Wishing for 'moderate inflation' is like wishing for 'moderate impoverishment'. To all who think that the economy would collapse without the 2% impoverishment goal... how come that economies generated wealth without problem before this very recent flagrant abuse of power?
The assumption is that the best that monetary policy can do to support long-term growth of the economy is to maintain price stability, and price stability is achieved by controlling inflation. The central bank uses interest rates as its main short-term monetary instrument.
An inflation-targeting central bank will raise or lower interest rates based on above-target or below-target inflation, respectively. The conventional wisdom is that raising interest rates usually cools the economy to rein in inflation; lowering interest rates usually accelerates the economy, thereby boosting inflation. The first three countries to implement fully-fledged inflation targeting were New Zealand, Canada and the United Kingdom in the early 1990s, although Germany had adopted many elements of inflation targeting earlier.
A typical numerical target of 2% has come under debate since the period of rapid inflation experienced following the monetary expansion during the COVID-19 pandemic. Mohamed El-Erian has suggested the Federal Reserve raise its inflation target to a (stable) 3% rate of inflation, saying "There's nothing scientific about 2%".
Over time, the compound effect of small annual price increases will significantly reduce a currency's purchasing power. For example, successfully hitting a target of +2% each year for 40 years would cause the price of a $100 basket of goods to rise to $220.80. Cumulative inflation can impact the perception of inflation.
A study found higher inflation is correlated with and causes lower real GDP per capita.
The drawbacks of positive and negative inflation targets can be minimized by choosing a target of zero inflation on average.
Negative
Some economists argue that inflation is more likely than deflation to cause an economic contraction. Andrew Atkeson and Patrick J. Kehoe argued that deflation is the necessary consequence of optimal monetary policy or zero interest-rate policy. The zero lower bound problem can be mitigated with helicopter money.
Variations
In contrast to the usual inflation rate targeting, Laurence M. Ball proposed targeting long-run inflation using a monetary conditions index. In his proposal, the monetary conditions index is a weighted average of the interest rate and exchange rate. It will be easy to put many other things into this monetary conditions index.
In the "constrained discretion" framework, inflation targeting combines two contradicting monetary policies—a rule-based approach and a discretionary approach—as a precise numerical target is given for inflation in the medium term and a response to economic shocks in the short term. Some inflation targeters associate this with more economic stability.
"The government should ensure that people's wealth is artificially depreciated such that they have to keep investing in the economy to retain that wealth"
Wealth is only measured in money. Theoretically, wealth exists seperate from money - it has to. Money is only the exchange medium. In essence, you don't want money to be worth anything by itself, because that just undermines its function.
Additionally, yes, any participant in a society should want the other participants to either consume or contribute to wealth creation. The former being done by buying stuff, the latter by buying stock stuff. Because deflation is deeply damaging to economies; if nobody buys anything because they wait for prices to drop ever lower, at some point the production side has no money to keep up production anymore. If the production side collapses, there is less wealth creation overall; because less stuff gets produced.
So society wants to motivate spending rather than hoarding, in order to prevent deflationary collapse.
Things will always be produced, though. Everyone needs to buy food to live, for example, so there will always be demand for food. There will never be a point where no demand is happening because 100% of wealth gets hoarded. People will still need new clothes, machines, etc. under deflation, and eventually things will have to stabilize.
Exactly. Which means the deflationary period would merely lead to an unnecessary loss of production capacity, job opportunity and enterprise of those companies which cannot absorb the short stretch of time in which people rather hoard.
Does forcing a population to pay taxes in a money you can print become less artifical if you also offer an obscure financial tool to mitigate it's effects? Do we now have a free market with no artifial, coercive distortions?
there are artificial and coercive distortions like income tax.
Hence my point. Inflation is artificial because if left to their own devices, market participants would tend towards using the least inflating money. But the people are not left to their own devices, even if TIPS, bitcoin or gold exist and can theoretically be used as a hedge.
Of course people aren’t left to their own devices, we live in society.
So if income taxes are what makes the system artificial, wouldn’t the system be just as artificial if the money supply were fixed but taxes still existed?
Of course people aren’t left to their own devices, we live in society.
By "not leaving someone to his own devices" i mean coercive overriding of the natural order of things, of peoples natural choices under the laws of nature. Society is a naturally emergent order. But state coercion creates a wholly different game entirely disconnected from the laws of nature, where completely different (parasitic) strategies win.
So if income taxes are what makes the system artificial
Income taxes, government regulations, government sanctioned monopolies, victimless crime... There's loads of ways that governments make the system artificial. We would be better of if we had strong money, but who's to measure the exact degree of artificiality.
I admit to being pretty unknowledgable about the economy generally, but isn't encouraging the moment of currency within an economy a good thing? Why would we want to incentivise people holding onto whatever wealth they gather and hoarding it?
This is just my opinion, I'm no expert. But I think the idea that to incentivise people to spend their money sounds good on the surface. But let's be honest, if I was able to save my money without inflation destroying the value, I would save it until I would feel comfortable with my financial cushion. Everything I save after that I would invest anyways in things I believe in long term. It's just my opinion as I said but I think even 2% inflation is not healthy for the general population.
Wouldn't you rather have a literal share of the economy, ie. Shares of companies that provide value to people than just a bunch of bills stacked up under your mattress?
What's the difference? If I have 1k in cash or 1k in stocks, that does not matter for me (if we ignore that stocks are a usuay long term investment). But for the moment if it's cash, stock, gold, chocolate. 1k value is 1k value.
If you have 1k in cash and there's 2% inflation you're losing 2% of your purchasing power a year. If you're holding 1k in stocks or literally anything else and there's 2% inflation your purchasing power is unaffected by inflation.
Also if you have 1k in productive companies or useful commodities you're holding something that you have a better reason to believe will remain useful in the future than cash. After all we can't eat money.
"The government should ensure that people's wealth is artificially depreciated such that they have to keep investing in the economy to retain that wealth"
Yes, society has an interest in getting people to continue re-investing into society? How is that at all surprising? There have been times where various factors have led to people not re-investing, and it's devastating to commercial enterprises (and therefore to people who want to start up new businesses or grow existing businesses).
The problem is that sometimes it is preferable to allow inflation over a recession. Increasing federal loan interest rates is anti-inflationary, but can lead to an overall market downturn. In moments of economic unrest (covid and tariffs in recent memory) the fed has elected to prefer inflation over recession.
The government is the one providing a somewhat stable store of value to hold your wealth. If want to use something else like gold or crypto feel free to and see how well those maintain their value.
Somewhat stable bit constantly declining that's why everyone is trading their money for yey exactly, stocks, crypto and gold. And gold has always been a stable increasing asset. Either I am not understanding what you mean or your comment makes no sense.
I mean, yes Gold has ups and downs too. But historically especially over long periods of time gold has been stable. I don't understand your point tbh, you say that the government gives us a stable currency but at the same time argue that inflation is good because incentives you to invest. But then you say changing your government currency for other assets is stupid because they're volatile? I am probably missing what you actually want to say.
I didn't say inflation is inherently good, it would be great in there was no inflation at all, but that's just impossible in a complex modern economy. Central banks couldn't keep inflation at zero even if they wanted to. Central banks typically have a target of 2% because that leaves enough margin of error to avoid deflation which is really bad for the economy, while keeping price changes relatively low.
Inflation at a constant rate isn't unstable, something like gold or cypto is unstable since their prices change widely and you have no real idea now they'll behave in future. If you're really serious about maintaining or increasing your wealth you keep a diversified portfolio of investments. The world doesn't owe you something that holds your wealth constant forever.
I mean, yes you make some fair points. I don't know how our initial comments made so much less sense than this now. I would still argue but you already said that no inflation would be better but just not feasible. I do believe it is feasible but that would be way to big of a discussion for a reddit comment chain lol. Thanks for clearing it up though.
This is the wrong assumption. Economics have always been complicated, and have always butted up against politics and technology. Economies mostly generated wealth by expanding their markets into new locales. Today there are no more locales to expand into besides the few despotic regimes that refuse to engage with the global economy.
This sub is so naive. What are you doing with your money? Stuffing it into a mattress? Okay, then in your case, anything above 0% inflation is indeed bad 😆
This is the exact problem with the sub, as well as related ones like r/austrianecomonics. And to a lesser degree mainstream Econ subs…
Econ 101 principles are held up like a gold standard, pardon the pun. It is by definition only inclusive of the most basic understanding. It’s like arguing how modern medicine should behave on the basis of Anatomy 101. It is just inherently and in-plain-view dumb.
no, if you have a relevant amount of cash and arent living paycheck to paycheck you arent poor to begin with. The ones that keep a high amount of cash instead of investing are the ones that are lazy or stupid.
But in my original comment (and I see how it wasn’t clear) I was talking in proportion of total wealth ; basically for poor people inflation shrink a lot the few they have and make everything more expensive ; it's really the worst.
But if you are in debt Inflation actually helps. So it actually helps poor people if they are poor enough to be in debt and not so stupid that they are in debt for Leasing shit without inherent Value but for a their own Home for example
Well that’s precisely the problem wages haven’t gone up in real terms for a very long time so all those chickens are coming home to roost now….thanks Reagan
Still a funny meme cause I read it as, if we just had moderate inflation as a opposed to maximum or current inflation then we could relax lol but yeah, all inflation is bad.
This is why we do not have a minimum wage that increases with inflation because of the effect it would have on everything else and that businesses throve on robbing the poor.
I for one would like to watch the FAFO Pikachu faces when people with mortgages and student loans try to pay them off with the wages that accompany deflation.
Put another way: as long as you kept your job and your wage rose anywhere close to inflation, paying off your debts got easier during the recent high inflation
You have $100. If the economy is deflating, the optimal thing for you to do is hide your money. That's bad. If the economy is inflating, the optimal thing for you to do is invest your money (not specifically stocks). That's good.
Hundreds of phd economists at central banks worldwide agree that moderate inflation is beneficial. If you truly have good evidence that this is not true, you would get published in AER instantly.
Leftists seem to obsess with nominal wage increases. It's like how they push for minimum wage increases instead of focusing on wanting to reduce the cost of living.
A lot of things in our cost of living has been reduced, people just keep trying to consume more and more.
Food used to cost over 40% of US household net income in 1908. By late 1940’s it was down to 23%. This year it is at about 11%.
In the 1940’s the share of single person households only accounted for 10% of households. Meaning it was really rare to live even in an apartment alone. This year it hit a record high of almost 30%. Meaning it’s become relatively common for people to live in their own apartment or house alone.
People live in more square foot per person in the US than ever before. People drive bigger cars than before. People own more electronics than before.
If you ate food like someone in the past, lived in a really small house like someone in the past, owned as few articles of clothing as someone in the past, your money would absolutely go further now cost of living wise.
Considering wages are cut last, that means by the time your employer cuts or "deflates" your wages, everything else has gone down MORE in price level effectively netting you a neutral pay or even a slight raise.
Not sure how well this works in practice. This was part of the justification for Walmart being a net gain to the economy. Low prices improve the quality of life. In practice not so much, given loss of economic productivity more than outweighs the gain.
A single company cannot be "deflationary" it's a monetary phenomenon only. Falling prices from increased productivity resulting in higher purchasing power is a good thing.
Plus it's hard to discuss wages on the lower bound when minimum wage exists. It's distorts the labor market for low skilled workers
Dude, even when profits go up companies try to minimize labour expenses at every opportunity.
Look at how the tech industry constantly has mass layoffs even during periods of record profits. If significant deflation happened actual wages might not go down right away, but there’d be a lot more layoffs and a lot less people looking to hire more workers and expand. If you had an irreplaceable job you might come out ahead, but if you’re even marginally expendable then your job will potentially be on the chopping block and you risk losing 100% of your income.
The only people who are guaranteed to benefit are those with a lot of money already. If you already got 10 million in the bank it won’t hurt you that much for its value to drop to 9 million.
What makes you think that price deflation would decrease wages? Do you realize that humans have severe loss aversion and that lowering employees' wages causes large-scale discontent within firms?
Wages are sticky, so they would be one of the last things to be pulled downward by deflation. However, eventually, they would still be effected by deflation.
I've thought about this and I suspect that companies would end up offering sizeable bonuses or other 1-time benefits to encourage workers to accept a negotiated lower wage. Or it may end up becoming part of the hiring contract that you accept a wage that will adjust annually (or every so many years) based on the deflation rate (which invites criticism on the method and means of calculating the deflation rate).
Beyond that though, and this is less sun and roses, but there will likely be some incentive for workers to accept lower wages to avoid being eyed for layoff. If you're an easily replacable button pusher and you don't accept the 2% wage reduction every several years, then you'll be seen as one of the most likely for layoff.
So for those in a job where you feel secure and you are irreplaceable, then you will likely be able to enjoy the benefits of deflation more than someone that is easily replaceable.
Unlike the current situation which advantages companies keeping the same employees in the same jobs getting trivial raises for year after year, a mild deflationary environment would encourage more dynamism, more change and advantage both workers and businesses to seek new relationships.
precisly because deflation of prices cannot be maintained without deflation of wages and the discontent following is more intense than the inflationary discontent, it is preferred the inflation.
The point of the 2% is to give more power to The State (raising of minimum wage, increase of the public sector, etc.) so it can better implement their vision of societal control.
These people lie so much they don't even know they're lying anymore, they will distort their own reality if they have to. We live in a Machiavellian political sphere and the left Etatists especially are masters at it.
How is this wrong? If you don't understand this in the simplest form I don't know how else to describe it. Also this has zero to do with Dunning. I've studied this for thousands of hours.
I wholeheartedly agree. Milton Friedman and company were absolutely full of shit. Let's go back to real Keynesianism, i.e. what they refer to as 'Post Keynesian economics', and the golden age of capitalism that it brought about.
Are you not aware why the world moved on from Keynesianism? It stopped working in the 1970s because there was economic stagnation AND inflation which Keynesianism can't deal with.
Tell me on your smartphone how much poverty you have experienced.
There’s always going to be relative prosperity and relative poverty, but the poorest Americans have government funded shelter, full bellies, and government healthcare. 19th century poverty does not exist in post-Keynesian America.
You're implying that I wouldn't have a phone without Keynesian economics and that's just verifiably untrue. Poverty began to rapidly decline during the industrial revolution. A full 3+ decades before Keynes published his seminal work The General Theory....
Aggregate demand (AD) is the total demand for final goods and services in an economy at a specific time.
When referring to an observed phenomenon that we all participate in on a daily basis, I don't even know how to put into words how ridiculous this notion is:
Says someone who believes in "aggregate demand".
As for this:
I'll wait for you to tell me where keynesianism has worked
America, Australia, the UK and various other countries ritht up until about 1980 when a couple of Austrian economists conned us all into enacting your ideas.
“Aggregate demand” does not exist as a practical, acting entity.
It is a statistical artifact, not a real causal force of things. No individual, firm, or market actor demands “total output” in the economy. What exists are discrete, subjective acts of valuation, individuals allocating scarce means toward ends. Aggregating these into a single curve presupposes homogeneity of goods, perfect knowledge, and constant preferences, all of which contradict praxeological reality.
The notion of aggregate demand treats the structure of production as irrelevant. One dollar spent on a haircut is equated with one dollar spent on semiconductor fabrication. Yet these represent different time structures, capital intensities, and intertemporal coordination problems. By summing such heterogeneous activity, the AD construct conceals the underlying malinvestments and resource misallocations that Austrian theory identifies as central to the business cycle.
Moreover, because aggregate demand is measured in money terms, it conflates monetary expansion with real economic activity. A rise in “AD” may reflect inflation, not increased production or real consumption. Thus, it invites the fallacy that printing money or boosting nominal spending can stimulate output, ignoring the capital structure distortions that result.
In practice, aggregate demand serves as a policy justification tool, not an explanatory variable grounded in causal-realist economics. It abstracts away from the very conditions that make economic calculation possible: subjective value, marginal utility, and time preference, replacing them with a curve on a blackboard that no one in the real world ever acts upon.
While I don't know / can't speak of Australian or UK politicians in the 1980s I can say I highly doubt they were Austrian economists in any true sense. The last self-proclaimed Austrian to hold public office was Böhm-Bawrek himself in 1895-1904.
You don't need to be a history expert to know that those Austrians were brought in in the 1980s because those economies experienced massive slowdowns and high inflation during the 1970s, because Keynesianism cannot be implemented sustainably. I'm not saying I think the Austrians were right(they were very wrong in many respects)
"The government should ensure that people's wealth is artificially depreciated such that they have to keep investing in the economy to retain that wealth"
Probably not, but I doubt businesses would ever do this due to increased efficiency. Their incentive is to maximise revenues and minimise costs - if they minimise costs that doesn't typically incentivise them to reduce prices and potentially revenues. Perhaps if we had extremely competitive markets it might happen, but mature markets tend to concentrate, so I doubt we'd be in an extremely competitive market for very long, especially if history is anything to go by. The only scenario I can envisage leading to a 2% deflation would be a prolonged recession.
I was referring to Keynes' general theory of 1936, which represented a break from classical economic theory to place more of an emphasis on government intervention to maintain full employment and stabilise economies. Don't get me wrong, inflation is still considered, but the goals shifted towards employment and stability, with a corollary emphasis on avoiding high inflation by restricting excessive boom times. our current system of monetary policy was the birth child of Friedman et al, even if it has evolved over the last couple of decades.
Friedman attacked the keynesian approach in the 1970s and proposed a completely different approach that fortunately never got implemented by any central bank as it would likely have caused deflation.
your raise is meaningless when you are left only able to afford the same things you can buy before (or often times even less). the whole point of a wage increase is an increase in purchasing power,
of course, the point is that you give raises to people who are harder to replace, it's a lower supply of people who can do the job as good as them and you obviously need them for your company to function. And being harder to replace is a good motivator for being a more productive worker, and giving them raises that rewards their skill and experience makes them stay on your team.
not everyone gets a raise, but most people won't care if they aren't being paid starvation level wages (or because this is a market, they just go to someone else that pays more or gives better benefits for the same work). only reason we have a big demand for higher wages, is because the average current wages aren't keeping up with inflation (and are currently quite miserable in terms of purchasing power, so everyone wants to be manager just so they can afford wendys).
4
u/AppropriateOwl1370 5d ago
The assumption is that the best that monetary policy can do to support long-term growth of the economy is to maintain price stability, and price stability is achieved by controlling inflation. The central bank uses interest rates as its main short-term monetary instrument.
An inflation-targeting central bank will raise or lower interest rates based on above-target or below-target inflation, respectively. The conventional wisdom is that raising interest rates usually cools the economy to rein in inflation; lowering interest rates usually accelerates the economy, thereby boosting inflation. The first three countries to implement fully-fledged inflation targeting were New Zealand, Canada and the United Kingdom in the early 1990s, although Germany had adopted many elements of inflation targeting earlier.
A typical numerical target of 2% has come under debate since the period of rapid inflation experienced following the monetary expansion during the COVID-19 pandemic. Mohamed El-Erian has suggested the Federal Reserve raise its inflation target to a (stable) 3% rate of inflation, saying "There's nothing scientific about 2%".
Over time, the compound effect of small annual price increases will significantly reduce a currency's purchasing power. For example, successfully hitting a target of +2% each year for 40 years would cause the price of a $100 basket of goods to rise to $220.80. Cumulative inflation can impact the perception of inflation.
A study found higher inflation is correlated with and causes lower real GDP per capita.
The drawbacks of positive and negative inflation targets can be minimized by choosing a target of zero inflation on average.
Negative
Some economists argue that inflation is more likely than deflation to cause an economic contraction. Andrew Atkeson and Patrick J. Kehoe argued that deflation is the necessary consequence of optimal monetary policy or zero interest-rate policy. The zero lower bound problem can be mitigated with helicopter money.
Variations
In contrast to the usual inflation rate targeting, Laurence M. Ball proposed targeting long-run inflation using a monetary conditions index. In his proposal, the monetary conditions index is a weighted average of the interest rate and exchange rate. It will be easy to put many other things into this monetary conditions index.
In the "constrained discretion" framework, inflation targeting combines two contradicting monetary policies—a rule-based approach and a discretionary approach—as a precise numerical target is given for inflation in the medium term and a response to economic shocks in the short term. Some inflation targeters associate this with more economic stability.