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Why the 2% inflation target? (2023)

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

#161

Post by throw0101d »

rvba wrote: post #7
willio58 wrote: post #6

> 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…

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

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

If you think negative inflation (deflation) would be a good choice to make, perhaps look at the 1930s.

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

#162

Post by qwytw »

paulddraper wrote: post #133
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…

> 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 goes up and down, but it's the most stable denomination of value that exists. Yes?

> Yes?

Not really? Adjusted by inflation it's very volatile and not at all stable. Gold now is worth ~7x more than in 1970 but 25% less than in 1980, yet 4x more than in 2000 but still less than in 2011... There were some periods since 1970 where the (CPI adjusted) price of gold was relatively stable but that's certainly the exception and not the rule.

> but it's the most stable denomination of value that exists

You might use oil instead? It's not that much more unstable than gold.. Or wheat?

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

#163

Post by SubjectToChange »

mike_hearn wrote: post #112
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.

> punishes hoarding Or put another way, punishes saving. Forcing people to "save" by loaning the money to businesses and governments bonds and equities is good for politicians who like to be measured by economic metrics. But it's bad for being able to actually save for the future, and reducing dependencies on banks, leading to the moral hazard (with 0% inflation you could have narrow banking without problems).

Or put another way, punishes saving.

Yes, savings should have a cost and/or risk associated with them. Furthermore, it’s insane to expect otherwise.

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

#164

Post by WalterBright »

klodolph wrote: post #150
WalterBright wrote: post #145

Inflation is entirely a monetary phenomenon. It is the result of the government creating money to fund the deficit. There's around a 13 month lag between the creation of the money and the inflation. It's the Law of Supply & Demand in action. More money representing the value of goods & services in the economy means each dollar is worth correspondingly less. The 2% inflation being "good" for the economy is propaganda.…

> It's all disinformation, and rather easy to refute. For example, if oil price hikes cause inflation, why do we not have corresponding deflation when oil prices go down? What’s the logic here? Are you saying that if oil prices going up caused inflation, that oil prices going down would cause deflation? That a nice intuitive leap, but you haven’t actually provided the reasoning for why that would be true. It’s kind o…

> Are you saying that if oil prices going up caused inflation, that oil prices going down would cause deflation?

That's right.

Where does the extra money come from to keep prices high after the oil prices drop? In order to have a general price increase, there must be more money in the economy to sustain it.

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

#165

Post by lupire »

nicoburns wrote: post #142
adam_arthur wrote: post #125

Earlier quoted context omitted.

"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 gl…

> women continuing to enter the labor force. One thing that's occurred to me recently is that demands for a 4 day working week seem entirely reasonable in the context that the labour force has, if not quite doubled, dramatically increased (due to more women participating) over the last few decades (and that time has been taken away from time that was previously available for the completion of domestic chores).

This is the solution to the "two-income trap".

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

#166

Post by vel0city »

mike_hearn wrote: post #112
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.

> punishes hoarding Or put another way, punishes saving. Forcing people to "save" by loaning the money to businesses and governments bonds and equities is good for politicians who like to be measured by economic metrics. But it's bad for being able to actually save for the future, and reducing dependencies on banks, leading to the moral hazard (with 0% inflation you could have narrow banking without problems).

It's not good for a society to save by holding on to worthless pieces of paper or shiny objects. It's good for society to save by investing in productive assets.

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

#167

Post by cjbgkagh »

JohnMakin wrote: post #153
cjbgkagh wrote: post #104

Earlier quoted context omitted.

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.

>You have capital gains tax on it eventually, Erm... no. That's how people imagine it's supposed to work, but in reality, the wealthy fund their consumption from loans using their wealth as collateral, enjoying the benefit of their wealth while avoiding capital gains taxes. Warren Buffet has famously criticized this, it's not some unheard of thing. There are many, many loopholes and they are very much there on purpos…

Certainly, I'm talking about the middle class that are not afforded such opportunities. The rich can not only often dodge such taxes but can benefit more easily from government largess.

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

#168

Post by bawolff »

cjbgkagh wrote: post #59
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…

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…

> I see it as a wealth tax and I agree

Inflation is like the opposite of a wealth tax - it affects poor people much more then rich people (since rich people have more of their wealth in owning assets which are less affected by inflation).

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

#169

Post by throw0101d »

dools wrote: post #50
mebazaa wrote: post #38

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…

The real problem is using monetary policy as a tool at all. We should have ZIRP forever and use fiscal policy to target price stability and full employment.

> We should have ZIRP forever and use fiscal policy to target price stability and full employment.

If only (US?) politicians would get their act together and act.

Instead we have folks that believe cutting spending/demand will increase economic output ("expansionary austerity"):

* https://en.wikipedia.org/wiki/Expansionary_fiscal_contractio...

Or that tax cuts pay for themselves:

* https://en.wikipedia.org/wiki/Kansas_experiment

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

#170

Post by kristianp »

immibis wrote: post #83
dools wrote: post #50

Earlier quoted context omitted.

The real problem is using monetary policy as a tool at all. We should have ZIRP forever and use fiscal policy to target price stability and full employment.

ZIRP is zero interest rate policy - were you perhaps thinking of zero inflation rate instead? Zero interest rate tends to create lots of inflation because borrowing money (i.e. banks other than the Fed creating money) is nearly free.

It didn't create lots of inflation though. It took the disruptions caused by covid shut-downs to kick off inflation.
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