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Why the 2% inflation target? (2023)

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

#501

Post by npoc »

npoc wrote: post #436
buzzerbetrayed wrote: post #309

Earlier quoted context omitted.

Having enjoyed your other comments in this thread, I'm curious how Bitcoin fixes this issue. Because it can't be created out of thin air? Or is there something else I'm missing?

To understand why Bitcoin fixes the issue takes hundreds of hours of research - much more than I can explain here. Here are some good starting points: https://youtube.com/playlist?list=PL2jAZ0x9H0bQFY6wIbQfnrnIl... (listen to at least the first 7 episodes - absolutely fascinating - the most interesting lectures I ever heard. Prepare to have your mind slowly blown) https://youtu.be/Z6qzEYxBYcQ https://www.onceinaspeci…

Jeff Booth with a great perspective (slightly over the head of the interviewer!): https://youtu.be/okDGQ-zU4sA

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

#502

Post by ponow »

graeme wrote: post #260
FactKnower69 wrote: post #237

Earlier quoted context omitted.

>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) This is EXACTLY the issue. The economy is rigged such that in the absence of any positive action, workers' purchasing power goes down over time by default. This obviously isn't a problem for the rich, whose money is stored almost entirely i…

You haven't understood the issue. If a firm needs to lower costs, the alternatives to mild inflation are: * Negotiating actual salary cuts, or * Job losses Ideally in a market, prices adjust up and down freely. Obviously this is not a sensible approach to salaries. Given the bias towards loss aversion, having mild inflation make mild losses is preferable to having, say: 5% deflation, 7% salary cut. This concept is fr…

Why should firms get a free 2% cut in salaries paid? Generally, firms are in a stronger negotiating position about salary, especially for the lowest skill labor and poorest people.

If there's a downturn, then everyone will have to tighten belts, and firms can make that case to employees.

Making a real 2% salary cut the universal default is cruel, and if your typical hourly wage-earner understood clearly the choice being made on their behalf, they'd be pissed.

Deals shouldn't be altered without agreement, but that's what 2% inflation targets do. If you agree to a salary, then nobody should be specifically putting their thumb on the scale one way or the the other.

Professionals and job-hoppers have less problem negotiating to keep up with inflation. It's the poor people who get screwed.

Also, inflation is less steady the farther away from zero it is, I'd wager. So we have inflation spikes sometimes, like we've seen. There's always a time lag between spikes in price increases on goods, and wage increases (which require negotiation). During that lag period before a compensating wage increase, savings get used and real loss is suffered. I highly doubt that the loss in savings is generally recovered, and the Fed never even aims to recover that loss. The most vulnerable people lose the most, and are impeded from building wealth as a result, and probably come to depend on government more.

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

#503

Post by bawolff »

gamepsys wrote: post #382
cjbgkagh wrote: post #196

Earlier quoted context omitted.

I agree that it would increase inequality not decrease it like people would assume a wealth tax (inflation + capital gains tax) would do. The problem I see with the government having their revenue tied to wealth tax becomes incentivized to do things that will make the wealthy wealthier, like maintain a higher rate of inflation.

High inflation has a huge benefit to the government in that the government is a major borrower and inflation reduces the value of their debt.

However, fixed inflation targets (with central bank using interest rates to control) are generally not that beneficial for that purpose, as the inflation is known ahead of time and would be priced in.

Inflating away your debt only works if you can increase the inflation to be more than what the person you borrowed from thought it would be.

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

#504

Post by npoc »

atroxone wrote: post #73
hartator wrote: post #56

Earlier quoted context omitted.

Yes, very good explanation. Quantitative easing is just printing money with extra steps through the banks.

In that case it's the government that decides who gets richer

The governments and banking system work hand-in-hand, and the Cantillon effect takes care of the rest

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

#505

Post by ponow »

oatmeal1 wrote: post #311
graeme wrote: post #260

Earlier quoted context omitted.

You haven't understood the issue. If a firm needs to lower costs, the alternatives to mild inflation are: * Negotiating actual salary cuts, or * Job losses Ideally in a market, prices adjust up and down freely. Obviously this is not a sensible approach to salaries. Given the bias towards loss aversion, having mild inflation make mild losses is preferable to having, say: 5% deflation, 7% salary cut. This concept is fr…

You haven't understood the issue. The issue is involuntary dilution created by fractional reserve banking. When a new loan is created, the bank and (especially) the borrower benefit from the increased money supply. That increased money supply dilutes everyone else. The rich get loans to pay for college, buy houses, expensive cars, and own stock in companies that use leverage to grow faster, whereas the poor get loans…

But isn't that money multiplier due to fractional-reserve banking essentially a one-shot deal, and doesn't continue to expand over long time periods?

So if banks keep 10% in reserves, then a cash deposit gets multiplied by 1/.1 = 10 times, and that factor does not grow with time. Even if there were no law against continually lowering reserve ratios (and therefore increasing this multiplier), the market would tend to create a bound, for otherwise the bank would have greater risk of collapse from runs and unexpected loan defaults.

By contrast, if the central bank (Fed) keeps increasing its balance sheet (by buying assets using money it created from thin air), we have continual growth in the money supply (since the folks who sold the assets have new money in their accounts, granted magically by the central bank).

In fact, if we had a law that banned fractional-reserve banking for all commercial banks, so that all commercial banks had to have 100% / full reserves, eliminating your dilution, the central bank could still perform open market operations and buy assets with printed money, and thereby continue to increase the money supply. Full reserve for private/commercial banks is still compatible with money printing by a central bank.

So I know fractional-reserve gets a lot of heat by sound money folks, but the continual inflation observed since the 70s is not primarily a fractional-reserve problem, but a central bank money printing problem.

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

#506

Post by ejb999 »

madsbuch wrote: post #302
ejb999 wrote: post #211

Earlier quoted context omitted.

That is such a bizarre statement I have a hard time believing you actually mean it. I think you would be hard pressed to find any/many 'working class' people who enjoy watching the cost of goods and services go up faster than their salaries. The rich benefit from inflation - especially if they have lots of assets like real estate that have increased dramatically in value.

that is cost inflation. there is also salary inflation, which indeed is a part of the general inflation. inflation is the reason why it makes sense to own you house. please enlighten me on how rich people benefit from (salary-)inflation

If you are rich and own multiple houses or other expensive assets, they appreciate even faster during times of high inflation…compare that to a young working class couple hoping to someday buy their first house which continually gets farther out of reach…which ones are most hurt by inflation?

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

#507

Post by ponow »

chii wrote: post #443
throwawaymaths wrote: post #440

Earlier quoted context omitted.

So you're saying that it's government's responsibility to let firms be shitty to their employees with stealth pay cuts? I would MUCH rather a firm have to face the music and reputational damage of cutting employee pay or firing employees. It's far more honest and the actual other option is gasp don't cut your employees wage and instead take a hit to your margins.

if you were the one whose jobs' being cut, would you make that very same argument?

Firms can do uniform pay cuts (say 2%) instead of targeted layoffs. That way all employees are in it together, and yet there's still market discipline in whether to cut.

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

#508

Post by ponow »

adriand wrote: post #277
FactKnower69 wrote: post #237

Earlier quoted context omitted.

>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) This is EXACTLY the issue. The economy is rigged such that in the absence of any positive action, workers' purchasing power goes down over time by default. This obviously isn't a problem for the rich, whose money is stored almost entirely i…

An under-appreciated benefit of inflation is that it reduces the value of debts. All things being equal (and of course they aren’t), inflation is good for debtors and bad for debt-holders. If you owe $500k on your mortgage, inflation at 5% annually is reducing your debt load substantially without you needing to do anything.

Excessive debt is not good. Encouraging debt by the effective subsidy of inflation tends to be coupled with varying interest rates to control that inflation, and therefore there are periods of low interest rates. Savvy investors try to borrow heavily during these low interest periods creating a boom, even though the enterprises they might invest in are no more worthy of investment. This is malinvestment, because real physical capital (including skilled labor) becomes reallocated into more risky ventures because of the influx of easy money. When reality returns and it's clear that many of those risks don't pan out, there is upheaval, bankrupcy, layoffs, etc., a "bust". This is a bad thing for economic stability and human happiness.

Debt should not be encouraged nor discouraged. Interest rates should be natural, based on market forces about the time value of money.

Homeowners don't deserve a mortgage subsidy paid via inflation. If there is a subsidy, make it explicit through law.

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

#509

Post by madsbuch »

ejb999 wrote: post #506
madsbuch wrote: post #302

Earlier quoted context omitted.

that is cost inflation. there is also salary inflation, which indeed is a part of the general inflation. inflation is the reason why it makes sense to own you house. please enlighten me on how rich people benefit from (salary-)inflation

If you are rich and own multiple houses or other expensive assets, they appreciate even faster during times of high inflation…compare that to a young working class couple hoping to someday buy their first house which continually gets farther out of reach…which ones are most hurt by inflation?

This sentiment stems from not being able to distinguish types of inflation.

In the current environment, cost inflation is not a problem anymore. The reason why the FEDs might not lower the interest rate, is because of salary inflation.

So right now you are at advantage working. Houses are flatlining in value due to increased interest rates and you can negotiate better pays with your employer.

Also, please avoid straw men like first time buyers etc. These are not really fitting for the debate and only add load the debate emotionally.

But to take you on your argument: The situation for young working class couples has generally not changed for decades.

(I am Danish, so statistics I know and use are mostly centered around macro dynamics of Denmark, though this is irrelevant for the broader discussion, as the ECB also seeks 2% inflation target)

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

#510

Post by ponow »

npoc wrote: post #467
anonuser123456 wrote: post #391

Earlier quoted context omitted.

I hate to break it to you, but the rich are taxed on nominal gains, not real. Holding assets during inflationary periods means paying a higher percentage of your real gains as taxes.

Not if you borrow against your assets, using nominal gains to obtain more and more loaned money. That's tax free and with hard assets such as real estate, the nominal gains far outweigh the interest.

I wish I knew how to play that game. It's a game primarily played by the rich, and is part of the reason that the primary losers from inflation are poor.
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