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Why the 2% inflation target? (2023)

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

#101

Post by qwytw »

vondur wrote: post #85
qwytw wrote: post #67

Earlier quoted context omitted.

> 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 "h…

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.

> was backed by gold and later silver

It's the other way around. US switched from a bimetallic system to the gold standard in 1873.

> I'm guessing it's that the US Currency was backed by gold

Well sort of, only until 1971 (or to some extent 1933) though. So you maybe could do that if you wanted to compare the price of housing in the 1870s and 1920s, certainly not between 1970 and the 2020s.

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

#102

Post by dottjt »

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.

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

#103

Post by jandrewrogers »

hgomersall wrote: post #25
jdsully wrote: post #10

Earlier quoted context omitted.

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.

The issue is investment, not consumption. When deciding what to invest in, expected returns are calculated net of taxes, inflation, and risk. Capital generally flows to the investment with the highest expected net return at every risk level.

In a deflationary environment, sitting on investable cash grows risk-free and tax-free, which makes it an attractive "investment" for many category of investor instead of putting that capital to work.

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

#104

Post by cjbgkagh »

agf wrote: post #91
cjbgkagh wrote: post #59

Earlier quoted context omitted.

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 securit…

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

You have capital gains tax on it eventually, much of that capital gains is from inflation. The only way for it not to be a wealth tax is if capital gains is indexed to inflation.

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

#105

Post by linguae »

ClumsyPilot wrote: post #63
bluescrn wrote: post #44

Earlier quoted context omitted.

> 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 workin…

> sensible/frugal ones who minimize their debt and accumulate some amount of savings What if this is wrong and being frugal is not sensible?

What happens when one gets laid off, disabled, changes careers, or faces some other circumstances that cause incomes to fall below what’s needed to service debt payments? That’s why living below one’s means and saving the rest is prudent.

Unfortunately high inflation penalizes savers by eroding the purchasing power of savings, and it forces all workers on a treadmill where it seems that the cost of living rises faster than many people’s ability to catch up. The only way to beat inflation it seams is to invest in assets such as real estate or stocks, but those squeezed by inflation have little to invest, and these assets are increasingly difficult to obtain due to inflation. I find being on the wrong side of inflation highly demoralizing and upsetting.

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

#106

Post by TehShrike »

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.

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

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

#107

Post by jokethrowaway »

bluescrn wrote: post #44
zaroth wrote: post #23

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…

> 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 workin…

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.

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

#108

Post by theteapot »

jokethrowaway wrote: post #48
sob727 wrote: post #5

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…

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.

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

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

#109

Post by SubjectToChange »

immibis wrote: post #77
SubjectToChange wrote: post #35

Earlier quoted context omitted.

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.

Disagree. A lot of people trot out the argument that you'd just save money instead of spending if there was deflation. But electronics are deflating, and how often do people save money instead of spending on electronics? People still buy electronics because, simply, they want the electronics. Purchases may be pushed back a little, perhaps until the next generation of device comes out, but this doesn't have much of an…

But electronics are deflating,…

Electronics have become cheaper through gargantuan investments of capital. Such investments are actively discouraged by deflation.

And in an inflationary world, you can just park your money in government bonds (effectively returning it back to the Fed) to beat inflation most of the time. Inflation doesn't force you to spend your money productively

Putting your money in government bonds or an interest earning savings account is by definition, putting your money to work. Sure, you aren’t doing anything with it, but whoever is paying you interest is only doing so because they expect to make more money than they borrowed.

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