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Why the 2% inflation target? (2023)

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Re: Why the 2% inflation target? (2023)

#21

Post by codetrotter »

vkou wrote: post #19
codetrotter wrote: post #17

> 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 r…

> 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.

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.

Re: Why the 2% inflation target? (2023)

#22

Post by jxdxbx »

codetrotter wrote: post #17

> 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 r…

Deflation has always been a disaster.

Re: Why the 2% inflation target? (2023)

#23

Post by zaroth »

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.

Re: Why the 2% inflation target? (2023)

#24

Post by vkou »

codetrotter wrote: post #21
vkou wrote: post #19

Earlier quoted context omitted.

> 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.

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.

Monetary policy isn't intended to steer the behavior of normal people[1] who have ~net-zero cash for most of their lives, it's intended to steer the behavior of investors who don't need to spend all their money on food and shelter and medicine, and who will happily choose to sit on their cash, instead of investing it, if that provides them with better returns.

Everyone bitches when the price of milk goes up 8%, but nobody seems to realize that it went up because wages did. On average, if you're a worker, and you aren't saving (or trying to save) a pile of cash, inflation is net-zero for you.

[1] Stimulus checks did steer the behavior of normal people, but they were fiscal, not monetary policy. They had knock-on monetary policy effects, but the juice was worth the squeeze - thanks to them and the PPP, the economy didn't entirely collapse.

Re: Why the 2% inflation target? (2023)

#25

Post by hgomersall »

jdsully wrote: post #10
rvba wrote: post #7

Earlier quoted context omitted.

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

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.

Well clearly it doesn't, because people still need to live. We have many years of evidence that people still buy shiny tech gadgets despite knowing that in a year's time they will be much cheaper.

Re: Why the 2% inflation target? (2023)

#26

Post by fuoqi »

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

Re: Why the 2% inflation target? (2023)

#27

Post by kinghajj »

visitor4712 wrote: post #20

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.

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.

Re: Why the 2% inflation target? (2023)

#28

Post by fwlr »

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.

Re: Why the 2% inflation target? (2023)

#30

Post by jxdxbx »

codetrotter wrote: post #21
vkou wrote: post #19

Earlier quoted context omitted.

> 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.

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.

Store shelves would be empty and businesses would shutter. There’d be less to buy. Banks would hold on to money instead of lending to productive businesses.
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