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Why the 2% inflation target? (2023)

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

#181

Post by bawolff »

mberning wrote: post #57
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…

Many people take inflation as an immutable law of nature, but that has not always been so. Food for example, for a long time, became cheaper. Computers and technology as well. Think how nuts it would be if you could get a better house for less money every few years.

Inflation/deflation is not the same as a specific product flucuating in price.

Yes, there have been times in the past where inflation rate was much different (in either direction), but computers getting cheaper is not an example of that.

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

#182

Post by lupire »

npoc wrote: post #159
CraigJPerry wrote: post #113

Earlier quoted context omitted.

>> The more money the banks print, the richer they get This is wrong. You’ve misunderstood the creation of credit and money. See https://www.sciencedirect.com/science/article/pii/S105752191... - but then spend time reading the relevant legislation pieces. You can safely ignore most of the mainstream economist schools of thought since the actual operational side of money as required by law is mostly a blind spot for t…

Although a great deal of smoke and mirrors is used when justifying the banks unique right to print money, and it's easy to miss the wood for the trees as you get lost in the details, the bigger picture is quite simple: 1) the banks print new money every time a loan is taken out and charge interest on that money 2) the amount of money loaned out is increasing every year 3) the total amount of money currently loaned is…

That created money is lent to borrowers, who in aggregate benefit from it more than the interest costs. The banks don't get to just spend the deposits.

Lending out money at the rate of inflation is 0 profit after inflation.

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

#183

Post by smegger001 »

rootusrootus wrote: post #70
jokethrowaway wrote: post #48

Earlier quoted context omitted.

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.

Are poor people's lives objectively worse now than they were, say, 40 years ago?

you need to make adjustments for the question to make since, was the lowest earning quartile of the population worse off relative to the upper quartile 40 years ago verses the lower compared to the upper today.

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

#184

Post by throw0101d »

margalabargala wrote: post #141
throw0101d wrote: post #126

Earlier quoted context omitted.

> 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 insi…

Japan is well known to be near-unique among world economies. It's commonly said "There are four kinds of countries: developed countries, developing countries, Japan, and Argentina". To point at some individual thing that happened a certain way in Japan and then try to justify some broad economic policy elsewhere in the world based on that won't work. Absent the other factors that make Japan's economy unique, the less…

I am aware of Simon Kuznets.

> As a counterpoint to your one example re: money supply and inflation, I would present the following: https://en.wikipedia.org/wiki/Hyperinflation#Notable_hyperin...

People like to point out money supply/printing and inflation (cause of), but often fail to ask what caused the money printing in the first place:

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

People don't 'run the printers' for funsies: there are usually extraneous reasons why it happens (including a good portion of what the US (and most other countries) recently experienced).

> Now think about that – did 6 different governments [including Weimar Germany], all within a 4 year time period [in the 1920s], and all bordering each other and/or in the same post WWI region and intellectual/political climate (with the seeds of the some of the farthest right and farthest left regimes in all of history within them that would lead to WWII just ~18 years later)—

> Did all of a sudden this little world region and precise time period and intellectual milieu decide to just start spending like crazy? At the same time? While the rest of the world did not?

> Or did they share the same underlying, and preceding, set of problems discussed above?

* https://clintballinger.com/2021/01/12/the-myth-of-hyperinfla...

* https://clintballinger.com/2019/05/24/the-autocorrelation-of...

Further, in modern financial systems money is mostly created by banks creating credit:

* https://www.pragcap.com/stop-with-the-money-printing-madness...

* https://advisoranalyst.com/2014/01/09/cullen-roche-the-ten-b...

* https://rationalreminder.ca/podcast/132

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

#185

Post by ndriscoll »

jandrewrogers wrote: post #103
hgomersall wrote: post #25

Earlier quoted context omitted.

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…

Isn't that a self-correcting problem? If the money supply were held constant, and people didn't invest, then production efficiency would not improve, and there won't be deflation, right?

Even for "risk-free" assets like cash/bonds, inflation risk always exists. It's essentially a risk that you don't have a counterparty willing to trade the things you want.

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

#186

Post by lupire »

throw0101d wrote: post #158
noqc wrote: post #71

Earlier quoted context omitted.

food became cheaper because it became cheaper to produce. Inflation is a very natural consequence of the fact that If I have money now, I can also very easily have that same money later, but the same cannot be said of having money later. Strategically, having money now dominates having money later, so money now is worth more than money later. How much? Who can say, but some.

> food became cheaper because it became cheaper to produce. Which was caused by technological progress which is the key source of de flation (being able to buy more with the same amount of money). It is de flation is happening regularly: > But Inflation is not inevitable. There are numerous countervailing forces that have been at work for much of the past 50 years. The three big Deflation drivers: 1) Technology, whic…

This is a (possibly) intentional (not by you) abuse of language in order to to rip people off.

Inflation/deflation is decrease/increase in the value of money, separate from technological progress or supply and demand of real products.

It's impossible to measure this directly, so dishonest people pushed to simply measure price increases/decreased, ignoring technologocal progress, so that powerful interests good steal from the public good.

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

#187

Post by smegger001 »

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…

and we didn't even get the productivity increase, if we had the computer revolution should have massively increased everyone wages due to increased efficiency.

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

#188

Post by georgeecollins »

I believe it is 2% because you can't ever let inflation get near zero, because deflation is devastating to an economy. (See: Great Depression). Interest rates, particularly for very safe investments like US bonds tend to be very close to what the long term inflation is expected to be. Like, not inflation this year, but the next five to ten years. That's why it's higher than the CPI when the CPI is very low and lower when it is high.

Everyone knows inflation is unpopular, so you want to keep it low.

The Fed may have to "cut interest rates" (they don't do that directly, but do things with money that have that effect) to improve economic growth, particularly if there is an external shock. They want to have some wiggle room to still be able to cut the interest rate without risking it getting to the dreaded deflationary zero rate. So they have 100- 150 points of stimulus to work with in an emergency.

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

#189

Post by lupire »

ndriscoll wrote: post #185
jandrewrogers wrote: post #103

Earlier quoted context omitted.

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…

Isn't that a self-correcting problem? If the money supply were held constant, and people didn't invest, then production efficiency would not improve, and there won't be deflation, right? Even for "risk-free" assets like cash/bonds, inflation risk always exists. It's essentially a risk that you don't have a counterparty willing to trade the things you want.

"self correcting" is a funny way to label macroeconomic shutdown.

The goal of inflation is to motivate productive work before the opportunity is lost due to idlenss.

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

#190

Post by throw0101d »

alfalfasprout wrote: post #47
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…

This is key. Due to hedonics/replacements inflation hasn't reflected what people actually feel for a while now.

> Due to hedonics/replacements inflation hasn't reflected what people actually feel for a while now.

The hedonics/replacements occur in the data because what is looked is taken from surveys of what people buy:

* https://www.bls.gov/respondents/cpi/

I just happened to answer a question on the CPI in Canada in another forum: The CPI you see in the headlines is made of of various components (Shelter, Food, Transportation, etc), the proportions of which are determined by spending surveys:

* https://www.statcan.gc.ca/en/survey/household/3508

As people change their buying habits the items that are tracked also change to reflect what consumers are spending. Here are the items in each category:

* https://www.statcan.gc.ca/en/statistical-programs/document/2...

* https://www.statcan.gc.ca/en/statistical-programs/document/2...

You can see the list of changes going back to 1913 at (coal and lard were removed/replaced in 1956):

* https://www.statcan.gc.ca/en/statistical-programs/document/2...

It should also be noted that the number reported in the headlines is the national average, while the prices can vary widely depending on your location. So in the report for February 2024, the national number was 2.8%, but Alberta had 4.2% while Manitoba had 0.9%:

* https://www150.statcan.gc.ca/n1/daily-quotidien/240319/dq240... (Chart 5)

* https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc...

* https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=181000... (searchable by province)

StatCan has a "Personal Inflation Calculator" where you can enter your own numbers/budget and find a number that may be closer to what's happening around you:

* https://www150.statcan.gc.ca/n1/pub/71-607-x/71-607-x2020015...

Remember: the CPI is a model of reality, and not reality itself. It is used as a guide, and to use the words of [Alfred Korzybski](https://en.wikipedia.org/wiki/Alfred_Korzybski):

* [The map is not the territory.](https://en.wikipedia.org/wiki/Map–territory_relation) * https://fs.blog/map-and-territory/

Or those of statistician George Box:

* [All models are wrong but some are useful.](https://en.wikipedia.org/wiki/All_models_are_wrong)

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