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Why the 2% inflation target? (2023)

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

#121

Post by qwytw »

npoc wrote: post #96
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…

> 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 coi…

> 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

Look at how the price of gold changed between 2000 and 2020. It's not at all constant (it's actually more volatile than the dollar)

> I'd argue that using the dollar as a measure of value would be absurd,

Perhaps. Still less absurd than using gold for that.

> When they turn the interest rates back up, they get their reward

When the interest rates go up the price of bonds goes down. If you're holding a lot of bonds and interest rates go up you're certainly not in a good position (that's how the Silicon Valley Bank went bankrupt). Just basic math. Of course if we're talking about variable rate debt then you do have a point (however almost all household debt in the US is fixed rate, it varies by country though).

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

#122

Post by throw0101d »

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…

> 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...

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

#123

Post by usrusr »

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…

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.

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

#124

Post by medvezhenok »

jxdxbx wrote: post #22
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.

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.

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

#125

Post by adam_arthur »

jmyeet wrote: post #39
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…

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 intentio…

"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.

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

#126

Post by throw0101d »

npoc wrote: post #45

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 aroun…

> 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...

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

#127

Post by SubjectToChange »

jokethrowaway wrote: post #82
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.

I think the key is in the amount of inflation or deflation. Little amounts won't influence spending habits and cause a recession or the economy to collapse. High amounts in any direction will. The only difference is the direction of the value transfer. In a inflationary environment the transfer is from poor to rich. In a deflationary environment is from rich to poor. Guess which economic theory will be enshrined in t…

In an inflationary environment the transfer is from poor to rich. In a deflationary environment is from rich to poor.

Absolutely not. Between someone with near zero net worth and someone with $100 billion net worth, inflation will cost the former almost nothing and the latter billions. In a deflationary environment a billionaire gets rewarded for merely existing while everyone else is starving for cash.

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

#128

Post by matwood »

codetrotter wrote: post #31
jxdxbx wrote: post #22

Earlier quoted context omitted.

Deflation has always been a disaster.

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.

The poor aren't paying that much tax that is easily tracked to get a break on. That's why UBI is appealing.

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

#129

Post by KarlKode »

madsbuch wrote: post #75
npoc wrote: post #45

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 aroun…

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.

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?

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

#130

Post by medvezhenok »

vkou wrote: post #40
codetrotter wrote: post #31

Earlier quoted context omitted.

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.

Property tax is just inflation on 'land'. It is also a useful tool for steering the economy. > Taxing people by the amount of savings they have. That's essentially what inflation does.

Inflation _redistributes_ wealth from those with higher knowledge / ability to avoid it, to those with little ability/knowledge. Alternatively, it redistributes from people with fixed incomes, to workers; or from people with cash savings to debtors. There are many ways to look at it.

That is different than an explicit tax (the tax can be structured in a way to shrink everyone's purchasing power proportionally, and is harder to avoid).

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