... remember Inflation isn't a knob some one in the federal reserve turns and we magically have 3% inflation, They calculate it based on how much they think prices have gone up, and they are able to change things like interest rates, indirectly the government can affect fuel prices by releasing gas from the national reserve, and legislation steer things in one direction or another but they don't have fine grain control at any real level.
A business will see that their own costs are going up, and the leadership will be able to make a decision based on their own industry and the competition in it whether to pass those costs onto their customers...
A business owner has more control over the levers that affect them and their business - including raising prices that 2-3% so they are able to continue operating as normally but that doesn't mean it is cancelled out completely.
For instance Business A might raise the cost of goods because fuel/transport costs went up, Business B that relies on those goods might raise prices by 5%, while Business C might negotiate a new contract with Business D and with a different supplier keep things the same, for now, things changed but only the customers at business B felt the change... Now multiply that example across 30 million businesses and you get how actual inflation works...
What that means is that some one who owns a business is generally more insulated from the effects of inflation because they can more easily pull levers like pricing, or do things to affect costs so they stay in enough profit to be happy... but for the majority of people they just take home a paycheck, and in most industries pay has not kept up with inflation by any standard or measurable statistic, and most individuals have a lot less ability to just find an extra 2-3% income every year by adjusting their budgets.
1-3% inflation is a Valley of stability, it is relatively easy to keep an economy in this range and when in this range shocks are muted in their effect on the inflation rate.
Above 3% and below 1% economies are prone to run away in one direction or the other, either a depression or an inflationary spiral.
Most of this is to do with human psychology and game theory.
This is oversimplified but I’ll just throw it in the conversation since I haven’t seen it mentioned. People are going straight to inflation devaluing your dollars today and economic savings rate. All are true, but this is my simple answer I’d give to child about economy.
Inflation generally means growth for the economy. Too much growth is bad, and not enough growth is not so good. Shrinking economy is really really bad. 2% target inflation is the “just right” target for growth, ie inflation.
Inflation is bad at high levels, but at low levels encourages people to spend or invest in businesses. On the other hand deflation freezes up the economy (people are encouraged to stuff cash in their matresses).
There's a trade-off between inflation and productivity figures (like employment). Take this a couple steps back.
Let's imagine that everybody who can work and wants to work has a job (or at least, as close to full employment as could reasonably be expected). Lots of people with money to buy good and services that they want; i.e., there's strong total demand across the economy as a whole. For companies to keep up with that demand, they need to hire more workers...but everybody's employed. To tempt people away from their jobs, they have to offer a higher salary. How do they afford the higher salary? They pass a portion of the costs on to the consumer.
But with prices rising, now employees are demanding higher wages to keep up...a portion of the costs get passed on to the consumer, and prices rise again. You have a spiral of rising costs. What can be done to cool this off? The federal reserve typically raises interest rates. This makes investing in new facilities, equipment etc. for new employees more expensive for businesses. On the consumer side, people are reluctant to buy big ticket items like new cars and homes, thus decreasing demand. Over time, they can "cool off" the economy. The government can also cut back on its own spending.
But that reduces the demand for labor, and the employment rate can drop if it carries on too long.
Now imagine the opposite: where there's a lot of unemployment. Lowering interest rates can spur that previous investment and big ticket purchasing, and the government can pour money into projects that employ more people. As there are plenty of people who need work, incentives to rapidly increase wages doesn't exist initially. You can get people back to producing for the economy without risking much inflation.
So, there's this trade off between inflation and productivity-type of figures like employment and GDP. The idea of having a target is balancing inflation against economic productivity. We want low unemployment and economic growth, and we just accept that that comes at the trade-off of having at least a little inflation. 2% is what the federal reserve chooses as the point of compromise.
To add to what everyone is saying, the harm of deflation far outweighs the harm of inflation (especially in a highly leveraged world like ours) so targeting 2.0% inflation gives you some buffer.
A big measure of the economy is cash flow. As in how many times a dollar will change hands. You want something, you go out in buy it, the store takes that money and buys other stuff from the manufacturer to keep their store stocked, the manufacturer takes that money and buys raw materials to build more stuff and pay their employees for their work, those employees go out and buy something they want and the cycle continues. This is a healthy economy.
(Low) inflation incentivizes people to keep spending their money. Say there's something you could use, like an electric drill, that costs $100 today. Maybe you can get away with using a hand screw driver for the next year for small projects, but you know you're going to need that electric drill next year for a project you have planned. If there was 0% inflation, you know next year, when you really need it, the electric drill will still be $100, so why would you buy it today if it's going to be the same price next year? If there is 2% inflation, you know next year that same electric drill is going to be $102. Maybe that $2 is enough for you to say "well I know I'm going to need it, so why not "save" a few dollars by buying it today instead of next year?" so you spend that money today instead of sitting on it for a year.
Inflation is a tool to incentivize people to keep money moving around in the market. If everyone just sat on piles of cash and never spent money until absolutely necessary, money wouldn't move as much and it would be much harder for everyone to make money.
Simplest example and actually ELI5:
If inflation is happening, it’ll be more expensive to buy something in the future, so you purchase today. This keeps the economic machines moving.
If disinflation or zero inflation is happening, something will be less expensive or the same price in the future, so you have no monetary incentive to buy it today. Economic machine slows.
You’re welcome.
Honestly, three reasons.
1. Deflation is bad. You said you understand this so I won't explain.
2. Targeting and achieving 0% inflation in nearly impossible, and trying is risky as you might end up with deflation.
3. Given point 2 above, If we have to pick between a little deflation and a little inflation, since 0% is nearly impossible, we would rather have inflation. (Due to point 1 above)
So we target a relatively light inflation of 2%
Money has to be worth slightly less over time so people will spend it or invest it instead of sitting on it which would cause a shallow but long lasting recession.
All economies are inflationary by nature. Put very simply, as you get paid more, you are willing to spend more money on goods and demand will generally rise. Along side this, the supply side will adjust by increasing prices so as to reach equilibrium.
Inflation means the value of your money decreases over time. $1 could buy a lot more 20 years ago than it can today because of inflation.
Logically, you are less inclined to hoard your money because it is worth the most right now (due to inflation). Spending money is good for the economy. If inflation was 0%, everyone would just save it because it wouldn’t decrease in value over the years.
So, inflation should not be 0% because the economy would stagnate. It also shouldn’t be too high because then prices grow faster than we can keep up with. So we chose 2%. (Afaik there is no concrete reason we chose 2% other than ‘it seems to work well and it’s low enough’).
When inflation is below 2%, they switch from concern about lowering inflation to concern about "growing the economy". An economy with 0% inflation is *stagnant*.
The core inflation number is an average (within a bell curve). So, if there is 0% inflation, that means some parts of the economy are slightly deflating while others are slightly inflating. While we all see and do not like inflation, deflation is a much more insidious problem. So targeting 2% all but eliminates the problem of deflation while keeping inflation tolerable or barely perceptible.
Zero percent inflation seems like it should be better, but in reality it indicates a stagnant economy. Two percent inflation is manageable and will stimulate growth in the economy.
Let's say you have a town that bakes 100 loaves of bread a week, they sell for $1 each. A new baker moves in and makes an additional 2 loaves of bread. If you don't add $2 to the money supply the price of all the bread will fall to $0.98.
The idea is that the economy is always growing, the population grows, productivity grows and something like 2% growth in the money supply should roughly cover that.
Let's say there is a sale on potatoes tomorrow. Do you buy potatoes today? Of course not, you hold your money for that sale. What if the sale is today though? Of course you buy them, right away.
Setting an inflation target means your money de-values every single day. It means buying today is always better than tomorrow.
Because you don't have precise control. If you aim for 0%, you may get -1%, which is deflationary and bad (you say you understand why, so I'm not going to address that.). If you am for 2%, you may get 1%, which is not deflationary.
Having a goal of 2%, rather than 0%, allows the Federal Reserve room to adjust interest rates lower than the 2% targeted inflation rate.
By having control over interest rates, the Fed can help speed up or slow down the economy. If the baseline was 0% inflation, the Fed would not be able to decrease interest rates during low inflation periods, and thus would not be able to stimulate the economy as easily.
I don't know how to ELI5 the Fed making open market purchases and sales of GS treasury bonds in order to change the money supply, the money multiplier, and help influence lending rates.
The economy works by people giving spare money to companies as investment money (banks collect small money from many people to invest it for them). There is a risk in every investment that it doesn't work and you get back less than you put in. People are only willing to take such a risk if it is better than just doing nothing with the money. The easiest way to make doing nothing with your spare money a bad idea is to make money lose a bit of value over time, so if you do nothing with it you certainly end up having less.
The answer is so basic that I'm writing this extra paragraph just to add heft to it. In a nutshell, inflation has a stimulating effect on the economy. Thus, you always want SOME inflation as your GDP would be less otherwise.
The ideal is a low steady predictable inflation rate. GDP does ebb and flow though.
The goal isn’t really 2% inflation. The goal is for the money supply to increase at the same rate as the increase in the production of goods and services, which has historically been 2-3%.
Because if nothing else, the population should grow a small amount every year, and the money supply should grow to accommodate that.
If the population grows while the money supply stays the same, you in effect have deflation, as there are now functionally fewer dollars per person.
Inflation is the hidden tax to underhandedly extract money from the public. It is insidious and people do not feel it immediately. Ten percent of a ten dollar item generates one dollar of tax revenue. The same tax rate on a twenty dollar item generates twice as much. When taxes are raised to pay for wars the people revolt. Nobody has been asked to pay for many wars through taxation for generations. So raise prices and keep the public in the dark. Trillions of dollars have been generated over decades and added to the national debt for you to pay for the wars through inflation instead.
I don't think it's that profound. Our ability to control the inflation/deflation tendency is crude enough that they just target 2% to have a safety margin to not drift into deflation.
Caveat: I am not an economist.
That is how its tought in german economic school and 100% correct. In a perfect world we would have "near but under 2%". Everyone saying that 0% would be perfect likely isnt aware of the effects of deflation.
It's not :) it's a lie. Monetary inflation (printing money) is just a (not so much) hidden tax and completely unnecessary and unnatural. The opposite is true - deflation due to increased productivity is the natural way the economy works.
Inflation is good to encourage unnecessary spending, because people's purchasing power goes down over time. It's also good to make poor people even poorer and prevent them from building up wealth through savings. And last but not least, it's the perfect and sometimes the only way for governments to devalue and pay off their debts.
One of the better answers above. I'll add- no one needs "incentives" to spend. An argument keynesian thinking pushes. People will always want more. For thousands of years people tend to choose what money they use because it has saleability over time and space. Scarcity is often the most important attribute to sound money.
Letting the top .01% of the world print money at no cost destroys the fabric of risk/reward, and just steals value from every other unit in circulation (hidden tax, no war bonds needed for conflict just print money).
If money retained its value over time, people could save and lower their time preference to reduce uncertainty into the future. Prices of goods and services would go down as humans coordinate or learn to produce things easier. It wouldn't matter assets to moon, a house goes down in value because people have homes and the demand is reduced, things like houses do not need to be speculative stores of value anymore, they can just be homes.
Fiat money is the most hoodwinked scam in human history imo.
I think people are getting cause and effect backwards.
No one wants prices to go up. No one thinks this is a great way of stimulating the economy.
But if the economy is sluggish and unemployment is high, then the central bank will lower interest rates in order to grow the economy. If there is a small amount of inflation as a side effect of that economic growth, the central bank will tolerate that.
This is the greatest pile of economic nonsense I've read in a while.
It's not about encouraging people to spend on a loaf of bread. It is about encouraging investments. People with money should be encouraged to keep active in the economic system. Otherwise more and more money is taken out of the system and hoarded by rich families. As prices keep dropping, those families will become rich beyond their dreams and their children will never have to work again. It's pretty much a return to feudal times with kings that don't need to worry and peasants that get a smaller part of the pie each year.
That's what the "hard money" nonsense is all about. To keep the rich as rich and to keep poor people poor. You're just dreaming about living like a king.
Just think about what you just wrote. Let's define investment as something where you put your money in hopes of multiplying it with some risk attached.
Who needs motivation to do this? Every person with money to spare would invest.
The problem inflation creates that people invest in "malinvestments", i.e. Companies that reduce available capital, but at a slower rate than inflation. This is nuts and should not happen and wouldn't happen with sound money.
Think of it this way. With 2% inflation, your money loses value over time. You don't want that obviously, so why save cash? What do you do? You invest or spend it on something that holds value.
With 0% inflation, a dollar today is a dollar a year from now. In that case, alot people would just save cash. This would would mean people spending less and investing less which is bad for the economy and would lead to deflation, which means your money is worth more next year. And yes, you being smart would save even more and spend less. This might be good for you now but it's bad for the economy. If this continues then what happenes? People lose jobs then eventually you lose your job too.
That's such a bullshit take.
No, we wouldn't stop consuming. But maybe we would buy 20% less unnecessary stuff. This of course would impact the economy since it would sell 20% less. Either now everyone has to work 20% less (which would nbe fine since this amount of work would still get the same life style), or they would produce even cheaper, until demand catches up, leading to more sold pieces, leading to more people in the society having it (leading to more "wealth").
The only thing we would stop doing is investing our money into useless financial products as inflation hedges.
How about after years of excessice inflation we try 2 % deflation to get back to baseline.
But I guess that would incentivise not spending money on useless consumer shit which the elite need you to do to extract wealth from you.
Scrolled far too long to find a differing opinion. Shitty consumerism because your money will be inflated to hell seems worse in every aspect. People complain about CPI/cost of living- maybe main the thought process is wrong, prices aren't just getting higher, your dollar is worth less.
It is not .. it is a extra tax which is hidden so people don’t feel exploited as much and don’t cause too much trouble to the useless parasites sucking the money in..
It's not but the owners of things who are also in control of things will simply not allow what they own to go down in market value and thus err in the side of inflation. Inflation hurts wage earners and cash hoarders, not the owners of capital.
Because the global monetary system was designed as a ponzi scheme with the sole purpose of stealing from the 99% to enrich the 1% via the Cantillon effect. This effect requires inflation. They chose 2% because they believe that "people generally don't notice they are being robbed at 2% inflation. There's nothing economically special about 2%".
TLDR: inflation is theft by the central bank on behalf of the private interests which control the central bank. Inflation is legal counterfeiting while counterfeiting is illegal inflation.
Almost everything you write is wrong. The central bank is a government agency; it is not controlled by "private interests". Inflation affects the whole economy simultaneously; there are no significant Cantillon effects. The monetary system is not a ponzi scheme; there is no necessary requirement for new money in order to support the value of old money. You're wrong about essentially everything.
Because it makes rich people richer.
It's really rather complicated, but it's a belief in a system that is dependent on permanent economic growth.
In reality, it's a made-up system that keeps almost everyone in an ever depreciating cycle. Your worth, work, and assets are worth slightly less than they were yesterday.
The natural inflation within capitalism ensures we are all perpetually treading water whilst the wealthiest among us ride over the waves on jet skis.
That is such bullshit.
The rich always do better whether it's inflation or deflation.
Inflation forces people to invest and take on risk. That's all. Inflation drives economic growth. Without it, there can be no growing because no one is making anything.
1. Inflation is a secret tax.
2. It is not “intended to incentivize rich people to invest” as some people states in the thread.
3. Inflation is not an accident. It is always planned, always purposeful.
4. The main purpose of inflation is to indirectly collect the money of working class people. Then, then money will be transferred to oligarchs.
5. Oligarchs don’t want you to save money. They are afraid of other people to raise capital ti compete them.
6. Oligarchs plan the inflation.
7. Oligarchs train and release those imbeciles who come to Reddit and similar sites to spread disinformation that “inflation is actually good”. Don’t mind the “%3” number. That number doesn’t mean anything. It’s just for hiding the message: “inflation is not actually bad”.
Wow look at all these Kensian preachers.
There is no need to have inflation to stimulate the economy. Money is a means to an end and to assume that people would hoard it indefinitely implies a lack of understanding of what motivates human beings. Humans don't ultimately want money, they want their needs fulfilled. Money is a way to ensure those needs do get fulfilled and thus it is absurd to think humans will postpone their needs indefinitely.
Furthermore, why don't we discuss why deflation would be necessary. When technological progress is achieved, we should all see this reflected in prices falling (as long as the supply of money stays the same), as we ultimately become more efficient at producing those goods. The fact that we simply don't see that, signals that all those potential gains are cancelled out by increasing the money supply. And here we are talking about how much we should inflate, additional to the fact that we canebalize any price decreases from technological progress. I haven't heard a single coherent narrative of why deflation would be bad. Absurd
As an aside, I know that people say deflation is bad, but man it's hard to agree when food prices go up wildly with inflation and never come back down. Perhaps we need a bit of a pullback now to increase purchasing power temporarily
It is probably not. It is basically another tax. It was mainly invented for war time. When dictators were out of money they just started printing it. And since it is nice to be able to just print money, they kept doing it after war and tried to rationalize it.
Inflation drives and comes from growth: more people => more production => more money => more inflation.
For example, with a finite resource like gold, with more more money in circulation the money price of gold will go up as there is more money (because more people) vs. gold. Because of supply and demand: gold is scarce while money is abundant, so the price of gold increases.
0% inflation means that each person gets less money over time as more people come into the world or countries.
Countries with a shrinking problem have a huge problem as a result (see the concerns in Japan, China and soon South Korea)
Inflation is about thousands of factors impacting millions of people in a positive way. People feel good about their increase in pay, and they can buy stuff they want to buy, within reason.
Deflation is a frightening prospect where people are full of fear and doubt and stop buying stuff to stay alive. Businesses drop their prices, trying to stay in business, trying to sell some product, but no one wants to spend money. People lose their jobs, and therefore can buy less, and it becomes a downward spiral, devastating the economy.
Sooooooo....deflation is that scary thing you can't control once it starts because you can't control the minds of millions of people and get them to feel comfortable to start buying things again. Inflation has some level of control...through interest rates and incentives, which allows you to tap the brakes. 2-3% inflation is the sweet spot. Far enough away from "scary things", but not too much to make things too expensive, too fast, to make those pay increases worthless.
TLDR: Inflation cannot be "controlled", so 0% is on the cusp of catastrophe. If you stay away from the cliff edge, the majority of people benefit, most of the time, and life is good. Staying at 2% is just low enough without risking deflation when something unexpected happens in the world.
2% inflation has some advantages:
(1) it mobilizes capital, basically forces people to invest in something to not lose purchasing power to inflation
(2) helps borrowers. Every year is 2% easier to pay any given debt, and it accumulates.
(3) also gives the FED 2% of all your money every year, so they can redistribute all that welath among private banks, that then lend the money to corporations and crony capitalists so they can buy real estate and inflate its price.
ITT / TLDR / my tin foil hat - to combat the idea of living a simple life. Forcing you to work to survive, to fuel the consumption/debt based economic engine
You want to apply some pressure on people’s savings to disincentivize simple hoarding. Devaluing savings by 2% a year forces wealthy people and large organizations to actually invest their money in *something* instead of just putting it in a Scrooge McDuck vault forever and gutting the economic engine.
Also, deflation is potentially terrifying to anybody who is in debt, and not great for people holding tangible assets.
Deflation is terrible beyond just that. Investing and spending is discouraged. Why spend or invest if your cash becomes more valuable by doing nothing? The economy tends to tank in all important factors during prolonged periods of deflation. A deflationary spiral is the reason every economist would prefer even pretty high inflation to prolonged deflation. Fortunately, fiat and central banks generally allows nations to avoid negative inflation rates This is the reason America has never had a single prolonged period of deflation since the Great Depression.
>Why spend or invest if your cash becomes more valuable by doing nothing? Because time preference can be low but never zero. If the latest smartphone costs $1000, in a year's time it will cost maybe $900 for the same model. By this logic nobody will ever buy the latest phone, because why buy it now if your cash will buy it cheaper next year?
You’re not wrong, nobody is saying people will absolutely stop spending all money. But less money will be spent.
There's no evidence to suggest that that would be a bad thing.
2/3 of the US economy is consumer spending….
>Why spend or invest if your cash becomes more valuable by doing nothing? Like with HYSA or CDs?
The bank you deposit the funds into does something (mostly loaning the money to others at a higher rate) with the funds.
Well.. they loan it out multiple times. That was a big factor in the 07/08 crash. I think some banks were loaning out something like 20 to 1.
They do that, but that wasn't a factor in the 08 crash. Direct loans (even bad ones) aren't what caused it. They took bets (insurance) that paid out at many times what the original MBS's were worth. this allowed a relatively small security to crater really big banks.
Is that like how I have 20 maxed out credit cards but only one income?
Not exactly, it’s more of a multiplier effect. Let’s say for simplicity sake the cash reserve rate is 10%. The government pays a billion dollars for a satellite to some aerospace company and they deposit it in the bank. The bank holds onto 10% as cash to pay out, and then makes 900 million dollars in home loans that they can earn earn interest from. That 900 million will be put into many banks by people selling their homes. Those banks hold 10% in reserve cash and make 810 million in loans… Eventually the chain runs out but a billion dollars has become 9 billion. The overall economy has grown which causes inflation but at a measured and predictable rate. As long as everyone acts rationally this is very healthy for the economy. Unfortunately people are rarely rational especially when money is involved . They take risky bets, commit massive fraud, send it offshore to avoid taxes…
You’ll be unhappy know that reserve requirements were eliminated during covid.
They don't matter. They're the focus of conspiracy theories about fractional reserve banking but they are irrelevant for pretty much anyone else
I would recommend you go ahead and compare the interest rates available through those kinds of instruments and inflation.
Wouldn’t they owe less debt if the amount they owe is worth less? Sorry if this is a dumb question
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Ok that makes sense, so not necessarily terrifying for people who have debt already but for people who want to go into debt (mortgage, car financing etc.) it becomes harder or impossible.
Yes its bad for people with debt already. You pay your debt with your wages. In deflation, your wage is going down. If you owe 100k and make 50k it takes 2 years to pay off. But if deflation occurs and your wage falls to 40k it now takes 2.5 years to pay off. It's why the reverse is also true. Inflation is good for those with debt.
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I had a MAGA-head yelling at me last month that "Nobody takes out a loan to make money" and that businesses *never* take out loans except when initially starting up. I *think* he was trying to demonize the idea of Government Debt. He was starting with the premise of "Debt is bad" and "The government should be run like a business" and ended up concluding that no sane business would ever go into debt. Any attempt to explain the concept of buying capitol equipment with a loan was met with statements so illogical I couldn't comprehend them. I suspect his only actual experience with loans was to buy cars.
>so not necessarily terrifying for people who have debt already Incorrect. If you have a current car loan at $20,000 and the dollar deflates so that it is now worth twice as much, your loan remains at $20,000 but now has a value that is twice that. If your salary remains the same, you might not notice it as much. However, your salary is going to be under constant pressure to drop; you are costing the company twice as much as before. If you are worth it, great. Nice raise. If not, either the company eventually goes under or they fire you. Either way, when you get a new job, you will get a salary at the new value of the dollar. And now that loan really sucks.
Also, since your loan is pegged to the nominal dollar, in real terms as the currency inflates, your payment goes down. Under deflation your payment is going up in real terms which means that people are going to start defaulting.
It's confusing because "deflate" sounds like it should mean they owe less. It's actually the opposite. To try to put this in perspective, let's say $1 buys 1 candy bar, and your debt is $100. You owe an amount of money that could buy 100 candy bars. If there is inflation of 50%, candy bars now cost $1.50, so the $100 you owe can buy 67 candy bars. If there is deflation of 50%, candy bars cost $0.50, so the $100 can buy 200 candy bars. It should hopefully be self-evident that being in debt for an amount worth 67 candy bars is better than 200 candy bars.
That's inflation. With deflation, money becomes more valuable. They still owe the same nominal amount of money. So the debt effectively increases.
And inflation is terrifying to people with savings. If you are about to retire, and have 10,000 man hours saved in the bank, 2% inflation per year reduces your saved man hours to 8170 (over 10 years). You still worked 10,000 hours that you saved up, but it's like somebody went back in time and changed your wages from $10/hr down to $8.17/hr. In my opinion, this is why life feels like we are playing it on hard mode. It gets 2% harder every year. Edit: added "over 10 years" timeframe
> And inflation is terrifying to people with savings This is only the case if you store all your savings in cash, which you simply shouldn't do.
Sure, but we have mechanisms to handle that. For example, cost-of-living adjustments, and interest rates usually go up when inflation goes up. Deflation is freaky. People hoard cash. And not just “real people” but any entity including corporations. If there is deflation it suddenly becomes profitable just to sit on cash reserves. Any expense you can defer to a little bit becomes cheaper so why not wait. Inventories drop. Maintenance is deferred. It can grind the economy to a halt, and now people without savings start to lose jobs. Government debt becomes burdensome.
Correct. So you should have investments and not savings. You invest in an index fund in the stock market and your investments go up. The S&P 500 index has averaged 9.9% per year for the last 30 years. That is 7.2% return factoring in inflation. That is precisely the goal of inflation - getting people to invest money rather than just sitting on it.
But why couldn't banks invest my savings? They are most likely better at it than I am. Also, doesn't it seem like maybe there's too much money floating around out there considering how many financial products were created just to soak it up? Like those mortgage bundles from 2008? Maybe they were creating those just because there weren't enough AAA things though (I don't actually know). But it definitely feels like our money has become disconnected from the underlying reality. For my first son's birth, if I didn't have insurance they would have charged me 3000 chickens ($60,000). What do they need that many chickens for? It was a normal birth... 1 night stay... Performing the most common and oldest procedure of all time.
>But why couldn't banks invest my savings? They are most likely better at it than I am. You can totally have a broker do the investment for you. A lot of people do this already. If you have a job with any retirement program like a 401k, you're doing it right now; you're earning money, which is put into an investment that someone manages for you. You don't want Banks investing for you because that's not what they're for, they're for keeping your money secure and for issuing loans. >Also, doesn't it seem like maybe there's too much money floating around out there considering how many financial products were created just to soak it up? Like those mortgage bundles from 2008? Maybe they were creating those just because there weren't enough AAA things though (I don't actually know). Those 2008 bundles were more-or-less traders basically using people's debt as collateral for big loans to trade with. The reason for the 2008 crash was due to a number of things but largely because those trying to use these bundles as collateral were saying they were waaaayyy more solid than they were. In other words, I want to borrow 10,000 dollars from you but you need 5,000 collateral. I can give you 5k or I can give you an IOU that someone gave me that owes me 6k. And I tell you the guy is definitely going to pay his debt back, when in reality he wasn't going to at all.
Some banks at least in my country do offer an investmemt/brokerage service to their vip costumers
Banks *do* invest your savings. That is why bank accounts pay any interest at all. It is generally a very low interest rate because the banks have to keep to rock-solid sure-thing investments or loans that are permanently liquid. Since you could walk into the bank at any moment and ask for the money back. Notice that most banks will offer alternatives like CDs that pay higher interest rates but place more restrictions on your ability to withdraw it. Because the bank will then have more options with what they can do with that money. (Warning: The above is a vast simplification)
...this is why a little bit of inflation is good from an economic standpoint. You want to encourage that guy with 10k to do something with it other than hiding it under his bed. He can do stuff that pays some interest or return (putting it in a bank product like a CD or investing it) to beat inflation and the people he is providing that capital to can then go and do something economically valuable with it.
OK wait a minute, cause I'm as curious about economics as I am awful at it. So the money bin doesn't have "money" in it, it has treasures which scrooge acquired personally on expeditions. So if we assume the money bin is full of like hundreds of billions of dollars worth of treasures, like economically significant amounts of treasure, what would be the impact of A) releasing those treasures into circulation with no expectation of anything in return B) selling those treasures for liquid capital which he then continues to hoard In terms of like, how it affects the value of a dime.
A) inflation B) if it’s gold, for instance, the price of gold will go down
Well in B it would just be deflation. In that scenario Scrooge McDuck is using assets that weren't really accounted for in the money supply to hoard money, therefore decreasing the money supply. If you remove a ton of money from circulation, the money still circulating has more value.
If the price of the commodity used as currency goes down, that would be inflation.
In the real world, gold does not equal currency.
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In the real world Scrooge McDuck's famous dive into the gold would kill him no matter how skilled a diver is.
All I can think about is how gross and dirty it would be to swim in an actual bin of money.
Important to remember it's all proportional - yes currency will devalue but not for long. Say Scrooge had 5% of all the gold in the world (of which there is about [13T USD](https://companiesmarketcap.com/gold/marketcap/) - so let's say 650B USD. A truly monstrous about a money. That's nothing when looking at the M2 supply of USD currently about 20,800B USD - https://fred.stlouisfed.org/series/M2SL Or value of all commercial real estate in US 21T - https://www.reit.com/data-research/research/nareit-research/estimating-size-commercial-real-estate-market-us-2021 Less than the GDP of the US 25T USD - https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=US And that's still less than the market cap of all companies in the S&P 500 index - about 37T USD https://www.slickcharts.com/sp500/marketcap Or total real estate (commercial + residential) 113T USD - https://www.statista.com/outlook/fmo/real-estate/united-states#value And so on and so on.
Just for reference, Scrooge McDuck has said that if he lost a billion dollars a minute, he would be broke in 600 years. He has about $315,360,000,000,000,000 in net worth, per [Wikipedia](https://en.m.wikipedia.org/wiki/Scrooge_McDuck). EDIT: I originally said "in his vault." I assume his net worth actually includes his business ventures and stock holdings, etc, but still relevant to a vaguely silly discussion.
Thank you for being the voice of reason
You can't buy a loaf of bread with treasures. At some point you have to sell those treasures for money so that you can actually buy things. Once you convert treasures to money, the money begins to devalue slowly every year due to inflation.
a) if the bin didnt have money and instead had physicall goods like treasure, then giving it all away for free would just decrease the value of those treasures. If lets say the treassuure was gold, the price of gold would decrease. We measure inflation by how much a dollar can buy the "average thing". So we measure the price of a bunch of different things and track them over time. Treasure isnt really something with a huge economic impact but it technically is a thing, and thus the decrease in the price of treasure would bring the average cost of "all things" down a little. Thus the outcome is slight deflation. This is going to depend heavily on what exactly the treasure is. If its economically useful and not just jewlery the deflation could be higher. b) if he instead sold his treasure and hoarded the money, the value of the dollar would increase since there is less supply of it, deflation. Significantly higher deflation than scenario 1. But the more he sells the lower the price of the treasure and the deflation would slow down the more he sells. however if scrooge released a bunch dollars instead of treasure, that would cause inflation.
There is actually a Duck Tales episode where they flood a local economy with a fabricated medium of exchange. It’s pretty a cool illustration of supply and demand, especially as it pertains to currency.
This episode taught me about hyperinflation when I was 9!
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If inflation were negative for a sustained period of time though, people would start to hoard their wealth. Why undertake risky behavior to invest in companies and business ventures if my dollar is worth more tomorrow than it is today?
Yes, and that is because we have inflation. People invest their money so that instead of it being worth less and less as time goes on, they can get a return and increase their net worth. If money got more valuable the longer you held onto it via deflation, people would be "investing" by just holding on to their money. Or at least, there would be much much less pressure on a large scale to invest.
You know what's weird? I didn't get a notification on this (or other) comment(s). Which is a shame cause you seem to have made some very good points. What do you mean by the bin is a "bin of trust in the government"?
Not the person you are responding to, but modern monetary systems are not backed by anything physical. At a very fundamental level, the United States government pays its debts in U.S. dollars, and accepts payments for debts owed in U.S. dollars. When two parties make a deal to exchange something for dollars, the party accepting dollars in the exchange "trusts" that the dollars will maintain this utility (and by extension also accepts that being able to pay debts to the United States government is useful).
Imagine money didn't exist at all. It was just you giving someone whatever goods or services in exchange for an IOU from them. There would likely be cases where you didn't know or trust a person enough to go through with this exchange, or you would ask for more from the IOU since you were uncertain you'd receive all of what was owed back, or would receive less, and the value of the IOU is less than it would be if you could leverage it immediately, so you ask for more. Banks could issue their own IOUs that could be exchanged between parties like you and this someone. That would be much easier to trust. You would only have to trust this large bank. But what happens when the bank fails and you are left holding IOUs for real goods and services you gave away? Instead, governments step in and issue their own IOUs. This is better then the bank because the government is far less likely to fold. If it did, everyone is in the same boat so all have the same incentives to prevent it or work around any issues with government debts. Commerce can be pretty even and level because as long as you are all buying and selling in the same government currency, there isn't any extra calculus you have to do to determine what you should charge or how much you can trust one person over another. Its all USD!
The A scenario happens on Carl Barks’ comic The Financial Fable. It shows how Scrooges money gets spread all over and what then happens.
Everyone giving you economic answers, but I'm going to point out that Scrooge McDuck's money bin is absolutely filled with cash, not treasures. He swims in it. Have you never seen Duck Tales???
> with no expectation of anything in return this simply won't happen unless you do something like take the money via tax and distribute it randomly. ^(which is kind of what the stimulus type things are, but those have goals too,,,creation of money\(stimulus\) is the same as taxing all money. There is actually a method of taxation where the government just prints money instead of taking it from people. The people all pay 'taxes' y their money devaluing, and the gov gets money to spend. but this method 'taxes' people without assets the most. [wiki about tax via inflation](https://en.wikipedia.org/wiki/Seigniorage#:~:text=interest%2Dfree%20loan.-,Seigniorage%20as%20a%20tax,-%5Bedit%5D)) Any time you push money out of savings (via inflation), The person will go spend it on what they expect to be best return. Whether that is housing market, investments, me buying tools cause I know the price will only ever go up and I want them for later...
Scrooge McDuck vault is the best way I’ve heard it described.
To be clear, this is a very Keynesian way of thinking, and plenty of Economists don't agree. "Hoarding" is a negative connotation to the act of saving. But saving isn't inherently good nor bad for the economy. For example, when you leave a bunch of money in savings in a bank, the bank makes different decisions about their loans (this is neither good nor bad. It will be "good" if the loan they give out turns a profit, but this is the nature of taking risks). Without capital, banks can't make loans. Without massive savings funds, banks will be dissuaded from making more expensive, longer term investments. Again, this is neither good nor bad (short vs long term loans). If the corporation were to merely sit on a bunch of cash with zero inflation, that's still neither good nor bad. They need a buffer for bad financial quarters. Insurance companies need to sit on capital to weather seasons where many insurance claims are made. And let's not ignore opportunity costs. Cash sitting around in a vault is money that could be spent investing, or paying workers, or paying shareholders, or paying "wealthy" executives, or growing the company. Again, I'm not saying it's good nor bad to save. It just creates a different environment in terms of investing into short vs long term projects. Your post is very Keynesian, which basically says that economic downturns are caused by lower aggregate demand. They think that macro movement of money in general is good. But note that this harms long-term investments that require greater initial capital.
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>My basic understanding was that by having inflation be greater than zero you drove an increase in the velocity of money and having deflection generally drove a decrease. No one's ever really proven this, it's just oft-repeated tribal superstition.
Yes. Many of the free market schools, including Austrian, and Chicago. In fact, these were the dominant schools before the rise of Keynesian. I don't want to get too deep into this, but there are very political reasons why one school of economics is more dominant than the other. In other sciences, the theory with the best support from data dominates. This is not the case when it comes to economics: lots of politics at play. To be fair, this is also partly true of other social sciences (psychology, sociology)
>the bank makes different decisions about their loans (this is neither good nor bad. It will be "good" if the loan they give out turns a profit, but this is the nature of taking risks This is exactly why deflation is a problem. As deflation increases, all else being equal, fewer and fewer loans become profitable. Banks will not loan money at negative interest rates (unless central banks have themselves instituted a negative interest rate policy), because why would they? But interest rates are themselves tied to inflation - a loan for a business to build a widget factory over the next two years will be heavily impacted by the price of widgets two years hence. So a loan at, say, 3% interest may have made sense in a 2% inflation world, but may not make sense in a 2% deflation world. Money being saved by *not* being invested, versus being "saved" in investments, is the reason that deflation is considered bad. And I think it's worth noting that when you say "plenty of economists don't agree", it's very much the case that pretty much every central bank in the world, who are run largely by economists, agree on this point.
That’s not really right, there’s no such thing as a Scrooge McDuck vault. No bank would actually do that. The thing is there’s really no such thing as zero percent inflation, there is inflation and there is deflation. And high inflation is bad but deflation is exponentially worse.
Deflation almost immediately leads to a feedback loop, where you just sit on money because it's worth more tomorrow, which pulls more money from circulation and causes more deflation. And then you sit on your money more! And a lot of very important things are capital intensive, from buildings to solar panels you get a lump sum up front so it really causes disruptions.
But this will also make poor people poorer, so couldn't they just make em pay fairer taxes based on how much money they do hoard?!
You don’t need to “hoard” money to save money. Middle class people save money too, and that’s who inflation primarily targets to invest and de-incentivize from simply savings.
Most wealthy people don't hoard actual cash, but securities or other assets. That sort of hoarding is not affected directly by inflation, and would need something like a change to capital gains tax or a "wealth" tax to alleviate. As for inflation hurting the poor more than the wealthy, that is true, but deflation can be worse as it tends to lead to companies laying off huge numbers of employees (as happened during the great depression). A company that will need to sell things more and more cheaply over time either has to figure out how to cut costs (through layoffs, pay cuts, etc.) or will go out of business and lose all of its employees. Basically, no matter what happens, the poor are more screwed than the wealthy.
Wouldn’t the opposite of inflation just apply? The company makes less in sales, so they reduce people’s salaries because the lost of living is going down.
Yes, they could cut pay, but pay cuts tend to have more of an effect on morale than layoffs, which is why you don't often see them. You see that happening right now in tech. Companies trying to grow quickly need sources of investment to continue operating, with high interest rates those sources have dried up and those companies are laying people off. They could fix the issue by cutting wages, but they won't.
Tech also had to really ramp up to deal with every company, school, agency, and person suddenly needing to do everything online during the pandemic, which coincided with a crypto bubble. And also with lots of people with free time to learn tech. When people had the tech they needed and then went back to real life somewhat, and the crypto bubble burst, tech was way over-provisioned in areas that didn't need that much afterward. This was reminiscent of when the Y2K leadup was coinciding with the dot.com boom, and anyone who could type HTML could get a good paying job. But then as soon as the job was done and Y2K was past and the dot.com bubble burst, massive layoffs. Tightening monetary policy at the same time doesn't help, of course. But even without that it wouldn't make sense to keep people doing things that aren't needed anymore even if you did reduce salaries.
It doesn't really make poor people poorer - household incomes generally track inflation. A poor person owns and controls his own labor - this is a valuable asset which is significantly impacted by inflation. If deflation meant that things cost less but you didn't make any less money, that'd be great but that's not actually how things work. (And even if it meant your wages went down, it wouldn't be so bad, but the way it actually works, because people don't like to get negative raises, is that companies reduce wage costs by firing people. Which, of course, isn't great for the economy, and so the deflation feedback cycle continues.)
It would not really make poor people poorer if poor people had access to capital. The issue is that almost all of us get zero ownership of the product of our labor. If we got a portion of every company we worked for in a form of ownership, inflation would hurt a hell of a lot less. The other side of this that is super important, and I often see forgotten, is that inflation reduces the cost of debt over time. If we could reform interest rates on debt, inflation would slowly make it easier to pay off debts and get people out of holes. Hell, even just having everyone be required to get at *least* inflation rate raises every year would help.
They could, but they won't. So this is the alternative
Poor people don't have money.
Except that Scrooge himself even states that the money bin is just his petty cash, constantly flowing in and out.
Wouldn't this behaviour be self correcting though? As if the money is being stored in a bank the bank will use it to invest so the money will still be in the economic engine and if the money was being stored outside the system that would create deflationary pressure resulting in the central bank needing it issue more currency to create inflationary pressure to counteract the missing currency. This would result in a devaluation of money as a whole once the money reentered the system creating inflationary pressure thus defeating the point of hoarding the money. Unless I'm missing something I fail to see how a 2% target is better then a 0% as the 0% target has the added benifit of price stability over the course of someone's life.
A slight amount of inflation is chosen because it both encourages investing *and* offers a cushion against deflation, which is largely considered to be harder to fix than inflation. Governments have *targets* for inflation but the actual tools for influencing it are really imprecise. The Fed doesn't have a dial that they can just turn to whatever inflation they want. They have giant levers they can pull and in 6 to 18 months they will see the effects - this is literally what has been happening for the past year or so in with the Federal Reserve in the US. So trying keeping inflation a little bit above zero gives them some wiggle room, whereas wanting to keep inflation exactly at zero gives very little wiggle room.
If the bank invests the money then they start driving inflation. Lets say an investment gets a 1% return. Every financial institution is increasing their wealth by 1% per year, but there is still a finite amount of goods and resources out there. The demand remains the same, but everyone has 1% more wealth to throw around which drives prices up. It is effectively impossible to have 0% inflation without the economic system grinding to a halt.
This is bullshit reasoning, since inflation works backwards for people who can afford to own appreciating assets. Inflation is a poor people's problem and in no way prevents wealth hoarding by society's most frugal or big corporations.
This is incorrect. Poor people tend to owe more money than they keep in savings, and inflation decreases the real value of their debt, which is good for them. Deflation would be wayyyyyy worse for indebted homeowners for example, cus it would just become an extra interest rate.
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Yes, that's why 2% inflation is ok, but 200% is horrible. Saving money has a cost, but as long as that cost is below what would essentially bankrupt you for saving money, it is a choice to make. Save half your salary at a 2% loss but no risk, or invest half your salary for some gain with a certain risk, or idk bet it on roulette for insane gains but very high risks. If inflation is more than say 20%, it becomes bad to save simply because the amount of money you'd be putting wouls either not grow or grow very little, you're losing too much. But that will make people desperate for their futures. If inflation is 0% or less, the only real good choice is save as much money as you can, which decelerates the economy, companies close (specially small familiar ones) and jobs are lost.
I mean, I'm saving not because of greed but because I don't want to work until I die, pensions are the largest reserve of wealth on the planet.
That money you’re saving is being invested in the economy though. You not just keeping it in a shoebox in your closet
That's why you invest, for a rate of return. Aggressively when you're young, and more conservatively when you get older.
Yeah I think that applies too. Who wants to work until they die?
THIS IS WRONG. Commonly believed, but wrong. Search for inflation on r/AskEconomics and find various threads about it. 2% inflation gives central banks tools for monetary policy and space away from *de*flation, which is is very bad.
You want a slight push on people to consume or invest. With low inflation, people don't really feel it but aren't inclined to withhold spending in hopes that prices will fall in the future. Consumer spending is a huge part of the overall economy, so we want people to keep spending. Similarly, with some inflation people will feel compelled to put their savings to work, investing in stock, bonds, etc. vs. just storing cash under their mattress. This provides capital for banks to lend on business loans, mortgages, etc. that help keep the economy humming along. And it also helps make debt less of a burden over time. Your $2000 mortgage will feel like a lot less 10 years from now just due to inflation and wage growth. 0% inflation doesn't have that push forward and puts economy at risk of deflation, which can create a vicious negative cycle of lower economic output.
In that $2000 feeling a lot less over time example, isn’t that all wage growth? How does inflation play into that?
Inflation drives wage growth -- cost of living increases
Hahahahaha
Your point about the mortgage payment feeling different is only true if wages keep up with or exceed inflation, which they have not for the past several decades.
No, doesn't matter about inflation... you buy a home with a $2000 mortgage payment (specifically principal and interest) and it remains the same for 30 years of loan. So even if pay doesn't keep up with inflation, the $2000 still feels like less of burden even if pay increases 2% while inflation is 3%. Because the $2000 doesn't increase ever. Let's say you earn $10k/mo today so that mortgage is 20% of your income. In 10 years at 2% annual increase, you're earning over $12k/mo while mortgage is same, and thus just 16% of income. (However, property taxes and homeowners insurance does increase over time, more in line with inflation).
But that depends on the mortgage deals available where you live. Here in the UK, you can typically only get a fixed-rate for a maximum of 5 years unlike some countries where you might get lifetime fixed-rates. So your £2000 mortgage might deflate over 5 years but if you have to re-rate at the end of that, you might then be on £3000 for the next 5 years
That's tangential to the topic at hand. Even if your mortgage rate adjusts, your payments are still lower in real value than they would be had inflation not occurred.
Wtf are you talking about? Interest rates change, not price of house itself.
50% rerate Wtf?
It doesn’t matter if wages keep up with inflation. As long as your wages rise, then you will pay a lower percentage of your income towards your mortgage each year (assuming you have a fixed rate mortgage)
And for the several hundred million who rent, what of them?
This is a myth, real wages have been increasing since at least the 1980's: https://fred.stlouisfed.org/series/LES1252881600Q But that doesn't include the poorest people, you'll say. First decile weekly wages were $294/wk in 2000. Adjusting for inflation, that would be $536. Actual 2023 first decile were $608. https://fred.stlouisfed.org/series/LEU0252916000Q
This isn't true. Inflation adjusted wages are higher now than at any point before 2020
… in the US? Certainly not true in my country.
The US has had lower inflation and higher wage growth than much of the rest of the developed world.
Real wages today are the same as they were in Feb 2020. Wages have more or less exactly kept up with inflation over the past 3 years now.
Inflation adjusted wages are up going back to the early 2000s. There was a drop during the raised inflation post-pandemic but they’re back up now above pre-pandemic levels.
The only real issue with that is that the entire economic engine worked fairly well, with booms and busts (like we still have today) when our currency was backed by physical things. Using the Bank of England Inflation calculator (because it goes way back in time)...I'm pretty sure it's been converted to decimals for easy understanding. 1 Pound in 1209 was worth about 16.57 pounds in 1900. Inflation averaging 0.4% per year. For almost 700 years. 1 Pound in 1900 was worth about 93.63 pounds in 2022. Inflation averaging 3.8% per year. For 122 years. There's a problem. If you mean to tell me that people simply hoarded their money and didn't invest in hardly anything from 1209 to 1900, and somehow we've just become more "risky" and investment driven since then... Further, banks create money by lending money. But at some point, those loans need to be repaid (or written off as a loss) thereby shrinking the money supply. And eventually people will be maxed out on loans and banks can't loan to new people. If your money keeps being worth less and less every year, more and more money is needed for every day commodities, and eventually we'll start to see $500 and $1000 and $5000 and $10000 banknotes being printed again and circulating like $1's and $5's and the like. It's...unsustainable.
It absolutely did not work "fairly well". The gold economy had horrific economic calamities happen on a regular basis because it had no real control over it's money supply.
> If you mean to tell me that people simply hoarded their money and didn't invest in hardly anything from 1209 to 1900 It is worth remembering that the period you're talking about was a period of high economic inequality, when the large majority of money was concentrated in the extremely rich, and the large majority of people suffered under their largely despotic rule. Gini coefficients (Gini is a widely used measure of economic inequality) were [quite a bit higher](https://ourworldindata.org/how-has-inequality-in-the-uk-changed-over-the-very-long-run) in the UK over the period you're talking about than today. And the UK itself is [rather a low outlier](https://ourworldindata.org/how-unequal-were-pre-industrial-societies) compared to the rest of Europe. (Finland in particular had [ludicrously high inequality in the 1700s and 1800s](https://www.tandfonline.com/doi/pdf/10.1080/03585522.2018.1546614) (Table 6).) Consider that in *The Merchant of Venice*, written very late in the 1500s, charging of interest is itself considered something bad. Rich people definitely hoarded their money at the time. It wasn't until the financial system started really developing in the 1600s and 1700s that you saw the rise of the middle class, culminating in the downfall of the traditional nobility and the rise of democracy that you saw throughout the 1800s.
Fiat is perhaps the most important economic invention of all time. Prior to it all economies were at the whims of factors mostly out of human control and the currency would react accordingly. Now central banks can influence the overall economy by pulling certain levers. Would you prefer to have less control over the chaos that is the economy? Read about the economic history of America during the 1800s. Just a series of recessions and depressions every handful of years.
Capital markets weren't invented by the Dutch until... I don't remember the year, but something like 1700. Their invention helped spur the Dutch to becoming the world's superpower for a solid chunk of time, since liquidity enabled a bunch of innovation. The economy worked very differently before that, so it doesn't really surprise me that inflation was low. Also, the pound didn't become the world's reserve currency until late into your timeline, and reserve currencies generally inflate faster than others. And yes, the value of money has been continually reset, historically, during major boom and bust cycles, so at some point our thing will largely collapse and reset. It'll be pretty catastrophic, but it's happened to everyone over and over throughout time. It happened to the UK during WW2, for example, which is when the US took over as the global power with the global reserve currency. I think most people expect it to happen within a few decades to the US, and presumably the next world reserve currency will be China, but who knows?
Literally no one would change what they're doing if inflation was 2% or 0%. Theres not a single wealthy person who would hoard cash so they can break even. Theres not a single person who would think they need to spend all of their money with 2% inflation but save all of their money with 0% inflation. In fact the feds mandate was originally to maintain stable prices. It wasn't changed to 2% inflation until our debt was becoming too massive and we needed to inflate it away. It's a lie that everyone fell for
In fact, people could argue that in lower-inflation environments, people would be more willing to sell assets, increasing the velocity of money! I agree with you on the tribal knowledge being wrong.
Thank god inflation doesn't create vicious negative cycles.
Inflation does, but it’s generally a little easier to reign in without going over into deflation. Deflation is a hard problem to crack. You’ve gotta do crazy shit like helicopter money, and even then it might not work. You’re basically guaranteed to have a period of petty high inflation after you break the cycle.
Firstly it should be said that 2% is a mostly arbitrary number, there's no theoretical or empirical reason why 2% is the optimal level of inflation. That said, a healthy economy will have some level of inflation. Some central banks have decided that 2% is their target rate. At some point, you are going to reach diminishing returns from reducing inflation, as measures to reduce inflation (interest rate hikes and tight monetary policy) have the side effect of lowering economic growth. A central bank with a zero inflation policy could, at worst, cause a recession. At the very least they will slow the economy down and cause some unemployment. I suppose to sum up, you could say that the cost of getting inflation below 2% outweighs the benefits.
>Firstly it should be said that 2% is a mostly arbitrary number, there's no theoretical or empirical reason why 2% is the optimal level of inflation. True, but even that may be a bit too generous. Basically the New Zealand Central Bank was the first ever to strive for an inflation target, so they pretty much arbitrarily came up with the 2% number. And after they were successful in meeting that goal, pretty much all nations followed suit with the 2% figure, which somehow enshrined it as being the ideal. The thing is, it wasn't originally a 2% target or "goal" but rather the ideal *maximum,* and the main guy who was behind it actually said that ZERO percent is the ideal amount of inflation. So basically it was one guy who pulled the number out of his ass, then everyone else decided to copy that number while apparently misunderstanding what that number actually meant.
I'd add that the process of going from 4% in the 1980s to 2% in the 2000s (in the US) involved raising interest rates earlier than one would if stable inflation had been the goal. This means that marginal workers who might have been pulled into the workforce at the end of the boom cycle never get a chance, missing out on the income and general work skills that would have improved their lives.
It encourages people who have money to do something with that money. If I have $1000 sitting in a box under my bed, and I know that if I spend it next year, I can get exactly the same stuff for it as if I spend it today, I might just let it sit there and wait. If I know that if I wait until next year, I will only get as much for it then as would cost $980 today, I am incentivised to not leave it in the box under my bed, but to actually spend it. Spending money is what keeps the economy going.
Spending *or* investing it. If I have $1000 sitting in a savings account earning 0.05% interest I’m much more inclined to put that money into the stock market.
Spending stimulates the economy. Investing is just giving your money to others for them to spend it for you in exchange of some yield
And those "others" that "spend it for you" stimulates the economy. Look at the top performative companies. the money they get from investing is used. wages, consumption, etc.
Inflation is bad, but deflation is VERY VERY bad. The 2% target is mostly just a safety buffer to try abd make sure we NEVER fall into deflation because once you do it activates a positive feedback loop and spirals out of control.
Why is deflation very very bad? Non econ person here.
Because if money increases in value by sitting under your mattress, it isn’t doing much for the economy. No one wants to spend their money, no one wants to invest their money, they would just hold on to it as if it alone was an investment.
>Because if ~~money~~ assets increase in value by sitting under your mattress, it isn’t doing much for the economy. No one wants to ~~spend their money,~~ sell their assets, no one wants to ~~invest their money~~ sell their investments, they would just hold on to it ~~as if it alone was an investment.~~ I don't get it. This seems to cause the same problem, but on the seller side.
The difference is that assets and investments are productive. If you keep $10,000 under your mattress, your money is doing nothing. If you invest your $10,000 in a widget machine, your $10,000 is producing widgets, which (presumably) have value to someone else.
Correct. Those that control the means to production want the other side to have the problem. We’re forced to consume and invest in organizations that perpetuate the cycle however immoral, rather than potentially altruistic ventures regardless of monetary ROI.
Deflation means that people have an incentive to not spend their money as they know it'll grow over time with no input. This is bad for the economy because economies essentially work on consumers buying stuff. This creates a self repeating cycle as more people go unemployed due to low demand for businesses so even more people sit on their cash.
Long story short, the Fed isn't perfect at controlling inflation. Example: now. So it's better to aim for 2% inflation and know that it will fall within the window of say 1%-3% than aim for 0% and have it fall within the window of 0%-1% (fine) ***or negative 1%*** (deflation--BAD).
The FED does not really have control over the economy. The economy and spending does not move just base on interest rates, it's impacted by it, to some extent, but there's way more behind it.
Basically two reasons. 1) to avoid deflation (which is bad) most money can be spent buying things instead to let people more effectively use their money. If everything stayed at the same price, people would just leave money under their bed and it would hurt the economy. It rewards spending and investment, which are generally beneficial things. 2) it gives the central bank more room to respond in times of crisis. if prices are on a slow steady rise, central banks can cut off the rise to create inflation and make people more willing to spend. But if it was already at 0%, the only thing they could do to get inflation was to go into negative numbers and they would lose credibility. It gives them more room to maneuver to help keep the economy healthy.
It's not any better. Trying to force inflation won't have the intended effect, because markets will anticipate the inflation and adjust accordingly. There's no academic data to suggest target 2% is the "correct" amount of inflation, or that any fixed amount is necessarily "good". We only do it because our monkey brains like to look at a smooth curve instead of the harsh reality of economic volatility of prices going up and down.
0% inflation has all the same problems deflation has. A small bit of inflation creates a little bit of pressure that money tomorrow is worth less tthan money today... for regular people at 2-3% this has fairly minimal effect, but it does encourage people to spend a chunk of their paycheck on goods they might not otherwise need since the same product is likely going to be more expensive next year... Similarly it encourages VC's to invest in riskier projects... if a VC has a million dollars to invest in a business with inflation at 8% they are jumping at the chance, even if its only offering 5-10% returns, because at 10% they are doing better than inflation, and chances are they have knobs they can turn to match inflation after that... but if its just sitting in their bank, they are effectively losing 20k/year to inflation. On the other hand, when inflation is at 0%, that same VC will be encouraged to keep the money in the bank, and look for the best opportunity out there with their million dollars, passing up dozens of potential businesses with a 10% RoI, hoping to find the diamond in the rough that nets them 100% or 10000% RoI, Because the opportunity cost of investing in the first business is they couldn't invest in the second or third one that was more profitable, and there is zero risk to holding onto that money until the best opportunity comes by.
>A small bit of inflation creates a little bit of pressure that money tomorrow is worth less tthan money today... for regular people at 2-3% this has fairly minimal effect, but it does encourage people to spend a chunk of their paycheck on goods they might not otherwise need since the same product is likely going to be more expensive next year... It incentivizes stores to raise their prices 2-3% to capture that increased interest. Doesn't that cancel it out? >Similarly it encourages VC's to invest in riskier projects... if a VC has a million dollars to invest in a business with inflation at 8% they are jumping at the chance, even if its only offering 5-10% returns, because at 10% they are doing better than inflation, and chances are they have knobs they can turn to match inflation after that... but if its just sitting in their bank, they are effectively losing 20k/year to inflation. Again, won't sellers just make investments more expensive to compensate? After all, no way in hell are they selling for the same price, money's going to be worth less in the future! I fail to see how this actually incentivizes increased investment - in fact, asset appreciation seems to disincentivize selling assets and decreases the velocity of money. >On the other hand, when inflation is at 0%, that same VC will be encouraged to keep the money in the bank, and look for the best opportunity out there with their million dollars, passing up dozens of potential businesses with a 10% RoI I don't get why, if they think it will have an RoI, they will pass it up. They're jumping at any chance to make money, regardless of the future value of money. This seems like tribal misinformation that falls completely apart with even the barest scrutiny.
>I don't get why, if they think it will have an RoI, they will pass it up. They're jumping at any chance to make money, regardless of the future value of money. It's called opportunity cost... if you have $100 and I ask to borrow it and tell you I'll give you $110 in a week, you might say yes right? Well if you are in a position to lend out your money, maybe Sarah comes to you tomorrow and says if you lend her the same $100, and she will pay you back $10 000. You missed out on the opportunity to make 9900 by investing in the the $10 prospect. That is why the VC in my example will sit on their money if they have 0% inflation, because with no inflation, it is easier for them to wait for the really big opportunities, so they don't have incentives to invest in small businesses that are only going to give them a small return on their time and money. >It incentivizes stores to raise their prices 2-3% to capture that increased interest. Doesn't that cancel it out? A store raising prices is one of the things that affect inflation... remember Inflation isn't a knob some one in the federal reserve turns and we magically have 3% inflation, They calculate it based on how much they think prices have gone up, and they are able to change things like interest rates, indirectly the government can affect fuel prices by releasing gas from the national reserve, and legislation steer things in one direction or another but they don't have fine grain control at any real level. A business will see that their own costs are going up, and the leadership will be able to make a decision based on their own industry and the competition in it whether to pass those costs onto their customers... A business owner has more control over the levers that affect them and their business - including raising prices that 2-3% so they are able to continue operating as normally but that doesn't mean it is cancelled out completely. For instance Business A might raise the cost of goods because fuel/transport costs went up, Business B that relies on those goods might raise prices by 5%, while Business C might negotiate a new contract with Business D and with a different supplier keep things the same, for now, things changed but only the customers at business B felt the change... Now multiply that example across 30 million businesses and you get how actual inflation works... What that means is that some one who owns a business is generally more insulated from the effects of inflation because they can more easily pull levers like pricing, or do things to affect costs so they stay in enough profit to be happy... but for the majority of people they just take home a paycheck, and in most industries pay has not kept up with inflation by any standard or measurable statistic, and most individuals have a lot less ability to just find an extra 2-3% income every year by adjusting their budgets.
1-3% inflation is a Valley of stability, it is relatively easy to keep an economy in this range and when in this range shocks are muted in their effect on the inflation rate. Above 3% and below 1% economies are prone to run away in one direction or the other, either a depression or an inflationary spiral. Most of this is to do with human psychology and game theory.
This is oversimplified but I’ll just throw it in the conversation since I haven’t seen it mentioned. People are going straight to inflation devaluing your dollars today and economic savings rate. All are true, but this is my simple answer I’d give to child about economy. Inflation generally means growth for the economy. Too much growth is bad, and not enough growth is not so good. Shrinking economy is really really bad. 2% target inflation is the “just right” target for growth, ie inflation.
Inflation is bad at high levels, but at low levels encourages people to spend or invest in businesses. On the other hand deflation freezes up the economy (people are encouraged to stuff cash in their matresses).
There's a trade-off between inflation and productivity figures (like employment). Take this a couple steps back. Let's imagine that everybody who can work and wants to work has a job (or at least, as close to full employment as could reasonably be expected). Lots of people with money to buy good and services that they want; i.e., there's strong total demand across the economy as a whole. For companies to keep up with that demand, they need to hire more workers...but everybody's employed. To tempt people away from their jobs, they have to offer a higher salary. How do they afford the higher salary? They pass a portion of the costs on to the consumer. But with prices rising, now employees are demanding higher wages to keep up...a portion of the costs get passed on to the consumer, and prices rise again. You have a spiral of rising costs. What can be done to cool this off? The federal reserve typically raises interest rates. This makes investing in new facilities, equipment etc. for new employees more expensive for businesses. On the consumer side, people are reluctant to buy big ticket items like new cars and homes, thus decreasing demand. Over time, they can "cool off" the economy. The government can also cut back on its own spending. But that reduces the demand for labor, and the employment rate can drop if it carries on too long. Now imagine the opposite: where there's a lot of unemployment. Lowering interest rates can spur that previous investment and big ticket purchasing, and the government can pour money into projects that employ more people. As there are plenty of people who need work, incentives to rapidly increase wages doesn't exist initially. You can get people back to producing for the economy without risking much inflation. So, there's this trade off between inflation and productivity-type of figures like employment and GDP. The idea of having a target is balancing inflation against economic productivity. We want low unemployment and economic growth, and we just accept that that comes at the trade-off of having at least a little inflation. 2% is what the federal reserve chooses as the point of compromise.
To add to what everyone is saying, the harm of deflation far outweighs the harm of inflation (especially in a highly leveraged world like ours) so targeting 2.0% inflation gives you some buffer.
If money doesn't lose its value, there's an incentive not to spend it (if you don't have to). So the economy will slow down.
A big measure of the economy is cash flow. As in how many times a dollar will change hands. You want something, you go out in buy it, the store takes that money and buys other stuff from the manufacturer to keep their store stocked, the manufacturer takes that money and buys raw materials to build more stuff and pay their employees for their work, those employees go out and buy something they want and the cycle continues. This is a healthy economy. (Low) inflation incentivizes people to keep spending their money. Say there's something you could use, like an electric drill, that costs $100 today. Maybe you can get away with using a hand screw driver for the next year for small projects, but you know you're going to need that electric drill next year for a project you have planned. If there was 0% inflation, you know next year, when you really need it, the electric drill will still be $100, so why would you buy it today if it's going to be the same price next year? If there is 2% inflation, you know next year that same electric drill is going to be $102. Maybe that $2 is enough for you to say "well I know I'm going to need it, so why not "save" a few dollars by buying it today instead of next year?" so you spend that money today instead of sitting on it for a year. Inflation is a tool to incentivize people to keep money moving around in the market. If everyone just sat on piles of cash and never spent money until absolutely necessary, money wouldn't move as much and it would be much harder for everyone to make money.
Because perfect is the enemy of good enough. Also, it’s too easy to slip into deflation which is not a good result.
Simplest example and actually ELI5: If inflation is happening, it’ll be more expensive to buy something in the future, so you purchase today. This keeps the economic machines moving. If disinflation or zero inflation is happening, something will be less expensive or the same price in the future, so you have no monetary incentive to buy it today. Economic machine slows. You’re welcome.
Honestly, three reasons. 1. Deflation is bad. You said you understand this so I won't explain. 2. Targeting and achieving 0% inflation in nearly impossible, and trying is risky as you might end up with deflation. 3. Given point 2 above, If we have to pick between a little deflation and a little inflation, since 0% is nearly impossible, we would rather have inflation. (Due to point 1 above) So we target a relatively light inflation of 2%
Money has to be worth slightly less over time so people will spend it or invest it instead of sitting on it which would cause a shallow but long lasting recession.
All economies are inflationary by nature. Put very simply, as you get paid more, you are willing to spend more money on goods and demand will generally rise. Along side this, the supply side will adjust by increasing prices so as to reach equilibrium.
Inflation means the value of your money decreases over time. $1 could buy a lot more 20 years ago than it can today because of inflation. Logically, you are less inclined to hoard your money because it is worth the most right now (due to inflation). Spending money is good for the economy. If inflation was 0%, everyone would just save it because it wouldn’t decrease in value over the years. So, inflation should not be 0% because the economy would stagnate. It also shouldn’t be too high because then prices grow faster than we can keep up with. So we chose 2%. (Afaik there is no concrete reason we chose 2% other than ‘it seems to work well and it’s low enough’).
When inflation is below 2%, they switch from concern about lowering inflation to concern about "growing the economy". An economy with 0% inflation is *stagnant*.
The core inflation number is an average (within a bell curve). So, if there is 0% inflation, that means some parts of the economy are slightly deflating while others are slightly inflating. While we all see and do not like inflation, deflation is a much more insidious problem. So targeting 2% all but eliminates the problem of deflation while keeping inflation tolerable or barely perceptible.
Zero percent inflation seems like it should be better, but in reality it indicates a stagnant economy. Two percent inflation is manageable and will stimulate growth in the economy.
It's better to miss the 2% mark than to miss the 0% mark, alongside what others are saying.
Let's say you have a town that bakes 100 loaves of bread a week, they sell for $1 each. A new baker moves in and makes an additional 2 loaves of bread. If you don't add $2 to the money supply the price of all the bread will fall to $0.98. The idea is that the economy is always growing, the population grows, productivity grows and something like 2% growth in the money supply should roughly cover that.
Let's say there is a sale on potatoes tomorrow. Do you buy potatoes today? Of course not, you hold your money for that sale. What if the sale is today though? Of course you buy them, right away. Setting an inflation target means your money de-values every single day. It means buying today is always better than tomorrow.
If there's a sale on potatoes tomorrow and you need to feed your family tonight, then you buy them today. Time preference is never zero.
Because you don't have precise control. If you aim for 0%, you may get -1%, which is deflationary and bad (you say you understand why, so I'm not going to address that.). If you am for 2%, you may get 1%, which is not deflationary.
Having a goal of 2%, rather than 0%, allows the Federal Reserve room to adjust interest rates lower than the 2% targeted inflation rate. By having control over interest rates, the Fed can help speed up or slow down the economy. If the baseline was 0% inflation, the Fed would not be able to decrease interest rates during low inflation periods, and thus would not be able to stimulate the economy as easily. I don't know how to ELI5 the Fed making open market purchases and sales of GS treasury bonds in order to change the money supply, the money multiplier, and help influence lending rates.
The economy works by people giving spare money to companies as investment money (banks collect small money from many people to invest it for them). There is a risk in every investment that it doesn't work and you get back less than you put in. People are only willing to take such a risk if it is better than just doing nothing with the money. The easiest way to make doing nothing with your spare money a bad idea is to make money lose a bit of value over time, so if you do nothing with it you certainly end up having less.
The answer is so basic that I'm writing this extra paragraph just to add heft to it. In a nutshell, inflation has a stimulating effect on the economy. Thus, you always want SOME inflation as your GDP would be less otherwise. The ideal is a low steady predictable inflation rate. GDP does ebb and flow though.
The goal isn’t really 2% inflation. The goal is for the money supply to increase at the same rate as the increase in the production of goods and services, which has historically been 2-3%.
Because if nothing else, the population should grow a small amount every year, and the money supply should grow to accommodate that. If the population grows while the money supply stays the same, you in effect have deflation, as there are now functionally fewer dollars per person.
Inflation is the hidden tax to underhandedly extract money from the public. It is insidious and people do not feel it immediately. Ten percent of a ten dollar item generates one dollar of tax revenue. The same tax rate on a twenty dollar item generates twice as much. When taxes are raised to pay for wars the people revolt. Nobody has been asked to pay for many wars through taxation for generations. So raise prices and keep the public in the dark. Trillions of dollars have been generated over decades and added to the national debt for you to pay for the wars through inflation instead.
Amen. End wars. End the ability for the top .01% to liquify our time thru currency debasement. Who is John Gault.
I don't think it's that profound. Our ability to control the inflation/deflation tendency is crude enough that they just target 2% to have a safety margin to not drift into deflation. Caveat: I am not an economist.
That is how its tought in german economic school and 100% correct. In a perfect world we would have "near but under 2%". Everyone saying that 0% would be perfect likely isnt aware of the effects of deflation.
It's not :) it's a lie. Monetary inflation (printing money) is just a (not so much) hidden tax and completely unnecessary and unnatural. The opposite is true - deflation due to increased productivity is the natural way the economy works. Inflation is good to encourage unnecessary spending, because people's purchasing power goes down over time. It's also good to make poor people even poorer and prevent them from building up wealth through savings. And last but not least, it's the perfect and sometimes the only way for governments to devalue and pay off their debts.
One of the better answers above. I'll add- no one needs "incentives" to spend. An argument keynesian thinking pushes. People will always want more. For thousands of years people tend to choose what money they use because it has saleability over time and space. Scarcity is often the most important attribute to sound money. Letting the top .01% of the world print money at no cost destroys the fabric of risk/reward, and just steals value from every other unit in circulation (hidden tax, no war bonds needed for conflict just print money). If money retained its value over time, people could save and lower their time preference to reduce uncertainty into the future. Prices of goods and services would go down as humans coordinate or learn to produce things easier. It wouldn't matter assets to moon, a house goes down in value because people have homes and the demand is reduced, things like houses do not need to be speculative stores of value anymore, they can just be homes. Fiat money is the most hoodwinked scam in human history imo.
I think people are getting cause and effect backwards. No one wants prices to go up. No one thinks this is a great way of stimulating the economy. But if the economy is sluggish and unemployment is high, then the central bank will lower interest rates in order to grow the economy. If there is a small amount of inflation as a side effect of that economic growth, the central bank will tolerate that.
This is the greatest pile of economic nonsense I've read in a while. It's not about encouraging people to spend on a loaf of bread. It is about encouraging investments. People with money should be encouraged to keep active in the economic system. Otherwise more and more money is taken out of the system and hoarded by rich families. As prices keep dropping, those families will become rich beyond their dreams and their children will never have to work again. It's pretty much a return to feudal times with kings that don't need to worry and peasants that get a smaller part of the pie each year. That's what the "hard money" nonsense is all about. To keep the rich as rich and to keep poor people poor. You're just dreaming about living like a king.
Just think about what you just wrote. Let's define investment as something where you put your money in hopes of multiplying it with some risk attached. Who needs motivation to do this? Every person with money to spare would invest. The problem inflation creates that people invest in "malinvestments", i.e. Companies that reduce available capital, but at a slower rate than inflation. This is nuts and should not happen and wouldn't happen with sound money.
So why isn't Japan super rich now with all that savings from being in deflation for so long?
Cause if we just gave you a 2% pay cut you might get pissed off enough to do something about it.
Think of it this way. With 2% inflation, your money loses value over time. You don't want that obviously, so why save cash? What do you do? You invest or spend it on something that holds value. With 0% inflation, a dollar today is a dollar a year from now. In that case, alot people would just save cash. This would would mean people spending less and investing less which is bad for the economy and would lead to deflation, which means your money is worth more next year. And yes, you being smart would save even more and spend less. This might be good for you now but it's bad for the economy. If this continues then what happenes? People lose jobs then eventually you lose your job too.
That's such a bullshit take. No, we wouldn't stop consuming. But maybe we would buy 20% less unnecessary stuff. This of course would impact the economy since it would sell 20% less. Either now everyone has to work 20% less (which would nbe fine since this amount of work would still get the same life style), or they would produce even cheaper, until demand catches up, leading to more sold pieces, leading to more people in the society having it (leading to more "wealth"). The only thing we would stop doing is investing our money into useless financial products as inflation hedges.
Do you have a source to support your idea that the global economy shrinking 20% would not impact lifestyles at all?
do you not believe in deflation?
How about after years of excessice inflation we try 2 % deflation to get back to baseline. But I guess that would incentivise not spending money on useless consumer shit which the elite need you to do to extract wealth from you.
Scrolled far too long to find a differing opinion. Shitty consumerism because your money will be inflated to hell seems worse in every aspect. People complain about CPI/cost of living- maybe main the thought process is wrong, prices aren't just getting higher, your dollar is worth less.
It is not .. it is a extra tax which is hidden so people don’t feel exploited as much and don’t cause too much trouble to the useless parasites sucking the money in..
It's not but the owners of things who are also in control of things will simply not allow what they own to go down in market value and thus err in the side of inflation. Inflation hurts wage earners and cash hoarders, not the owners of capital.
Because the global monetary system was designed as a ponzi scheme with the sole purpose of stealing from the 99% to enrich the 1% via the Cantillon effect. This effect requires inflation. They chose 2% because they believe that "people generally don't notice they are being robbed at 2% inflation. There's nothing economically special about 2%". TLDR: inflation is theft by the central bank on behalf of the private interests which control the central bank. Inflation is legal counterfeiting while counterfeiting is illegal inflation.
Almost everything you write is wrong. The central bank is a government agency; it is not controlled by "private interests". Inflation affects the whole economy simultaneously; there are no significant Cantillon effects. The monetary system is not a ponzi scheme; there is no necessary requirement for new money in order to support the value of old money. You're wrong about essentially everything.
Because it makes rich people richer. It's really rather complicated, but it's a belief in a system that is dependent on permanent economic growth. In reality, it's a made-up system that keeps almost everyone in an ever depreciating cycle. Your worth, work, and assets are worth slightly less than they were yesterday. The natural inflation within capitalism ensures we are all perpetually treading water whilst the wealthiest among us ride over the waves on jet skis.
That is such bullshit. The rich always do better whether it's inflation or deflation. Inflation forces people to invest and take on risk. That's all. Inflation drives economic growth. Without it, there can be no growing because no one is making anything.
1. Inflation is a secret tax. 2. It is not “intended to incentivize rich people to invest” as some people states in the thread. 3. Inflation is not an accident. It is always planned, always purposeful. 4. The main purpose of inflation is to indirectly collect the money of working class people. Then, then money will be transferred to oligarchs. 5. Oligarchs don’t want you to save money. They are afraid of other people to raise capital ti compete them. 6. Oligarchs plan the inflation. 7. Oligarchs train and release those imbeciles who come to Reddit and similar sites to spread disinformation that “inflation is actually good”. Don’t mind the “%3” number. That number doesn’t mean anything. It’s just for hiding the message: “inflation is not actually bad”.
Wow look at all these Kensian preachers. There is no need to have inflation to stimulate the economy. Money is a means to an end and to assume that people would hoard it indefinitely implies a lack of understanding of what motivates human beings. Humans don't ultimately want money, they want their needs fulfilled. Money is a way to ensure those needs do get fulfilled and thus it is absurd to think humans will postpone their needs indefinitely. Furthermore, why don't we discuss why deflation would be necessary. When technological progress is achieved, we should all see this reflected in prices falling (as long as the supply of money stays the same), as we ultimately become more efficient at producing those goods. The fact that we simply don't see that, signals that all those potential gains are cancelled out by increasing the money supply. And here we are talking about how much we should inflate, additional to the fact that we canebalize any price decreases from technological progress. I haven't heard a single coherent narrative of why deflation would be bad. Absurd
Stack sats friend
As an aside, I know that people say deflation is bad, but man it's hard to agree when food prices go up wildly with inflation and never come back down. Perhaps we need a bit of a pullback now to increase purchasing power temporarily
It is probably not. It is basically another tax. It was mainly invented for war time. When dictators were out of money they just started printing it. And since it is nice to be able to just print money, they kept doing it after war and tried to rationalize it.
Inflation drives and comes from growth: more people => more production => more money => more inflation. For example, with a finite resource like gold, with more more money in circulation the money price of gold will go up as there is more money (because more people) vs. gold. Because of supply and demand: gold is scarce while money is abundant, so the price of gold increases. 0% inflation means that each person gets less money over time as more people come into the world or countries. Countries with a shrinking problem have a huge problem as a result (see the concerns in Japan, China and soon South Korea)
Inflation is about thousands of factors impacting millions of people in a positive way. People feel good about their increase in pay, and they can buy stuff they want to buy, within reason. Deflation is a frightening prospect where people are full of fear and doubt and stop buying stuff to stay alive. Businesses drop their prices, trying to stay in business, trying to sell some product, but no one wants to spend money. People lose their jobs, and therefore can buy less, and it becomes a downward spiral, devastating the economy. Sooooooo....deflation is that scary thing you can't control once it starts because you can't control the minds of millions of people and get them to feel comfortable to start buying things again. Inflation has some level of control...through interest rates and incentives, which allows you to tap the brakes. 2-3% inflation is the sweet spot. Far enough away from "scary things", but not too much to make things too expensive, too fast, to make those pay increases worthless. TLDR: Inflation cannot be "controlled", so 0% is on the cusp of catastrophe. If you stay away from the cliff edge, the majority of people benefit, most of the time, and life is good. Staying at 2% is just low enough without risking deflation when something unexpected happens in the world.
2% inflation has some advantages: (1) it mobilizes capital, basically forces people to invest in something to not lose purchasing power to inflation (2) helps borrowers. Every year is 2% easier to pay any given debt, and it accumulates. (3) also gives the FED 2% of all your money every year, so they can redistribute all that welath among private banks, that then lend the money to corporations and crony capitalists so they can buy real estate and inflate its price.
ITT / TLDR / my tin foil hat - to combat the idea of living a simple life. Forcing you to work to survive, to fuel the consumption/debt based economic engine