Why the 2% inflation target? (2023)

https://sites.lsa.umich.edu/mje/2023/09/04/why-the-2-inflation-target/

by luu • 2 years ago

259 602 2 years ago

sites.lsa.umich.edu

seunosewa• 2 years ago

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

aspenmayer• 2 years ago

I don’t think that logically follows unless we can assume or demonstrate that the factors influencing the inflation rate and other factors such as purchasing power parity of all who are targeting the same inflation rate across the board are themselves stable.

esafak• 2 years ago

What about differences in productivity?

georgeplusplus3• 2 years ago

> This loss of trust is a major problem. For example, if you no longer believe the Fed inflation target, then you will base your actions on what you think the inflation rate will be, which can lead to cycles of inflation. If you believe inflation will be high soon, you will buy a lot of stuff now when prices are lower. However, other people will realize this too, and then there will be a race to buy goods and services, which will lead to less supply and higher prices. This creates more demand, which leads to higher prices, creating the inflationary doom loop. Showing that losing the Fed’s credibility may not be worth the benefit of a better target.

The FED is clearly in a damned if they do damned if they dont scenario. Blaming the target feels like a red herring. In the scenario they pitched would create demand and supply shocks in the short term but recession must and would is surely to follow because of the inefficiencies in the market. The real question is Who is in charge here? If the Fed was, they would and could get in front of inflation and raise rates to where inflation would not come back however, at the risk of upsetting markets, it seems they've been politicized into inaction.

bobthepanda• 2 years ago

the inflation rate setting is trying to predict human behavior and so it is always a damned if you do damned if you don't.

that being said, the psychological power of central banks is very real. Brazil's real was introduced in 1994, after an intermediate period in which the prices had to be dual listed in the old and future currency, but the future currency had not been printed yet. They just never inflated the future currency, and people seemed to believe that. https://en.wikipedia.org/wiki/Plano_Real

ajross4• 2 years ago

You understand that the paragraph you quoted was a didactic illustration[1], not a description of reality, right? In fact inflation is sitting right at 3% right now, not at the 2% target but hardly very far off.

The real question is Who is in charge here? If the Fed was, they would and could get in front of inflation and raise rates

They... did?

[1] Specifically of the situation where a change of target rate (which, again, is not happening) would be interpreted by the market as a loss of control.

Tyrek• 2 years ago

Trailing 12 Mths Inflation: 3.2% (Headline) 3.8% (Core). In both cases, it's at least 50% above target. While a smaller gap than in recent years, it's still fairly sizable, all things considered.

georgeplusplus3• 2 years ago

As someone else pointed out at 3% , it's at least 50% above the target I don't see how someone can consider that small. Cherry picking historical data as a way to hand wave that fact is disengenious at best.

Even if for some reason you think 3% is not high, inflation is clearly starting to reverse which the fed has admitted its not gonna get better in the short term.

Contrast this to Volker who made the hard decision to raise rates well above inflation not once but twice.

082349872349872• 2 years ago

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

sob7272• 2 years ago

Yellen supposedly told Greenspan & co in the mid 90s that 2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary). It was the only way to have some flexibility there. If you admit that this is a desirable thing, this is defeated by wage negotiations (or say, benefits) than tend to be indexed to inflation.

Another interesting thing that happened under Greenspan is how inflation is computed (hedonics, replacements, etc... conceptually, think "if I can't buy a porterhouse steak anymore, I'll get the lesser hanger", meaning inflation is underreported). I'm not suggesting this was intentional or coordinated, but this had the huge benefit for federal and local governments that it lowered the benefits they had to pay out that were linked to inflation. Issue is it hurts the poor more.

jmyeet• 2 years ago

That's not new or controversial (in economics circles).

This really took off in the Reagan years where real wages stagnated [1]. It was from the 1980s where you started to hear statements like "wage incresaes should be tied to productivity increases" [2]. If you parse that statement, it means no cost-of-living increases ie a decrease in real wages.

All of this is wealth transfer to the very rich and entirely intentional.

[1] https://www.epi.org/publication/charting-wage-stagnation/

[2] https://www.epi.org/productivity-pay-gap/

adam_arthur• 2 years ago

"Real" wages are driven by the "real" supply and demand of labor, not by nominal numbers.

If the number of qualified workers increases significantly, you will end up with lower real wages. There were three major factors increasing labor supply around this time in the US. Immigration from Mexico, women continuing to enter the labor force, and reduction in demand/increase in (global) supply for lower skill labor via globalization of manufacturing

Not casting any judgment on whether these things are good, but they are far more likely to be the primary factor than inflation.

smegger0013• 2 years ago

and we didn't even get the productivity increase, if we had the computer revolution should have massively increased everyone wages due to increased efficiency.

alfalfasprout• 2 years ago

This is key. Due to hedonics/replacements inflation hasn't reflected what people actually feel for a while now.

throw0101d11• 2 years ago

Due to hedonics/replacements inflation hasn't reflected what people actually feel for a while now.

The hedonics/replacements occur in the data because what is looked is taken from surveys of what people buy:

* https://www.bls.gov/respondents/cpi/

I just happened to answer a question on the CPI in Canada in another forum: The CPI you see in the headlines is made of of various components (Shelter, Food, Transportation, etc), the proportions of which are determined by spending surveys:

* https://www.statcan.gc.ca/en/survey/household/3508

As people change their buying habits the items that are tracked also change to reflect what consumers are spending. Here are the items in each category:

* https://www.statcan.gc.ca/en/statistical-programs/document/2...

You can see the list of changes going back to 1913 at (coal and lard were removed/replaced in 1956):

* https://www.statcan.gc.ca/en/statistical-programs/document/2...

It should also be noted that the number reported in the headlines is the national average, while the prices can vary widely depending on your location. So in the report for February 2024, the national number was 2.8%, but Alberta had 4.2% while Manitoba had 0.9%:

* https://www150.statcan.gc.ca/n1/daily-quotidien/240319/dq240... (Chart 5)

* https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc...

* https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=181000... (searchable by province)

StatCan has a "Personal Inflation Calculator" where you can enter your own numbers/budget and find a number that may be closer to what's happening around you:

* https://www150.statcan.gc.ca/n1/pub/71-607-x/71-607-x2020015...

Remember: the CPI is a model of reality, and not reality itself. It is used as a guide, and to use the words of [Alfred Korzybski](https://en.wikipedia.org/wiki/Alfred_Korzybski):

* [The map is not the territory.](https://en.wikipedia.org/wiki/Map–territory_relation) * https://fs.blog/map-and-territory/

Or those of statistician George Box:

* [All models are wrong but some are useful.](https://en.wikipedia.org/wiki/All_models_are_wrong)

jokethrowaway6• 2 years ago

I don't believe leading economists didn't see this coming. Even if they didn't originally, it's been clear now, for decades.

This is the system working as intended, making government spending easy and gradually worsening poor's people lives.

cjbgkagh13• 2 years ago

One neat feature of ignorance is the ability to hold incorrect ideas with sincerity, I not only think economists are generally wrong, but the most dim amongst them are the most likely to be promoted to prominence.

rootusrootus• 2 years ago

Are poor people's lives objectively worse now than they were, say, 40 years ago?

theteapot• 2 years ago

Pretty sure they have a steady poor people target rate as well (unemployment rate roughly) so no need to worry.

throw0101d11• 2 years ago

Another interesting thing that happened under Greenspan is how inflation is computed (hedonics, replacements, etc... conceptually, think "if I can't buy a porterhouse steak anymore, I'll get the lesser hanger", meaning inflation is underreported).

Inflation calculations (in the US) did not happen under Greenspan, or under any other Federal Reserve chair, because the calculations are not done by the Fed, but by the Bureau of Labour Statistics (BLS: https://www.bls.gov/cpi/).

The 1990s change to the CPI were done under the auspices of the US Senate Boskin Commission:

* https://en.wikipedia.org/wiki/Boskin_Commission

* https://www.ssa.gov/history/reports/boskinrpt.html

One of the conclusions was (AIUI) that the CPI then-methodology actually resulted in numbers too high.

This is true in many (most?) countries: e.g., in Canada CPI is calculated by StatCan and various types are used by the Bank of Canada (BoC):

* https://www.statcan.gc.ca/en/statistical-programs/document/2...

* https://www.bankofcanada.ca/rates/indicators/key-variables/k...

* https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=181002...

OnlineGladiator4• 2 years ago

One of the conclusions was (AIUI) that the CPI then-methodology actually resulted in numbers too high.

How is this any different from saying they changed the methodology to make the numbers look better? In my opinion the old methodology was better, but I realize this is a complex issue and there is no "correct" answer.

transcriptase• 2 years ago

StatsCan under-reports to a hilarious degree.

Your rent went up by 30%, groceries went up by 20%, but fuel went down by 10% and a new TV went down by 30%. Also people stopped buying steak because it went up 50% so we'll drop that from the basket. Let's see... if we run the numbers by dropping goods that are experiencing rapid inflation, and then weight things in a way that has no correlation with the increase in cost of living experienced by 99% of the population we get... oh look at that! 4.1%! Great news for the person who buys a new TV with their groceries every week!

tsimionescu4• 2 years ago

The OP and your reports agree: the Boskin committee changed the way inflation is calculated. The new way says there is less inflation than the old measure said.

So, if the new measure is actually wrong, then inflation is underreported now, when it used to be correctly reported before. The Boskin committee believes it was overreported before and it is now correctly reported.

sob7272• 2 years ago

You are absolutely correct that the BLS publishes CPI, but this still happened in the Greenspan era (and that's what I meant by "under Greenspan"). I remember reading (IIRC, in Bill Fleckenstein's book), that the Boskin commission was not free of interference and/or had an intent going in.

Either way, especially in recent years, it's pretty clear that CPI has been a flawed metric. I remember this episode fondly: https://www.wsj.com/articles/SB10001424052748704893604576199...

spaceman_20207• 2 years ago

This is why I think CPI numbers are all hogwash

All the younger people I know in less than stellar jobs are really hurting. These people were never well off but were comfortable before the pandemic.

But now they’re making hard decisions for basic necessities and grinding down the quality of their lives.

wolverine87614• 2 years ago

So what do you use that's better? Your personal experiences don't tell us much about the other 320+ million people.

esoterica5• 2 years ago

The lowest income workers have seen the largest wage gains over the course of the pandemic.

throw0101c5• 2 years ago

All the younger people I know in less than stellar jobs are really hurting.

And? It has always sucked to be poor / have less. That doesn't mean that the measurement of prices via CPI is inaccurate.

The fact that capitalism has run amok and income inequality is growing doesn't mean the statisticians at the BLS are wrong or are cooking the books.

esoterica5• 2 years ago

Why are inflation truthers so resistant to spending even the tiniest amount of time learning how inflation is computed instead of repeating nonsensical conspiracy theories that match their ideological priors? Replacing porterhouse with hanger steaks in the basket simply means giving the change in price of hanger steaks a higher weight than the change in price of porterhouse steaks in the basket. It does not mean recording the difference in price between a porterhouse and hanger steak as a decrease in the price index. If porterhouse and hanger steaks both go up by 5% then switching from porterhouse to hanger steaks will not lower inflation, even if hanger steaks are cheaper. And of course that’s the correct way to compute inflation, if people stop using typewriters and start using computers why would you still include typewriters in the consumer basket.

It’s not even true in general that the trend has been switching towards lower quality products. Despite all the ahistoric whining about how much better the old days were, Americans have gotten richer over the past several decades and have been buying bigger cars, dining out instead of eating at home, spending more on travel etc.

testacpwoek3• 2 years ago

nonsensical conspiracy theories that match their ideological priors

People's lived experiences in many parts of the country don't match what they're being told. If macro trends go one way but microtrends all over the country go the other way, then the macrotrend analysis is functionally meaningless for millions of people. That's not a conspiracy theory, and hand-waving so many people's lived experiences away because it doesn't match YOUR ideological prior is not taking the discussion seriously and fundamentally and possibly wilfully misunderstanding the issue. Insisting that people everywhere saying life is harder than it was pre-pandemic or 10 years ago or whatever are wrong "because the charts say so" is silly.

lebean3• 2 years ago

They must be the 7% of the population not covered by BLS stats when working out the CPI, assuming they're from US, or living in a remote area. Agree that overall, the population has been growing richer for several decades. But what about us folks who subsisted off of GPUs and used cars in 2021-2022? The reality for us is way different.

FactKnower694• 2 years ago

2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary)

This is EXACTLY the issue. The economy is rigged such that in the absence of any positive action, workers' purchasing power goes down over time by default. This obviously isn't a problem for the rich, whose money is stored almost entirely in assets which by definition rise in value with inflation. Meanwhile, everyone else whose income comes primarily from a wage must constantly struggle for more concessions just to earn the same real amount they did last year.

throwaway143564• 2 years ago

I have this picture burned on my retina with the union reps toasting champagne after successfully negotiating 2% this while my rent went up by 5% using the same arguments.

graeme2• 2 years ago

You haven't understood the issue. If a firm needs to lower costs, the alternatives to mild inflation are:

* Negotiating actual salary cuts, or * Job losses

Ideally in a market, prices adjust up and down freely. Obviously this is not a sensible approach to salaries. Given the bias towards loss aversion, having mild inflation make mild losses is preferable to having, say: 5% deflation, 7% salary cut.

This concept is from Econ 101. And it doesn't mean everyone's wage drops. It means struggling firms can adjust wages less painfully.

Your alternatives to 2% are:

* active deflation, with actual wage cuts

* higher inflation, where you have active salary negotiations each year to predict inflation and negotiate higher or lower than inflation, like in the 70s

nickff• 2 years ago

"This obviously isn't a problem for the rich, whose money is stored almost entirely in assets which by definition rise in value with inflation."

This isn't true (at least not by definition); no common measure of inflation uses the assets of the rich as a primary input. The closest thing you will find is OER, but that's unrelated to the stock market or other common assets used by the rich to park wealth.

adriand• 2 years ago

An under-appreciated benefit of inflation is that it reduces the value of debts. All things being equal (and of course they aren’t), inflation is good for debtors and bad for debt-holders. If you owe $500k on your mortgage, inflation at 5% annually is reducing your debt load substantially without you needing to do anything.

itsoktocry• 2 years ago

The economy is rigged such that in the absence of any positive action, workers' purchasing power goes down over time by default. This obviously isn't a problem for the rich, whose money is stored almost entirely in assets which by definition rise in value with inflation.

Look, I'm sensitive to the struggles of the less well off, and that we are in a particularly rough part of a cycle. I don't believe the economy is at all optimal.

But your comment implies that people are getting poorer over time, and it flies in the face of reality, doesn't it? Society has become significantly wealthier, despite the absurdities of inflation and interest rates.

username332211• 2 years ago

The economy is rigged such that in the absence of any positive action, workers' purchasing power goes down over time by default.

It's not rigging. Here's a few observations from a study in 1776.

It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labor.
China has been long one of the richest, that is, one of the most fertile, best cultivated, most industrious, and most populous countries in the world. It seems, however, to have been long stationary. [...] The accounts of all travellers, inconsistent in many other respects, agree in the low wages of labor, and in the difficulty which a laborer finds in bringing up a family in China. If by digging the ground a whole day he can get what will purchase a small quantity of rice in the evening, he is contented. The condition of artificers is, if possible, still worse.
The liberal reward of labor, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the laboring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition that they are going fast backward.

At risk of derailing the conversation, your post is an excellent demonstration of how conspiracy theories come about. You notice some basic social truth, and since it's a harsh and unpleasant one, you blame it on some sort of deliberate action.

aorloff• 2 years ago

America is rigged to benefit the business owner. This used to make more sense where in the first couple hundred years the end goal of a profession was being the head of your own shop.

But it is still true that a lot of people, including all stripes of middle class, are self employed or have income other than wages (I shared a chairlift recently with someone who spent 1/3 of the year ranching his cattle, 1/3 of the year farming a crop with his grandfather and a hired hand, and 1/3 of the year as a ski bum - 3 types of seasonal hard labor that gave him the freedom he wanted)

afpx• 2 years ago

Just put most of your liquid money in a gold ETF.

simonh2• 2 years ago

You’re missing the ‘if needed’. The idea is not that wages will permanently lag inflation, we can see from the figures that this has not been the case. Workers know what the inflation rate is and what it means when they negotiate wages. It’s that if there is an economic downturn employers can mitigate some of the impact by freezing wages instead of having to sack employees (or as many, anyway). If needed.

This is also not the only reason for targeting inflation at some low but positive level. Another is that you _really_ don’t want persistent deflation, so aiming for modest inflation reduces that risk. Inflation also erodes unproductive savings, encouraging investment, which supports jobs and growth.

anonuser123456• 2 years ago

I hate to break it to you, but the rich are taxed on nominal gains, not real.

Holding assets during inflationary periods means paying a higher percentage of your real gains as taxes.

317070• 2 years ago

The economy is rigged such that in the absence of any positive action, workers' purchasing power goes down over time by default.

In Belgium, nearly all wages and salaries are "indexed" automatically in order to avoid social unrest [0]. If the government notices that prices of an index of goods have increased with 2% or more since the last increase, all wages, benefits and rents go up with the same number. The exact details could fill whole books though.

Indeed, if it weren't for such a mechanism, you would need to see strikes way too regularly in order to fix the runaway inflation against fixed wages (which is bad for productivity, which causes even more inflation).

It creates a setting where most people (who don't understand inflation anyway) don't need to care about inflation too much either. In fact, I have found most Belgians react incredulous when you point out it's pretty much the only country that handles inflation this way.

[0] https://en.m.wikipedia.org/wiki/Consumer_price_index_(Belgiu...

hayst4ck• 2 years ago

The issue is much more complex than devalued wages.

It's worth asking where the inflated money goes. It doesn't go to your bank account, it doesn't get sent out in checks to every citizen. It goes directly into the pockets of people who take out loans to fund business ventures -- capitalists/owners. That's what the interest rate is, interest on loans. When you have socialism for the rich as we do in America, that further compounds the corruptive damage of inflation, because those loans that are given out are then not defaulted on, so inflation then becomes a direct handout to the rich free from the consequences of risk. This makes both the rich richer and the poor poorer.

Inflation fuels wealth inequality, which fuels corruption, which destroys rule of law, which destroys innovation, which shrinks the economy, which requires more inflation.

Ray Dailio's Principles for Dealing with the Changing World Order talks about why the problem is so much more complex and worse than you think it is (45min): https://www.youtube.com/watch?v=xguam0TKMw8

kypro• 2 years ago

I'm highly critical of the Federal reverse and I think they suppress wages in other ways, but the 2% inflation target in my opinion has no impact on wages broadly.

Assets don't automatically rise in value with inflation. If you own shares in a business generating $100,000 in profit in the current year, then it won't automatically generate $102,000 the next year. In fact, because of inflation it will probably generate less profit because costs are always going up. And if profits are decreasing then so should the value of the company.

Hard assets are slightly different, they will generally go up with inflation, but notably the same is true in the reverse. If you're very poor and have a lot of debt, inflation is great because the value of that debt will be devalued.

And for these two reasons I'm not sure it's as simple as saying inflation is good for the rich. Inflation is bad for companies with high variable costs.

Finally one of the core drivers of inflation is wages. It's very hard for inflation to rise without wages rising, because demand in an economy is ultimately a product of the purchasing power of consumers which is tightly coupled to wages. Without wage growth to get inflation you'd probably need some other driver of demand such as demographics (immigration, high birth rates, etc), fiscal deficits (more public borrowing), or accommodative interest rates (more private borrowing).

sarmike31• 2 years ago

You are viewing inflation narrowly from a worker perspective. Inflation is there to also spur economic activity in a way that encourages people to keep their cash moving and invest their money in a similar way to how companies start losing out if they slow down and rest on their laurels (e.g. stop innovating or growing). In any other case people would just start hoarding their cash. So it’s a way to keep the economy chugging just like purposefully keeping a couple of percent of unemployment always there (even if full total employment would be possible). It tends to keep people on the edge, active and moving.

But there are other useful reasons for inflation too. It enables stable expansion of currency and funding of deficits, money printing and overall economic expansion (or funding of wars for political ends) despite all the inconsistencies when allocating this added money supply, and particularly the outright morally bankrupt socialistic rescue of large ”systemically important” banks etc. The same governments that create and manage the money supply may also introduce millions of large deviations and problems with the price formation on goods and services or investment such as IRA sucking the world dry to get all the investment and manufacturing capacity back to the US.

It’s a complex topic, but you have to keep in mind that central banks are the mystical force that keeps this whole game running. If you corrupt this system too much it tends to fail and I’d like to remind that the US Fed is the third central bank attempt in the US alone. It’s just crazy how it is all set up this way and people remain fascinated by it.

In the end it comes down to trust and military firepower and compulsion (as well as tax collection in that currency, i.e. legal tender) to keep everything legitimate and workable… I could go on and on but you get the point. You are just a cog in the machine, so don’t worry too much if your salary buys you a tad less than before, we gotta work with it somehow and that’s the intention. If you upskill and work hard enough, you can ask for more salary. Or if you’re closer to the source, then you have have nothing to worry about (govt. contracts, even something like large venture capital during the zero interest rate time, or just close and cozy with banks).

dventimi2• 2 years ago

This is backward. Workers' benefit from (wage) inflation. The rich do not.

jcarrano• 2 years ago

Those monetary tricks only work for a short time, in this case until workers realize that not getting a rise roughly matching inflation is effectively the same as a getting paid less (i.e. Rational Expectations).

rhelz6• 2 years ago

Well, no matter how the 2% figure was arrived at as a matter of historical happenstance, 2% is actually a very good number to shoot for.

First of all, a rate of zero would be ideal, but, lets face it, like any measurement, this is going to have some error. So, if you are going to err, on which side do you want to err? In favor of a little bit of inflation, or a little bit of deflation?

Well, inflation is painful, sure, but it's not nearly as bad as deflation. Let's exaggerate the numbers to make this point: if we had 50% deflation, your paycheck--the dollar amount you brought home--would be cut in half. However, your car payment, your mortgage, and your credit card bills would stay at the same nominal value.

So all of a sudden, you'd be financing twice as much debt, in real terms. A Calamity. You'd lose your car, your house, your credit. Cf with 50% inflation. You'd be paying back your debts with inflated dollars, which is hard for banks--but remember, they are also paying back their creditors with inflated dollars too...

So, given that inflation is bad but deflation is worse, and given that the Fed probably can't measure and-or even control the inflation rate to a sub 1% precision, shooting to keep inflation at 2% is a good strategy.

ncivkcndixbdbx• 2 years ago

if we had 50% deflation, your paycheck--the dollar amount you brought home--would be cut in half. However, your car payment, your mortgage, and your credit card bills would stay at the same nominal value.

Society doesn’t need to operate with so much debt. Usury is a financial tool that benefits the rich.

diego_sandoval• 2 years ago

your paycheck--the dollar amount you brought home--would be cut in half. However, your car payment, your mortgage, and your credit card bills would stay at the same nominal value.

Not necessarily. If the transition to a deflationary economy is slow and planned, then expected deflation would start to be considered in the interest rates of your car payment, mortgage, etc. i.e. interest rates would become negative not long after inflation becomes negative.

If employers are capable of negotiating deflation adjusted salaries, then market pressure is capable of forcing companies to adjust their prices and interest rates to deflation.

ThePowerOfFuet• 2 years ago

if we had 50% deflation, your paycheck--the dollar amount you brought home--would be cut in half. However, your car payment, your mortgage, and your credit card bills would stay at the same nominal value

If your contract says you make $5000/month in salary, then why would the number of dollars decrease? They wouldn't increase due to inflation unless the employer chose to "give you a raise" (just adjusting for inflation perhaps), but they can't unilaterally decrease your salary (in countries that don't suck, anyway).

living_room_pc• 2 years ago

On a individual level, your examples may not representative of younger generations who have less liabilities. This demographic of course are more likely to rent and buy a cheaper car (or no car at all), consequently they would likely have a higher liquid/non-liquid asset ratio and therefor would probably benefit in the short term to deflation. In the long term they would fair better than older generation for the reasons you mention, plus the fact they can change their living situation faster (new location, rental, job etc) at the detriment of their landlord or other leasing companies.

Regarding inflation, I would argue that younger people are more susceptible. Their free cash flow will drop, and at higher rates could lead to negative flow which over an extended period would be financially deadly especially for NEETs or other people at risk.

ponow11• 2 years ago

Secular deflation existed in the late 19th century during growth periods.

Deflation associated with debt deleveraging can be bad. But the problem is that we got into debt. Debt was not nearly as high in the 19th century. Debt addiction is relative modern.

Our inflationary 2%++ regime tends to encourage debt, and the Trumps of the world can leverage their lives to the hilt. Poor people have much more difficulty juggling debt and fail spectacularly. Debt growth increases economic instability.

analog31• 2 years ago

Ah, but if inflation is underreported with a 2% target, it's also likely to be underreported with a 0% target.

On the other side, fiscal hawks have an incentive to overreport inflation.

bsdpufferfish10• 2 years ago

fiscal hawks, like who? and with what power?

RustyRussell• 2 years ago

This argument goes back to Keynes IIRC: inflation was good to keep wages reduced.

It's hard to imagine a deflationary world where bosses had to negotiate with workers to reduce their salary annually, which kind of shows how powerful this idea is...

rufus_foreman3• 2 years ago

The word supposedly is doing a lot of work there.

Did that actually happen? What's the evidence that Yellen told Greenspan that?

ludwigislaugh• 2 years ago

Ludwig Von Mises is laughing, he was so right. It's not even funny.

brikym• 2 years ago

Exactly. By changing the composition all the time of the CPI you're underreporting inflation. We all know about shrinkflation being common as well but shitflation is the worst one of them all because now you can't even spend a few more cents for the quality your favourite products have been turned into shit by means of substituting ingredients, worse customer service, tricks like subscription seat-heaters and so on. One of example of many is dairy products. The common yoghurt brands in my locale have started taking all the fat out of their so-called yoghurt, adding thickening agents and in a very small font labelling it 'low-fat'. Well that's not really yoghurt which is milk+culture is it? I can see why Germany has their beer purity law maybe a yoghurt purity law is in order too.

wodenokoto• 2 years ago

Inflation is meaningless if you don’t include substitutes as part of defining your basket.

The price of typewriters, film or rotary phones are completely irrelevant to the cost of living today and would be meaningless to include.

You don’t substitute beef with beef. You substitute elk with beef, if elk used to be a stable but now isn’t.

willio58• 2 years ago

Once the bill became law, then an inflation target had to be chosen. In an off-hand remark in an interview, the former head central banker said the inflation target should be zero to 1 percent. However, Don Brash, the head of the central bank, claimed “It was almost a chance remark,” and “The figure was plucked out of the air to influence the public’s expectations ”(Irwin, 2014). They used this number as a starting point and pushed it up to 2% to give themselves a bit more room

This feels like so many decisions we make day-to-day in STEM. We all love to feel like we have quantitative reasoning behind decisions but due to the organic nature of the work at some point, we just have to land on _something_ and go from there. Like qualitatively-influenced quantitative data.

rvba• 2 years ago

They could have chosen 0 or -2% but they like to reap that 2% free money premium..

jdsully2• 2 years ago

Defalation has more risk of feedback spirals, it heavily incentives you to wait to invest as tomorrow it will be cheaper than today. This is why small positive inflation rates are preferred. You could target 0% but in practice you will oscillate around it and have potentially long periods of deflation.

SubjectToChange13• 2 years ago

Slight inflation encourages money to be put towards productive use and punishes hoarding. Choosing a deflationary monetary policy is unconscionable, just think for a moment what the consequences would be.

Wytwwww5• 2 years ago

-2%

Would be pretty awful though. Very slow or no GDP growth, if you have any significant amounts of debt you're basically permanently screwed (if you're rentier and can just live on interest from low-risk bonds without doing anything productive you're set though...)

throw0101d11• 2 years ago

They could have chosen 0 or -2% but they like to reap that 2% free money premium..

If you think negative inflation (deflation) would be a good choice to make, perhaps look at the 1930s.

Workaccount2• 2 years ago

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

taneq• 2 years ago

I had to double check to make sure this wasn't my comment because I'm getting amazing levels of deja vu right now. Everybody's winging it, nobody knows what they're doing, and the higher you climb the chain the more terrifying this fact becomes.

abdullahkhalids• 2 years ago

I was listening to this podcast [1] by a previous head of the IMF, who basically said the same thing.

[1] https://josephnoelwalker.com/151-raghuram-rajan/ Search for 2% in the transcript

smallmancontrov2• 2 years ago

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

yinser• 2 years ago

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

codetrotter4• 2 years ago

Although the idea of a more valuable dollar may sound great, many economists think it is worse than high inflation (Engeman, 2019). The problem is that the value of money would increase when people do nothing with it. This would be problematic since people would not invest or spend money to get the country out of a recession when they could just get a return from doing nothing.

Yes, how terrible that would be.

In reality people would still need to buy things that are actually important.

Housing. Food. Heating. All kinds of stuff. And on top of that we are still gonna spend on the non-essentials as well. It’s not like I’m going to completely stop watching movies or playing games or listening to music just because I know my dollar today would be worth more tomorrow.

The people that would be holding back are the ones that have hoarded all the resources in the first place. And that’s the real problem. Inflation is a bandaid to avoid things getting as bad as they would. But the reason is because of people taking too much and societies that don’t take care of their people. Incidentally the ultra rich also have a lot of clever ways of avoiding being impacted by inflation in the way that it impacts most normal people.

vkou7• 2 years ago

Yes, how terrible that would be.

It would be pretty terrible if I became richer not by generating economic activity, but by sitting around with my money in a mattress.

You are correct that it's a band-aid fix... But it's the best one we have.

codetrotter4• 2 years ago

What I’m telling you is that normal people would not be doing that. Not in the way that this kind of idea makes it sound like anyway.

TehShrike2• 2 years ago

How would that be different from the people who buy the S&P500 instead of spending their money and generating economic activity?

jxdxbx2• 2 years ago

Deflation has always been a disaster.

codetrotter4• 2 years ago

You don’t need inflation to solve the problems. Adjust the tax rates instead.

Property taxes. Income taxes. Taxing people by the amount of savings they have. Importantly, don’t give the rich guys tax breaks. Give the tax breaks to the poor.

medvezhenok4• 2 years ago

This is flat out incorrect. There have been productivity driven deflations in the 1800s that have actually been net good for the average person.

It's just that the most salient example of recent deflations (2008 and 1930) happened to coincide with massive crashes and problems; but that is a feedback of deflation + excessive leverage leading into the deflation - it's not something inherent in deflation itself.

mindslight• 2 years ago

The combination of monetary creation by the central bank to bring price inflation up to 2% combined with kayfabe austerity by the legislative/executive government is responsible for the utter hollowing out of our economy. The combo has given the centralized financial industry basically unlimited power to make highly leveraged investments for predictable things that conform to their pet models, while vacuuming real wealth away from the edges in the form of loan payments. A fundamental assumption of real working capitalism is that capital is distributed, and this combo has all but destroyed it.

Even if one insists on the orthodoxy that some price inflation is necessary, the new money to create such price inflation represents a distributed taking from our society (ie a tax), and thus should be spent for deliberate purposes by the government - ideally on infrastructure and other investments aimed at creating more wealth in the future - rather than being given to the financial industry as low interest loans to bid up the asset bubble out of the reach of main street. I believe this is the core of Modern Monetary Theory, and while poised to encourage a bit more spending than I would like from an Austrian perspective, it is at least honest compared to the past several decades of the Keynesian+Reaganomics bait, switch, and squeeze.

visitor4712• 2 years ago

never understood this mantra of 2 %, mindlessly pound out by the msm.

in twenty years your savings have lost nearly half of its purchasing power.

kinghajj• 2 years ago

0.98^30 = 0.5459, so more like 30 years. But, that's why you have to put the bulk of your savings in equities and bonds.

smallmancontrov2• 2 years ago

...if held in cash. Were you holding your savings in cash?

tombert• 2 years ago

You probably shouldn't be storing all your savings in cash. I think it's generally considered better practice to put at least some percentage into something market-based, like an index fund.

zaroth• 2 years ago

I was taught two reasons in undergrad Econ;

1) Deflation is seen as much worse, because inflation encourages spending over saving, which drives growth. Targeting, e.g. 0.5% risks missing and going negative.

2) Inflation reduces the true value (cost) of debt. And with $34.5 trillion of it, that’s a big incentive to keep it around.

IMO 2% is clearly too high of a target, but it’s the hamster wheel that makes everyone keep running so not surprising that government spins it too fast.

bluescrn• 2 years ago

2) Inflation reduces the true value (cost) of debt. And with $34.5 trillion of it, that’s a big incentive to keep it around.

This is the point that a lot of people miss. Inflation is good for governments as well as businesses who can exploit high inflation to raise prices and shrinkflate products disproportionatly while lowing their wage bills in real terms.

But it inflicts the most suffering on not just the working class, but the sensible/frugal ones who minimize their debt and accumulate some amount of savings rather, but who don't have enough wealth or knowledge to get serious about investing it.

ClumsyPilot4• 2 years ago

sensible/frugal ones who minimize their debt and accumulate some amount of savings

What if this is wrong and being frugal is not sensible?

jokethrowaway6• 2 years ago

I don't think people against inflation miss this point, they just think the massive government spending needs to go (or, at the extreme, the entire government, whether they have rationalised it yet or not), not the value of poor people's cash.

usrusr• 2 years ago

And good for people so wealthy that they never go without debt but have people they pay for keeping their net worth leveraged forever. Eventually paying off the mortgage is a very middle class thing, they can't afford risking shelter longer than necessary. The rich never stop paying off mortgages.

spaceman_20207• 2 years ago

So many of my cohort are now in a state of financial nihilism. Just yolo into the hottest stocks and crypto because debt is money and cash is for suckers.

throw0101d11• 2 years ago

But it inflicts the most suffering on not just the working class, but the sensible/frugal ones who minimize their debt […]

It also helps people with debt, like folks with student loans, mortgages, etc.

fuoqi• 2 years ago

Higher inflation levels in the upcoming decades are effectively inevitable with the parabolic public debt levels and zero political appetite for reducing budget deficits. Things like quickly approaching insolvency of the Social Security program only make the situation worse. As soon as the public debt market (including repo) will see any issues the Fed will quickly ride to the rescue, inflation be damned. We've clearly seen it right before the pandemic and with UK gilts.

It does not matter what the inflation target is. It's likely we will see double digit inflation spikes with "hard work" of bringing it back to target levels (be it 2% or 4%), so on average you will get anything but the target level.

And before someone mentions Japan, read this: https://www.lynalden.com/economic-japanification

wolverine87614• 2 years ago

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

fwlr• 2 years ago

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

foobarian• 2 years ago

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

notShabu• 2 years ago

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

thehumanmeat• 2 years ago

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

mebazaa• 2 years ago

Paul Krugman covers that question here (gift link): https://www.nytimes.com/2023/06/09/opinion/inflation-target-... and argues that the theoretical assumptions that led to the 2 percent rate didn’t turn out to be true:

On one side were economists who believed that the essential role of monetary policy — maybe even its moral duty — was to deliver stable prices. Money, after all, is a yardstick we use to measure economic activity, and they argued that this yardstick shouldn’t be constantly changing its length.
On the other side were economists who worried that too low an inflation rate could inhibit our ability to fight recessions. The Federal Reserve and its counterparts in other countries try to manage the economy mainly through their control of short-term interest rates; but these rates can’t go much below zero, because negative rates would just lead people to accumulate stacks of $100 bills. A higher rate of inflation tends, other things being equal, to raise interest rates and makes it less likely that the Fed, faced with a recession, will hit the “zero lower bound” and be unable to cut rates further.

The zero lower bound turned out to be a real problem, given the amount of years we spent at a zero percent interest rate.

dools2• 2 years ago

The real problem is using monetary policy as a tool at all. We should have ZIRP forever and use fiscal policy to target price stability and full employment.

immibis10• 2 years ago

ZIRP is zero interest rate policy - were you perhaps thinking of zero inflation rate instead?

Zero interest rate tends to create lots of inflation because borrowing money (i.e. banks other than the Fed creating money) is nearly free.

quickthrowman2• 2 years ago

Using fiscal policy would require a functional legislative branch.

throw0101d11• 2 years ago

We should have ZIRP forever and use fiscal policy to target price stability and full employment.

If only (US?) politicians would get their act together and act.

Instead we have folks that believe cutting spending/demand will increase economic output ("expansionary austerity"):

* https://en.wikipedia.org/wiki/Expansionary_fiscal_contractio...

Or that tax cuts pay for themselves:

* https://en.wikipedia.org/wiki/Kansas_experiment

jokethrowaway6• 2 years ago

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

nemo44x2• 2 years ago

It's good for regular people too. Debt is a great thing to have in an inflationary economy, especially long term debt backed by an asset, like a home. In essence, we inflate debt away over time. In a deflationary economy debt is crippling and because we are a debt based economy we have a deadly fear of deflation and will do anything to prevent it. Hence why they desperately inflated the economy during Covid. The alternative (do nothing) would have resulted in massive deflationary pressure and would have been devastating for debt holders.

immibis10• 2 years ago

Forcing regular people to take out huge debt is not good for them.

npoc34• 2 years ago

The more money the banks print, the richer they get, with the side-effect that prices rise (they make the monetary units less scarce and worth less).

2-3% just happens to be the most they can get away with in the long term without the population getting concerned.

What the general population don't realise is that the value of goods and services are going down over time, due to efficiency increases, at a rate of around 5% / year. The banks can print enough money to soak that up unnoticed, and then an extra 2% just because they can. It's essentially a stealth transfer of wealth from the people to the banks and it's been going on for decades/centuries (before fiat, it used to take the form of coin shaving, impure metals etc).

You really see the effect when you look at house prices. They are roughly the same price in gold as they were in the 1970s. Rather than housing going up in value since then, it has been the monetary units going down in value, due to the supply roughly doubling every decade (look up M2 USD).

You can understand the incentive to print money when you realise that every year the banks are collecting interest on every dollar/euro/pound etc. in existence. And the banks don't really own any of them - they printed them out of thin air as loans and have to destroy them when the loans are repaid, but total debt only increases every year...

silent_cal3• 2 years ago

Good answer. Inflation is just a euphemism for stealing from working people.

Wytwwww5• 2 years ago

Still preferable to deflation. At least the working class has something that can be stolen..

spaceman_20207• 2 years ago

You know what truly sucks about all of this? How much it forces people to grind and hustle and do all sorts of undignified crap just to make a living.

It truly kills all dignity of labor.

bradjohnson3• 2 years ago

If we operated on a deflationary currency, the value of your labour would be tied to cost of goods, and your salary would decrease each year, while the rich continued to accumulate more of the proportion of cash. Working people would still have to spend most of their income on survival, while the rich would be free to sit on piles of deflationary currency and become even richer.

In an inflationary currency, the rich invest in assets that aren't affected by inflation. Inflation is not the problem in this scenario. Hoarding wealth is. This would be increased with a deflationary currency.

hartator• 2 years ago

Yes, very good explanation.

Quantitative easing is just printing money with extra steps through the banks.

atroxone2• 2 years ago

In that case it's the government that decides who gets richer

mberning• 2 years ago

Many people take inflation as an immutable law of nature, but that has not always been so. Food for example, for a long time, became cheaper. Computers and technology as well. Think how nuts it would be if you could get a better house for less money every few years.

noqc2• 2 years ago

food became cheaper because it became cheaper to produce. Inflation is a very natural consequence of the fact that If I have money now, I can also very easily have that same money later, but the same cannot be said of having money later. Strategically, having money now dominates having money later, so money now is worth more than money later. How much? Who can say, but some.

qwytw11• 2 years ago

Food for example, for a long time, became cheaper

Which certainly wasn't great if you were a farmer with a mortgage back in the 1800s and 1900s (it was grender if you were a lender, rentier or a British aristocrat). Governments back then kept increasing money supply at slower (sometimes by a lot) rate than the GDP was growing. That didn't really work that well (basically the economy was stuck in a permanent boom and bust cycle with pretty severe depressions by modern standards).

adamomada• 2 years ago

You’d think that housing would be the priority, all this other shit getting cheaper while basic necessities turn into investments.

I wonder if someone from 1950 or so would believe an average person from the future that told them almost all the work they do at a ridiculous productivity level would go to a house to live in.

Think of all the wasted opportunity of most people not being able to spend their work on other things besides basic necessities.

(I have a Canadian bias, up here we can see the world in a decade already)

bawolff4• 2 years ago

Inflation/deflation is not the same as a specific product flucuating in price.

Yes, there have been times in the past where inflation rate was much different (in either direction), but computers getting cheaper is not an example of that.

throw0101d11• 2 years ago

Many people take inflation as an immutable law of nature […]

Not in Japan. They've had stagnant prices and wages for a few decades now (though seems to be changing just recently):

* https://www.youtube.com/watch?v=HFYv-rk4v9Y

cjbgkagh13• 2 years ago

I see it as a wealth tax and I agree, 2% is roughly long term stable maximum returns that leaves enough on the table for the middle class to prosper. I think at 3.5% or whatever they want to up the target to be will not be long term stable. It’ll work for a little while as GDP increases with increased inequality but civil unrest will from said inequality will reduce efficiency as more will need to be spent on security.

agf• 2 years ago

How is it a wealth tax? One of the things the wealthy do is hedge against inflation.

bawolff4• 2 years ago

I see it as a wealth tax and I agree

Inflation is like the opposite of a wealth tax - it affects poor people much more then rich people (since rich people have more of their wealth in owning assets which are less affected by inflation).

psychlops2• 2 years ago

Inflation is absolutely not a wealth tax. You should spend some more time understanding the impact of inflation and I suspect you will come to the opposite conclusion and that it is a tax on the poor.

immibis10• 2 years ago

Gold is not a good stable measure of value. In fact there are very few or no good stable measures of value. Something like bread might be, at least in places with stable food supply chains.

unyttigfjelltol• 2 years ago

Yes, an alternative summary of the article is:

The 2% target started as a nonsense 'dog ate my homework' line from inconsequential characters in an obscure corner of the world, that the world's elite latched onto in the last two decades as a post-hoc rationalization for debasing the currency to ensure politically-important businesses never go broke and politicians never have to say 'I'm sorry.' A real fairy tale.

qwytw11• 2 years ago

They are roughly the same price in gold as they were in the 1970s

So you're implying that there was no inflation between 2011 and 2022 (gold prices were basically the same) or that prices increasing 8 times or so between 2000 and 2011 because gold got a lot more expensive?

Gold is just a random commodity affected by market supply/demand just like every other commodities (or bitcoin). Implying it's some sort of a "hard currency" or can be used to compare prices of goods/services/housing over long periods of time is just absurd.

when you realise that every year the banks are collecting interest on every dollar/euro/pound etc

That doesn't work that well when the real interest rates (i.e. after you subtract inflation) are negative or close to negative (as they were in the Eurozone between around 2012 and 2022).

vondur• 2 years ago

I'm guessing it's that the US Currency was backed by gold and later silver and the central banks couldn't print currency without some precious metal to back it up.

npoc34• 2 years ago

Gold is just a random commodity affected by market supply/demand just like every other commodities (or bitcoin). Implying it's some sort of a "hard currency" or can be used to compare prices of goods/services/housing over long periods of time is just absurd.

It's sensible to use gold or housing as a measure of value - they are both extremely mature markets with a relatively constant supply/demand ratio. It's no coincidence that after 50+ years they are still the same value relatively to each other. I'd argue that using the dollar as a measure of value would be absurd, given that it's demand is relatively constant but it's supply is doubling every decade.

That doesn't work that well when the real interest rates (i.e. after you subtract inflation) are negative or close to negative (as they were in the Eurozone between around 2012 and 2022).

The banks are playing a much longer game. While the interest rates are held low, they increase the number of people indebted to them. When they turn the interest rates back up, they get their reward. I recommend reading the short book "The Great Taking" (https://thegreattaking.com/)

KarlKode2• 2 years ago

Not arguing for the OPs argument but observing a pattern over a longer timespan doesn’t mean that the pattern can be observed during the whole timespan.

At the same time IMHO you’re right in pointing out that gold is a poor measurement of the true cost of a house.

paulddraper• 2 years ago

Implying it's some sort of a "hard currency" or can be used to compare prices of goods/services/housing over long periods of time is just absurd.

It goes up and down, but it's the most stable denomination of value that exists. Yes?

pdonis12• 2 years ago

So you're implying that there was no inflation between 2011 and 2022 (gold prices were basically the same)

He doesn't mean the price of gold in dollars, he means the price of houses in gold. In dollar terms, he's just saying that the price of gold and the price of houses have inflated by the same amount.

Gold is just a random commodity affected by market supply/demand just like every other commodities (or bitcoin). Implying it's some sort of a "hard currency" or can be used to compare prices of goods/services/housing over long periods of time is just absurd.

Not as absurd as printing money and then spending it on things that nobody wants, and then claiming that that "stimulates the economy". Which is what our current monetary regime has been doing for decades now.

numpad02• 2 years ago

super cherry picking and definitions bending:

no inflation between 2011 and 2022

iPhone 4S, iPhone 14

increasing 8 times or so between 2000 and 2011

Pentium III @ ~1GHz 1C/1T, Sandy Bridge @ ~3.7GHz 4C/4T

throwaway143564• 2 years ago

let me try something else:

If you take out a lone you get money in exchange for signing a contract that forces you to pay everything back [say] 3x over 30 years.

The party giving you the money loses nothing, they trade one kind of paper for the other.

They get more money in return because there is a small risk you wont pay. (if they get 1/3 they have their money back)

This would be sensible if the bank had this money. They don't, they bring nothing to the table and give you freshly minted fiat.

This is only possible because you've signed on the dotted line.

If you are buying a house the risk you wont pay is tiny! Government could easily force you to get insurance and give you an interest free lone that you won't need to pay back.

This would bring some serious fiat into circulation.

Ask Gaddafi what happens next.

wakawaka282• 2 years ago

Price increases come in fits and starts. Gold is not entirely arbitrary. It is a commodity with a restricted and steady supply. As such it can be used as a measuring stick to judge how distorted prices are getting. Mind you, (price) inflation is measured by the government as a relative change in a cherry-picked basket of goods that changes over time. It's not honest and does not accurately account for changes in credit conditions.

madsbuch8• 2 years ago

quite the opposite. inflation is good for the working class. Housing prices are generally congruent to salary with interest rates as the coefficient.

personally I see inflation as the innovation dispersion factor - the rate we let the value of innovation disperse throughout the society.

KarlKode2• 2 years ago

Hasn’t the percentage an average person spends on housing significantly increased in the past 50 (or 20) years?

Additionally I can’t follow your second thought: are you saying that the inflation rate is directly correlated with the rate of the value of innovation dispersement? E.g. a high inflation should eventually lead to a high dispersion of innovations/a more innovative culture?

ejb9995• 2 years ago

That is such a bizarre statement I have a hard time believing you actually mean it. I think you would be hard pressed to find any/many 'working class' people who enjoy watching the cost of goods and services go up faster than their salaries.

The rich benefit from inflation - especially if they have lots of assets like real estate that have increased dramatically in value.

CraigJPerry2• 2 years ago

> The more money the banks print, the richer they get

This is wrong. You’ve misunderstood the creation of credit and money.

See https://www.sciencedirect.com/science/article/pii/S105752191... - but then spend time reading the relevant legislation pieces.

You can safely ignore most of the mainstream economist schools of thought since the actual operational side of money as required by law is mostly a blind spot for them. Economic schools of thought do not link to relevant legislation when sharing their fairy tales since the laws the banks operate under result in behaviour distinct from that claimed by any major economic school of thought.

npoc34• 2 years ago

Although a great deal of smoke and mirrors is used when justifying the banks unique right to print money, and it's easy to miss the wood for the trees as you get lost in the details, the bigger picture is quite simple:

1) the banks print new money every time a loan is taken out and charge interest on that money

2) the amount of money loaned out is increasing every year

3) the total amount of money currently loaned is essentially all the fiat money in existence i.e. even 2% interest is a mind-blowing amount of annual income

Sure, we can debate about between the banks and government, who receives what proportion of the interest, but if you disagree with any of those three points, please explain.

throw0101d11• 2 years ago

The more money the banks print, the richer they get, with the side-effect that prices rise (they make the monetary units less scarce and worth less).

Meanwhile Japan has been increasing money supply for decades, and yet during that time they've had low and even negative rates of inflation:

* https://fred.stlouisfed.org/graph/?g=PA7P

Stop looking at money supply and inflation:

But also – why do so many people insist that inflation is an increase in the money supply? This makes zero sense. Here’s why – our economy is mostly a credit based economy. So, if I take out a loan for $100,000 then the money supply has technically increased by $100,000. But what if I don’t actually tap that loan? What if I borrow the money because, for instance, house prices just went up 25% and I want to have some cash around for emergencies? This doesn’t tell us anything about prices, living standards or really anything. But this is what so much of the money supply represents – money that has been issued and is just sitting around unused. Why is this useful? It’s like calculating your weight changes by counting how much food you have in your refrigerator. No. That’s potential calories consumed and potential weight gain. The amount of food in your fridge tells you little about your future weight changes just like the amount of money in the economy tells us little about the actual price changes in the economy.

* https://www.pragcap.com/three-things-i-think-i-think-i-see-d...

margalabargala• 2 years ago

Japan is well known to be near-unique among world economies.

It's commonly said "There are four kinds of countries: developed countries, developing countries, Japan, and Argentina".

To point at some individual thing that happened a certain way in Japan and then try to justify some broad economic policy elsewhere in the world based on that won't work. Absent the other factors that make Japan's economy unique, the lessons there do not apply elsewhere.

As a counterpoint to your one example re: money supply and inflation, I would present the following: https://en.wikipedia.org/wiki/Hyperinflation#Notable_hyperin...

spaceman_20207• 2 years ago

The real inflation is in asset prices

Sometimes it just happens to bleed over into the price of sneakers and steaks and that’s when people get angry

But when money is printed out of thin air, the first refuge it seeks is in housing. And housing inflation has beaten all other inflation by a mile and a half

wolverine87614• 2 years ago

money the banks print

Banks don't print money. The government can.

rufus_foreman3• 2 years ago

They create money. So can you.

audunw3• 2 years ago

Banks don't print money. The government can.

If you mean "physically print" money, you're technically right. In some countries.

But I think in this discussion, most of us are thinking about "virtually printing" money. That is, creating numbers in your bank account.

Again, you're technically right in that the government is the one steering this process. But the practical matter of actually "printing" the money is handled by the banks. It's their decision when and where to "print" money, as long as they have enough reserves at the end of the day.

pdonis12• 2 years ago

It's essentially a stealth transfer of wealth from the people to the banks and it's been going on for decades/centuries (before fiat, it used to take the form of coin shaving, impure metals etc).

I wish I could upvote this more. If enough people understood that this is the root problem, we might have a chance of actually fixing it.

audunw3• 2 years ago

1. This isn't as much of a problem as it's made out to be. It's the same problem we have with the uneven distribution of wealth and poor competition in the economy in general. If the banks are all publicly traded and the shares evenly distributed, the wealth will just go back to the general population. If you have a healthy banking market with several competitors the banks will compete to the point where none of them can extract too much profit. Same as how you end up with companies extracting wealth in any market where they get too much of a monopoly. 2. Nobody has even proposed a solution that is remotely capable of improving on the system we have. Because most proposed solutions are formulated by people who haven't bothered to truly understand how the system of money/banking we have today actually works.

npoc34• 2 years ago

The fix is already here, it's just a matter of time while we wait for the world to understand what it is.

"I don't believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can't take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something they can't stop" F.A. Hayek

https://www.youtube.com/watch?v=CBIidtaUCzs

esoterica5• 2 years ago

Gold fell 50% from 1980 to 2000, does that mean we had 50% deflation over that time period?

npoc34• 2 years ago

Did gold fall or did the dollar rise?

Define deflation

audunw3• 2 years ago

You've glossed over so many things.

The banks are not just in the business of lending out money. They also take deposits and pay interest on those deposits. It's a fraction of what they make on loan interest payments, but it's still a significant expense.

Borrowers can go bankrupt and default on debt. That's also effectively a huge expense.

Banks are competing to offer the best interest rates to their customers. If a bank could still make a lot of money while offering a lower interest rate than their competitors, they would.

The more money the banks print

The only way they can print more money, is to issue more debt. But issuing debt is an expense for a bank. Either you do due diligence, which takes a lot of work. Or you accept the risk of issuing risky loans that may be defaulted on, which again, will be an expense. And then there's a mountain of regulations on top of that to try to prevent the banks from taking the second option, which also takes work.

It's not the free money machine you make it out to be. (Edit: Not that I'm saying it's not at all lucrative. But it's a risky and difficult high-skill job, which is extremely important to every aspect of society so that in itself isn't remotely surprising)

they printed them out of thin air as loans and have to destroy them when the loans are repaid, but total debt only increases every year...

Sure.. that's how the economy has worked since the dawn of time.

Money is just an abstraction over credit in general, and credit is always how most of the economy has worked, even before money was invented.

You need a barn built? You ask your neighbors to help you build it, and promise them some grains or something in return. Boom. Credit (i.e. money) created from thin air. And the more the economy grows, the more this kind of debt is created.

Some of the earliest texts we've discovered was records of this kind of debt. That's exactly what paper (and digital) money is.. a record of debt distilled to its purest essence and made easily tradable.

The difference now is that instead of credit being created through these informal arrangements, you go to the bank, which does the work of ensuring that you're good for the debt. You get some numbers in an account which then lets you go to the neighbors and pay them to help. Whether you repay them by doing work for them directly, or work for someone else in the community, doesn't matter anymore. Which makes the whole system much more efficient.

npoc34• 2 years ago

You need a barn built? You ask your neighbors to help you build it, and promise them some grains or something in return. Boom. Credit (i.e. money) created from thin air. And the more the economy grows, the more this kind of debt is created.

You're missing the bigger picture. The difference is that banks are handing out unlimited credit notes for something they don't have, and are charging interest on them.

hsjsbeebue• 2 years ago

Those efficiency increases - aren’t they affected by supply chain shocks, covid, limits on natural resources etc.?

unboxingelf• 2 years ago

This guy gets it. Bitcoin fixes this.

dopylitty• 2 years ago

I would ask a different question. Why combine a bunch of prices into an opaque number and call it "inflation"?

I'd argue that doing so masks the true causes of price rises. Prices go up because companies make the choice to raise their prices. Sometimes this is because their own inputs became more expensive but in many more cases it's because the people running the company want to increase profits.

By hiding the choices made by people running companies behind this opaque number called "inflation" that people perceive as somehow controlled by the government we've allowed companies to get away with making decisions that increase profits for wealthy executives and shareholders at the expense of people who rely on the goods produced by the companies.

drexlspivey• 2 years ago

A company’s input is some other company’s output. How do you calculate inflation with your scheme?

immibis10• 2 years ago

I don't understand the objection.

daedrdev• 2 years ago

A company normally intends to charge the most profitable price. Ascribing their actions to one force or another is useless, it mainly is supply and demand that force them to set lower prices. When their input costs go up, they raise prices because they otherwise their last product produced would be unprofitable, and when prices go down it is because their customers would go elsewhere if they did not.

vwkd• 2 years ago

but in many more cases it's because the people running the company want to increase profits

source?

sega_sai• 2 years ago

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

from-nibly2• 2 years ago

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

csomar• 2 years ago

This would be problematic since people would not invest or spend money to get the country out of a recession when they could just get a return from doing nothing. Instead of taking a risk and investing the money, the velocity of money decreases, and there is less spending leading to higher unemployment and less growth.
The story of the inflation target is one which is much more random and less thought through than you would expect.

Apart from that, the Japanese narrative is used as an argument but misses that Japan had a real-estate bubble and the burst of this bubble will force deflation. This is not a case of "deflation bad" but rather a re-adjustment of their local prices.

As an anecdote, in the latest crypto "deflation cycle", activity was up. Essentially, people used their extra purchasing power and bought goods. In fact, I'd argue that this is healthier. If you know the value of your money will go up, you'll hold up buying useless stuff freeing the capacity for somebody else. People will always buy stuff when they need the stuff.

On the other hand, inflation encourages unnecessary spending. You know your money will burn anyway, so you go ahead and spend it. This is bad because it de-allocates resources from people who might need them. A strong deflationary cycle will push certain capital to be spent again because it appreciated much: the economy has enough excess capacity that everything is on sale.

Of course the people who benefit from inflation will sell a different narrative. And of course the above is strictly my opinion.

orwin• 2 years ago

If all money become deflationnary, countries will have to move almost all taxes to wealth taxes, which is, now that i think about it, not a bad idea. I might be convinced now :P

Aerbil3133• 2 years ago

In Islamic economy interest is forbidden, there are no taxes and every Muslim is required to give 1/40 of their wealth to the poor every year (zakah). It is collected mandatorily and distributed by the government. Non-Muslims pay an annual protection tax aka jizya, in exchange for not paying zakah and not serving in the army. Modern scholars argue that collecting tax is permissible because of modern needs and responsibilities of the government (e.g infrastructure building), but only the strictly needed amount.

dottjt• 2 years ago

One way I've been told to understand this is that money is actually growing at around 6%, which is to say that money growth is highly inflationary.

Of course this is way too high, so to offset this there are deflationary measures, primarily increased productivity, technological improvements etc.

The problem with this is that we end up working permanently harder and it reaches a point of unsustainability. For example, now you generally need two incomes to sustain the same lifestyle as previously, because we need more people working etc.

Other deflationary measures included the opening of the Asian labor market, and then other globalisation measures.

jokethrowaway6• 2 years ago

Lifestyle worsened significantly, people too poor to have a car had servants in the 50s.

There's also a cultural shift caused by propaganda in the 60s which pushed women to work, increasing the supply of workers and thus lowering the value of work and thus salaries.

Thanks to capitalism and innovation, at least we have some technology to pick up the slack and counteract the government and the top 0.01% stealing from everyone else through economic policies.

tareqak• 2 years ago

I have been thinking that with better and more frequent reporting of the statistics over the years that this inflation target of 2% could go to 1% if not zero.

In my mind, central banks and the all the levels of governments should be getting weekly (if not daily) reports of hiring, job losses, house building, and rental prices / turnovers in like a Grafana dashboard.

Alpha30313• 2 years ago

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

atroxone2• 2 years ago

The current monetary system could essentially be swapped for Universal Basic Income.

If the reason 2% inflation exists is to increase money velocity then a fair distribution of money to everyone equally would accomplish exactly that and more.

What about loans? People would still keep their money in banks, which would make circulate in the economy only keeping 10%, just like now.

WalterBright7• 2 years ago

Inflation is entirely a monetary phenomenon. It is the result of the government creating money to fund the deficit. There's around a 13 month lag between the creation of the money and the inflation.

It's the Law of Supply & Demand in action. More money representing the value of goods & services in the economy means each dollar is worth correspondingly less.

The 2% inflation being "good" for the economy is propaganda.

The propaganda around inflation is amazingly effective. How often do you hear from otherwise intelligent and education people that inflation is caused by:

1. speculators

2. profiteers

3. greedy business

4. greedy unions

5. Putin's price hike

6. supply chain shocks

7. oil companies

8. Arab cartels

9. savers

10. banks

11. wage-price spiral

12. cost-push

13. demand-pull

It's all disinformation, and rather easy to refute. For example, if oil price hikes cause inflation, why do we not have corresponding deflation when oil prices go down?

maxerickson3• 2 years ago

It is the result of the government creating money to fund the deficit.

How does the inflation tell the difference between money created to fund the deficit and money created for other reasons?

WalterBright7• 2 years ago

Great question.

When banks loan money, they create the money. But when the loan is paid back, the money is destroyed.

The federal deficit is not paid back. (Oh, there's the fiction of it being paid back, but what actually happens is the government just issues more debt.)

klodolph3• 2 years ago

It's all disinformation, and rather easy to refute. For example, if oil price hikes cause inflation, why do we not have corresponding deflation when oil prices go down?

What’s the logic here? Are you saying that if oil prices going up caused inflation, that oil prices going down would cause deflation?

That a nice intuitive leap, but you haven’t actually provided the reasoning for why that would be true. It’s kind of like saying that sticking a knife in someone doesn’t kill them, because pulling the knife out doesn’t bring them back to life. Sometimes, the opposite action doesn’t have the opposite effect. Pulling a knife out of somebody doesn’t restore them to the original state before they got stabbed. Lowering oil prices does not restore the economy to the original state before oil prices were raised.

WalterBright7• 2 years ago

Are you saying that if oil prices going up caused inflation, that oil prices going down would cause deflation?

That's right.

Where does the extra money come from to keep prices high after the oil prices drop? In order to have a general price increase, there must be more money in the economy to sustain it.

triceratops4• 2 years ago

Inflation being due to a combination of all the factors you listed seems far more likely than it being due to exactly one thing.

WalterBright7• 2 years ago

Except if you look at history, inflation reliably corresponds with the increase in the national debt.

The US had zero net inflation from 1800 to 1914, and endemic inflation afterwards. What happened in 1914? The Federal Reserve Act, which specifically empowered the Fed to issue money without restriction.

Those other alleged causes all existed prior to 1914.

Did you know that the US experienced inflation when on the gold standard when gold was being dug out of the ground in the California and Yukon gold rushes?

Spain experience massive inflation when they were looting the New World of its gold and silver.

The inflation was so bad during the American Revolution that the Founders did not empower the government to print money. The government found a way around the Constitutional prohibition with the Federal Reserve Act, and then, of course, inflation ensued.

It's the same cause.

georgeecollins• 2 years ago

I believe it is 2% because you can't ever let inflation get near zero, because deflation is devastating to an economy. (See: Great Depression). Interest rates, particularly for very safe investments like US bonds tend to be very close to what the long term inflation is expected to be. Like, not inflation this year, but the next five to ten years. That's why it's higher than the CPI when the CPI is very low and lower when it is high.

Everyone knows inflation is unpopular, so you want to keep it low.

The Fed may have to "cut interest rates" (they don't do that directly, but do things with money that have that effect) to improve economic growth, particularly if there is an external shock. They want to have some wiggle room to still be able to cut the interest rate without risking it getting to the dreaded deflationary zero rate. So they have 100- 150 points of stimulus to work with in an emergency.

Socnic• 2 years ago

because the rich are guaranteed a return.

scottjad• 2 years ago

Once the central bank said that inflation would be 2%

This article is confusing. It makes it sound like NZ set a target of 2% inflation, when in actuality they set a target range of 0-2%, so 2% was the ceiling not the target.

https://www.rba.gov.au/publications/confs/2018/mcdermott-wil... figure 1 and table 1 makes it more clear.

Naturally central bankers have been happy to turn a ceiling into a target/floor.

dennis_jeeves2• 2 years ago

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

SubjectToChange13• 2 years ago

Private money has a long history within the United States, cryptocurrency is just the latest instance of it. The US Government doesn't really care how anyone conducts their transactions as long as they pay their taxes in USD.

tryptophan• 2 years ago

This is false. You have to pay cap gains on anything against the dollar when buying with alt currencies.

This intentionally kills the use of anything other than the dollar for transactions. The record keeping for this sort of nonsense presents a massive and impractical to fight burden.

rybosworld• 2 years ago

Many economists and policy makers would agree that a rising tide lifts all boats. So if decreasing the real value of wages via inflation sounds counter intuitive and misguided, it's because it is.

The problem is capitalism only prizes selfishness. An individual (corporation) acts selfishly by paying the smallest amount to workers that it can get away with.

If wages rose with inflation there'd be more money for consumers to buy products, and all else being equal that is better for the economy (and corporations).

An environment where wages rise slower than inflation is a vicious cycle of workers having less money to allocate to goods, thus hurting demand, thus hurting wage growth, thus hurting demand, etc.

You might be tempted to think that these situations should even out over the long run. But that ignores the psychological effect that decreased purchasing power has on workers - making them more likely to be stingy with their money (spend less).

ponymontana• 2 years ago

study bitcoin

psychlops2• 2 years ago

And thus was born a consumer economy.

jmclnx• 2 years ago

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

SubjectToChange13• 2 years ago

Inflation does not spare Government budgets. Just look at how inflation cuts into the DoD budget.

...inflation is a way to raise revenue without calling it a tax.

Wow, European governments must've made a killing off of energy inflation over the last few years. Hopefully OPEC decides on another embargo, it'd pair perfectly with a Panamanian banana virus. The resulting inflation would certainly fill EU coffers to the brink. Still, nothing will compare to the impending wave of mass retirement in the developed world, government revenues will greatly benefit from the resulting wage inflation.

bsdpufferfish10• 2 years ago

The comment is referring to playing loose with the currency, not a drop in supply or an increase in demand.

crooked-v• 2 years ago

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

Entwickler4• 2 years ago

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

steve19772• 2 years ago

What is missing from the article (unless I missed it myself) is why inflation would be desirable in the first place.

There's probably a couple of reasons, some already discussed. Like lowering wages without actually lowering wages.

And inflation is a great tool for governments to "pay off" their debt.

But you have to keep the rate at a level low enough not to cause upheavals. Hence the rates of like 1% or 2%.

ImHereToVote• 2 years ago

Why is it so important to lower wages and increasing the wealth of bond holders?

madsbuch8• 2 years ago

it had emperically shown to be effective for the economy.

in the end the economy as a whole is a setup for work and collaboration.

if the farmer does not want to work, i can't spend my earned money on their produce.

inflation has shown to be an effective tool to ensure that people partake in the workforce.

- lowering wages keeps people on the lookout for new skills and increases job mobility.

lastly, inflation does not. increase the wealth of bond holders. only when they miscalculated their rate such that interest is higher than inflation. This has certainly not been the case the pa's 6-7 years where bond holders have lost big time.

gorbot• 2 years ago

The major reason for a base inflation this: If there was zero inflation, then keeping cash in the bank is the safest thing to do. If everyone does this, money moves less, less investment, slower economy. Sure some will still invest, but the vast majority of people will just put money in the bank, or under their mattress.

With >0% inflation, you now need to do something with your money or else you lose money. If my great great grandparents buried their life savings and gave I received it now, I'd get a new laptop and that's about it.

So now everyone has to invest it. 401k's, other investments, etc. This makes the economy start moving, more activity, this is the 'velocity' of money they mentioned as being a key factor in the health of an economy.

steve19772• 2 years ago

But isn't that "artificial" growth of the economy than basically eaten up by the inflation?

pcw7321• 2 years ago

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

friend_and_foe• 2 years ago

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

dventimi2• 2 years ago

"After all, no one likes it when prices rise."

Excuse me? One man or woman's "price" is another's "wage", and plenty of people like it when their wages go up.

janandonly• 2 years ago

I feel like it's the time of the year again to point to this website: https://wtfhappenedin1971.com

Why the 2% inflation target? (2023)

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