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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…
Earlier quoted context omitted.
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…
But people should be able to save. So that they can buy a house or apartment for themselves and their family. Without having to take up a loan to do so.
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 k…
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.
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...
> 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…
[1] https://josephnoelwalker.com/151-raghuram-rajan/ Search for 2% in the transcript
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 i…
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 i…
This is the system working as intended, making government spending easy and gradually worsening poor's people lives.
Earlier quoted context omitted.
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…
> if you're a worker, and you aren't saving (or trying to save) a pile of cash, inflation is net-zero for you But people should be able to save. So that they can buy a house or apartment for themselves and their family. Without having to take up a loan to do so.
If everyone saves, the economy will collapse. Every dollar you save is a dollar that someone else doesn't earn.
In an inflationary environment, people can still save by buying equities.
This has tax and timing implications... But it's still possible.
> Without having to take up a loan to do so.
The existence of 25, 30, 35 year mortgages driving housing prices into the stratosphere is a separate problem, but not one you're ever going to unwind without having existing mortgage holders stringing you up from a lamp post.
That's a completely separate issue to inflation.
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 econ…