> 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 point and pushed it up to 2% to give themselves a bit more room
This feels like so many decisions we make day-to-day in STEM. We all love to feel like we have quantitative reasoning behind decisions but due to the organic nature of the work at some point, we just have to land on _something_ and go from there. Like qualitatively-influenced quantitative data.
A pivotal moment in my career was realizing how much "winging it" was going on even at the highest levels of the craft. Yes, there is a lot skill and intuition behind it, but its still pretty off the cuff.
I had to double check to make sure this wasn't my comment because I'm getting amazing levels of deja vu right now. Everybody's winging it, nobody knows what they're doing, and the higher you climb the chain the more terrifying this fact becomes.
Le Carré said this in the interview about his life (The Pigeon Tunnel):
“At a certain age, you want the answer. You want the rolled up parchment in the inmost room that tells you who runs your lives and why. The trouble is that by then, you’re the very people who know best that the inmost room is bare.”
It is terrifying that people are just winging it, especially those who wield so much power and control over other people's lives.
On the other hand, it reminds me of that Steve Jobs quote about the whole world being built by people who are no smarter than you and me. It's humbling and encouraging, that we ourselves may participate in the perpetual (re)making of the world.
> Everybody's winging it, nobody knows what they're doing
I’ve seen this comment a lot in recent years and I think there’s a lot of nuance here that is unappreciated.
When taken literally, it is used as a weapon of anti-intellectualism e.g. the doctors don’t know what they are doing when it comes to vaccines.
What it actually should mean is that the experts know there’s only a small slice about the universe/society that we understand, and thus proposal represents the best of our knowledge. It cannot guarantee success. But by god, it’s a lot better of an attempt than the opinion of some guy off the street
I'm so glad we're having this conversation. Early in my career I kept waiting for that moment when I would feel like I really knew what was going on... and the last several years I keep feeling like a fraud. I've been at it for two decades, but I'm afraid eventually people will figure it out and then how will I earn any money?
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.
That’s not true. The issue isn’t that the same device will be cheaper in a year, but that the latest device will be the same or close to it. As a result, people are more likely to hang on to their devices (for example) if they assume that next year’s latest model will be cheaper than this year’s.
A great example is the Apple Vision Pro. How many people didn’t buy it simply because the price is too high? Betcha they would if it were cheaper, which they know it will be eventually.
The same is not true of phones, which don’t generally get cheaper for the flagship products.
> The issue isn’t that the same device will be cheaper in a year, but that the latest device will be the same or close to it.
I can't see how this is not a matter-of-degree of what GP comment said. If the latest-tech device is going to be cheaper next year, I will still have to use the old tech for another year before I upgrade. I don't think the equation changes at all.
If the iPhone 5 is the latest and greatest this year and is $1000, next year it may be $600. But the iPhone 6, which only exists next year, will be at or around $1000.
Therefore, there is no benefit to waiting until next year, as it is unlikely that the latest device (which is the device most people buy) is going to drop in price.
Of course there's a benefit; you can buy the iPhone 5 for $600. If you would be happy with it this year, you'll be happy with it next year too. The existence of an iPhone 6 doesn't make the iPhone 5 any worse.
I understand this. But most people do not, and will buy the most recent one and wait two or more years before buying the next one. They buy the most recent one, aka the most expensive one, because they believe (correctly) it will last them the longest. But the price changing doesn’t affect their decision.
Of course there's a benefit, you get more value per dollar the more you wait.
When the first androids came out I waited for the first 300€ model and bought it. Over the years I always hovered around the 200€-300€ range and kept upgrading. The last phone was 200€ and it's the best phone I've ever had.
I can get the same (even better!) value from cheaper models over time.
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.
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.
I pay $1 to buy an apple and eat it. It is gone and tomorrow I will have no Apples unless I buy more. Instead I buy (invest in) an apple tree and now I have apples continuously.
The difference is the spending for a one time use vs production of new goods.
In the context of the thread, both investment and consumption are spending though. Whether one buys a shiny new gadget or a tech stock that pays dividends doesn't matter, because cost of doing either will be less tomorrow in a deflationary economy.
Consumption is concerned with your actual wants and needs. Investing is purely a financial measure with your excess cash. If you assess that it is financially savvier to not invest you will not invest. Investment is the concern of the large amount of excess money that wealthy people have that drive new projects.
But you’re still going to want and need things to consume. Much, much less sensitive to inflation.
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 effect overall. The money still gets spent.
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.
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.
This comment avoids responding to the actual point about electronics, which is that deflation is alleged to cause certain effects, and when we observe deflation, we don't actually observe those effects, so why is that?
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.
Holding on to currency or shiny objects is just another form of speculation. Maybe the bank fails. Maybe your house burns down and melts the contents of your safe. Maybe you're robbed. Maybe trade wars massively reduce your purchasing power. Maybe a new source of the shiny objects gets found and it's not are rare as you think. Maybe less people care about that shiny object in the future. Maybe that gold certificate was really just a fraud.
Your argument isn't really related to whether we should incentivize people to bury paper in their backyard or if they should hold bonds or other investments. The answer to your problem is to have better social safety nets.
Of course there is always risk. But one of the supposed goals of fiat money and property rights is to reduce that risk, ensuring the ability to save into the future.
There are countless examples of countries where that trust was broken.
Your argument of governments are supposed to protect property rights still applies for bonds and stocks and other investments, so once again still not exactly an argument for incentivizing speculation on pieces of paper or shiny objects instead of productive assets.
The point of fiat isn't to give returns to those who worked hard by burying paper in their backyard, the point of fiat is to be an easy medium of exchange which does involve a certain level of value stability. A currency having a slow, predictable rate of inflation can still be considered having a certain level of stability, at least when concerning being a useful medium of exchange. I know that a loaf of bread isn't going to be $50 or $0.05 tomorrow, it'll likely be roughly the same as today. Over a long time scale sure that loaf will probably be more than today, but I'll be buying that bread in 2044 dollars not 2024 dollars, because in the end I shouldn't be incentivized to hold dollars.
And once again the only way to address "it's not good for society that ordinary people have to speculate" is by having strong social safety nets. Hoarding paper or shiny objects is still speculation with risks, as you just agreed.
No you are conflating two topics. Property rights is not propping up stocks and bonds. It's protecting ownership so you can invest in building things over the long term without them being taken.
Similar reasons encourage the government to protect the value of their currency.
> the point of fiat is to be an easy medium of exchange
The stated goal of the federal reserve is price stability, not exchange.
> Hoarding paper or shiny objects is still speculation with risk
Yep but it's a difference of how much risk.
> having strong social safety nets
Those carry their own kinds of risk.
> I shouldn't be incentivized to hold dollars.
0% is hardly a massive incentive to hold cash. If we can't agree on that then ill be incentivized to hold a currency that does care about its value.
> Property rights is not propping up stocks and bonds.
I'm not talking about propping up stocks and bonds, I'm talking about ensuring fair, open markets for such things. I'm entirely talking about "protecting ownership so you can invest in building things over the long term without them being taken." That same concept of the government protecting your ownership of some shiny objects applies to protecting shareholders from a company publishing fraudulent financial statements, or selling bonds that are actually objectively worthless with actual review, or shenanigans that effectively remove such ownership aspects.
> 0% is hardly a massive incentive to hold cash.
Negative rate bonds are (or at least were) a thing as well. If it costs more to put your shiny objects and fancy paper in a safe and protect it than having an account at a bank then there's incentive on it even if there are costs. And sure, even with inflation there's still some incentive to hold some amount of dollars. Liquidity has value after all. Even though I'm OK with some slight inflation on dollars I still tend to hold some amount of them. After all, I didn't buy lunch with stocks!
And even then, it is not about 0% being an incentive to hold, it is about not having an incentive to invest. As I already stated, IMO its worse for society overall to encourage people to hoard fancy paper and shiny objects compared to actually investing it. But hey maybe you'd prefer for people to not invest in bonds and what not and instead just have piles of fancy paper and shiny objects instead of roads and infrastructure and more productive enterprises. I'm sure that'll work out well for them.
Lets assume the FED makes 0% inflation a policy objective. As the US and the rest of the developed world continues to age, more and more retirees are supported by fewer and fewer working people. In other words a massive portion of the population is spending money, and soaking up resources, while producing nothing. Obviously this is profoundly inflationary but to maintain 0% inflation, the productive members of society will have to work a great deal more and endure policies which are explicitly designed to artificially suppress the value of their labor.
Yes, that scenario is bad and it happens when the Fed is still trying to control inflation.
The people who presented as arguing for 0% inflation are actually more often arguing for a lack of inflation targeting at all, and an end to the practice of creating money. In other words they argue for 100% reserve banking and abolition of the legal right of the central bank to issue new money.
In such a system prices might go up or down, depending on whether the underlying economy is doing better or worse, and governments would simply ignore it. In the case of demographic decline that would mean prices do indeed go up and that would correctly reflect the fact that resources have become scarcer.
Even with 0% inflation savings do have inherent costs and risks: you might die before you get to spend them, they might be confiscated by some future dystopian state, or society might just get poorer and the money buys less in the future than it does now.
Most obviously there is the time value of money. Money by itself isn't useful, only the things you can buy with it are. Something today is more useful than the same thing in a year.
Economists often act like none of the above is true. They argue that given an improving world people would just do nothing, hoarding money in the expectation of it being worth more in a year. For as long as I've been alive the 2% target has been justified with this sort of nonsensical circular pop psychology, in which supposedly devaluing savings was required to manipulate the people out of their naturally zombie-like state (which if true would obviously mean the economy wouldn't grow, acting as a negative feedback loop that would then make it immediately untrue again). The existence of counter-examples like Switzerland did not bother any of them. Now we read that this wasn't even the actual source of the number, it was just plucked out of the air and justified retroactively! Not really a surprise given the weakness of the original argument.
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 the public's mind? Guess which economists will become successful?
> However, for a period of approximately five years, prices of consumer goods went down in Switzerland without any widespread negative impact on the country's economy.
> In fact, their economy prospered in the midst of falling prices.
> This has caused some economists to revise their opinion about the ill effects of deflation, with some arguing that as long as there isn't too much deflation, consumers, and producers in an economy can find an equilibrium.
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.
Someone with a net worth of $100 billion doesn't have one billion $100 bills. They have assets: land, equities, and machines. And they tend to also have lots of debt, because they can borrow at ultra low interest rates, which allows them to acquire even more assets beyond their net worth. Inflation helps them because leverage is cheaper for billionaires than for anyone else.
Someone with a net worth of $100b would be well advised to keep it as $100b in bills in a deflationary environment though, because other more productive things they could be investing in would, on average, return less money.
Deflation is everybody else working harder than last year to beg cash hoarders to spend their money back into the economy.
I guess it would be less messy if we just enact wealth tax and aim for 0% inflation. This way government won't be able to justify printing excessive money anymore.
Coincidentally my religion enforce around 2.5% wealth tax which sounds almost exactly the inflation target.
I guess it would be less messy if we just enact wealth tax and aim for 0% inflation.
0% inflation would still be undesirable. First of all, introducing any sort of deflation is undesirable and dangerous. Second of all, there are so many causes of inflation that it's practically impossible to control them. But fundamentally there is an issue of time and labor. For instance, a landscaper doing work on my property this week is providing me with far more value than the landscaper who did work for me 20 years ago. Likewise, a car right off the production line is more valuable than an identical model that has been sitting in storage for a decade. Simply put, the value of labor cannot be separated from the time in which that labor was performed. Over a long enough period of time, the value of any labor becomes practically nonexistent. Therefore, even if it were possible to maintain a 0% inflation rate, doing so would be distorting the market.
Would be pretty awful though. Very slow or no GDP growth, if you have any significant amounts of debt you're basically permanently screwed (if you're rentier and can just live on interest from low-risk bonds without doing anything productive you're set though...)
This feels like so many decisions we make day-to-day in STEM. We all love to feel like we have quantitative reasoning behind decisions but due to the organic nature of the work at some point, we just have to land on _something_ and go from there. Like qualitatively-influenced quantitative data.