> History teaches us that inflation will continue as long as the government keeps printing fiat money.
Of course, that is almost a tautology. The devil is in the details. No inflation is bad because the economy stops. High inflation is bad because of erosion of purchasing power and negative impact on nearly every participant in the economy. So what do you do to get that sweet spot of about 1-2% inflation? I'd say raising interest rates was a pretty good start, if a bit late in the game.
> Note that the US had net 0% inflation from 1800-1914, while growing from subsistence farming to superpower.
This is grossly ahistorical: in 1914, 2/3rds of the US lived in abject poverty[1]. Individual farming, including subsistence farming, didn't peak until the 1930s[2]. The US's ascent to superpower status can be traced, at the earliest, to lending programs begun during WWI (and repeated, to fantastic effect, during WWII).
The US's phenomenal ascent in international status and power is directly tied to its monetary policy, a policy that has more or less kept inflation around 2% since 1935[3].
> in 1914, 2/3rds of the US lived in abject poverty[1]
Your cite doesn't support that. Besides, during the 19th century average height increased enormously (a sign of good and consistent nutrition), mortality rates dropped dramatically, life expectancy increased, and the growth of the middle class was spectacular.
When the US entered WW1, the German soldiers were shocked by how tall they were, and how well fed and well supplied they were.
I.e. your claim is completely false.
> The US's phenomenal ascent in international status and power is directly tied to its monetary policy
None of your cites support that, either.
See "Historical Statistics of the United States Colonial Times To 1970, volumes 1 and 2". I think you can download it from archive.org. It's a gold mine.
> Besides, during the 19th century average height increased enormously (a sign of good and consistent nutrition), mortality rates dropped dramatically, life expectancy increased, and the growth of the middle class was spectacular.
Growth is good, but it's a delta: it doesn't mean that the average life was particularly nice by modern standards. The fact that things improved over time is not evidence that they were good at any instant (and indeed, nobody questions that things improved: they clearly had to in order to get to where we are now).
In 1914, the average male life expectancy was 52[1]. That's over 20 years shorter than our current life expectancies.
> When the US entered WW1, the German soldiers were shocked by how tall they were, and how well fed and well supplied they were.
This is a comparative error: the US's military population didn't need to be well fed by objective standards; they only needed to be better fed than the peasants who were press-ganged into the German army.
Nobody is saying that the US was uniquely impoverished by contemporaneous metrics; the claim is that the US was impoverished on an absolute and modern scale, and that said impoverishment declined as the US established domestic and international policies that are inextricably linked to its monetary policy.
0% inflation is incredibly dangerous. Deflation is just about the worst possible thing that can happen to an economy. It instantly kills money market liquidity as real interest rates rise as they hit the lower bond for nominal rates. People stop spending as much as they can since their money will be worth more in the future. So the question is how can we guarantee no deflation. And the only answer is target 1-2% inflation.
By the way the us was in a recession for practically the entirety of the second half of the 19th century, mostly because of absolutely garbage monetary policy.
I don’t know, the concept just makes sense to me intuitively. There are enough weird effects in systems and math when things are at zero that I just can’t tell what would happen. Example, in queueing theory when input rate is equal to output rate under reasonable randomness you get large backlogs. When everything drains at just a few percent over zero it just seems like a better system.
The US also had a civil war during that period. And then repeated brutal boom and bust cycles until Breton Woods.
Dismissing a contrary position as "propaganda" only stifles debate, and you haven't presented an argument against "sweet spots". It's a good mental model for many situations. What makes you think there doesn't exist an optimal inflation rate?
0% inflation is generally not a safe target. In an economy you want to avoid deflation at all costs. If consumers expect future price drops, demand can dip significantly and induce further drops in price (deflationary spiral). Businesses need consistent, predictable demand, else they enact shortsighted, over-reactive responses (e.g. layoffs) which can further exacerbate an economic downturn. See the Japanese financial crisis. Even a small fluctuation into deflationary territory can have long-lasting effects on consumer perception. It's safer (read: insurance policy) to maintain a slightly positive inflation rate so that consumers are encouraged to make purchase decisions promptly when needs arise versus indefinite speculative postponement.
Of course, the "optimal" inflation rate is context-dependent. Your unique economic situation will dictate which inflation trade-offs you end up selecting.
Money is necessary to conduct transactions. If people are incapable of transacting because some people play a hoarding game like with Bitcoin then real people's real basic needs like food or housing won't be met. You will get wholly pointless homelessness.
How do we make sure that money cannot be abused to doom the rest of the economy into an inability to transact? You make people pay for the benefits they receive by holding onto money. People hate free markets, they are against paying for the costs they cause.
Not necessarily. Money is little more than a distributed IOU held from providing past benefit to someone else to be used in exchange for future benefit from someone else. Money records that I did work for you now and in return you will do work for me later, except given that the IOU is recognized in a distributed fashion the work later can also come from other people.
IOUs bring a lot of benefit, but aren't strictly necessary to conduct a transaction. I could work for you now and at the same time you could work for me to provide equal value. Since there is no delay between services rendered there is no need to record that the other party promises to provide a future benefit. The transaction is already complete in the moment.
Demand doesn't disappear. People still want the things they want. They just might not be wiling to pay as much as others would like them to. Lower the prices, and suddenly those people can justify (or even simply afford) satisfing the demand that never went away. People spending leads to more jobs.
As if prices are going to come down. If the companies who have been making record profits refuse to accept making a little less profit and won't lower prices how long will you have to wait to buy something cheaper.
Not at all. The issue of rampant consumerism is mostly orthogonal to issues of overall economic stability. Deflation will certainly reduce consumption, but at the cost of massive societal upheaval by way of extreme unemployment and all of its ill effects.
The reason everybody believes that inflation is good for you is because of persistent government propaganda to sell that idea, because what inflation really is is a tax on your money. That's right, a tax.
Now, if you want to argue that the inflation tax is a reasonable way for the government to raise revenue, ok, but be realistic as to what it is. Inflation isn't good for you any more than taxing you is good for you.
The "deflationary spiral" has empirical evidence from a fair number of financial crises in the 19th and early 20th centuries. It happened. A lot. And it was really destructive when it did.
Nothing of what you said is an argument against the points I made. Where is the error in my reasoning? I literally gave an example of my argument applying to a real life, well studied scenario.
Which they do. The only time in US history where a significant inflationary spike was not followed by deflation was in the long run up (already making it an outlier) in the 1970s through 1980s, and inflation in that period transpired primarily due to wage inflation. As wages are the stickiest of all, you don't get downward movement on price when the tide shifts, you simply see unemployment shoot through the roof.
When fertilizer availability is no longer the most pressing concern facing humanity, something we are unlikely to not be able to resolve in due time, there won't be much reason for prices to persist. There is little to no stickiness here and it tumbles from there.
>I'm amazed that propaganda of a sweet spot gets so heavily embedded into the popular wisdom.
Because that sweet spot is very similar to the benefits liquidity confers to the holder of liquidity. Come on grandpa, please don't tell me all the people "bringing their wares to the market" are doing so at no cost and that the holders of liquidity aren't benefitting from stores optimistically stocking goods.
I've never heard anyone tell me they were going to quit working because the US government wasn't printing money fast enough.
I have heard people tell me they weren't making enough money to cover their expenses on a month-to-month basis as a result of cost increases. These happen to correlate with inflation.
There is no way an economy would stop just because there was no inflation. Would Microsoft suddenly decree that if the US government won't print US dollars, it won't sell you a Windows license key? Even in the case of extreme deflation, it only becomes an issue when you have people trying to do weird things with physical currency like cut a penny into 1/4s and use it to buy different goods.
How much net inflation was there in Europe between the Napoleonic Wars and the start of WWI? Do you think "the economy stops" is a fair description of this time period?
Zero inflation is fine, but a small hiccup would cause it to spiral into deflation. Deflation sounds good in a micro-scale because money gets more valuable. However, this is actually a terrible thing because the only way this can happen is when money gets destroyed through defaults, which is why you only see deflation during a financial crisis.
When technology increases increases productivity and society has a fixed supply of paper money, you'd think you'd see deflation because there are more goods and the same amount of money. However, actually during those periods of times, banks lend out money, which increases the money supply. This is a good thing because they're enabling economic activity that otherwise wouldn't have happened like a loan to start a new business. However, this system is fragile because if depositors lose faith in the bank, everyone will try to withdrawal their money, which is called a bank run. The bank doesn't have enough money because they leant some of it out, so they default and depositors that aren't quick money lose their money. One of the purposes of central banks is to ensure that this doesn't happen.
There is also the problem that if you pay off your debts at a faster rate than people spend off their savings your debt will shrink at the rate others are spending their money, not at the rate you are paying it off. If we expect people to be personally responsible why do we treat them as if they aren't when they do the right thing?
There are some other comments that probably described it better, but as an example: let's say inflation is negative. That means it is good to keep cash. What happens is everyone starts hoarding cash under their mattresses and there is no liquidity around to help exchange goods, and everything slows down.
With a small inflation, there is no incentive to hoard cash, and there is enough liquidity to make sure goods get exchanged without too much delay. At the end of the day that is what an economy is, exchanging goods.
And ... this is exactly what the ecosphere needs right now.
People continuing to consume all the usual necessities as they always have and always will. And consuming less of all the extra wasteful unnecessary stuff that gets pumped out of factories because of a destructive culture of "increasing GDP is good".
Yes this is a great point. I wonder if to achieve that, a back pressure is required in the system that we are just not willing to put up with. Example, cruel warlords keeping the serfs in misery, or hunter gatherer tribes annihilating each other. Or more modern, some central authority allocating resources.
> I wonder if to achieve that, a back pressure is required in the system that we are just not willing to put up with.
By back pressure you mean some kind of negative feedback, I assume.
I think, more precisely, the problem is not that negative feedback is completely missing. The problem is, that technology and societies have implemented (mostly involuntarily so) lots of systems that effectively distribute the entirety of the negative feedback very widely across the members of society.
Like in a shared living situation where some people take great care to clean up after themselves and others do not. As a whole it somehow "works", without cleanliness getting out of hand, but only because some people are doing more than others. This way, those who do not clean up their own dirt, never even learn their real impact on the whole, because it's continuously remedied by others. Their negative feedback is effectively missing, so they get the impression that everything is fine.
On the worldwide scale it's an analogous situation.
Widespread governmental subsidies for energy are one of the biggest issues I see there. They redistribute a big part of production costs across all tax payers and eliminate a big part of negative feedback.
No, I didn't get it either. People will still need food, electricity, gas, clothing. Buildings will need maintenance. Are you saying people will decide to not eat because deflation? Or not fix their broken windows?
In deflation, prices are going down. So I know it will cost me less next week to fix that broken window than doing it today. So I wait a week. But the logic doesn't change - when next week comes, I'll wait another week to get a better price. Apply this across the board, and people mostly just buy what they need. Producers of goods stop producing. R&D disappears. Etc.
Seems more like a good thing you've turned upside down. As long as some R&D has an average payoff that outperforms the rate of deflation, people will be motivated to take the risk. Deflation would disproportionately hurt risky investments, whereas inflation causes worse and worse choices to become increasingly attractive. I'd say we already got way more stupid investments than we needed in the last few decades of low inflation.
Deflation forces real interest rates up which kills investment and immediately lowers gdp. It is unequivocally an awful thing that leads to massive unemployment.
Lowering prices is a good thing for consumers and businesses who need to buy those things. There's nothing "unequivocal" about the argument here. Including the value of speculative investments (good investments will still pay better than real interest rates) or the position of economists as you surely are aware. And by the way those historic periods of massive unemployment had other causes with deflation as a side effect, not the cause. Other times in history had deflation during periods of growth.
They will decide to not eat because the medium of exchange is scarce. Some rich people see their big bank accounts go up in value and keep it there but poor people will keep spending until they have no money. Because the medium of exchange is blocked they can't sell their labor to obtain a medium of exchange which they can then use to buy food.
Deflation is like turning off the internet and no longer being able to pay with your credit card but it also affects paper money. The problem isn't a lack of productivity or a lack of capable workers.
If the medium of exchange didn't act as a gatekeeper people would keep trading in some beautiful purely theoretical economic model via barter.
Why are interests rates as a money sink preferable to the more direct approach of simply sinking money out of supply via tax? They seem to amount to the same thing at the end of the day - siphoning dollars out.
That is also a valid approach but I'm not sure it is more direct. Tax policy is generally only set once a year and only affects tax payers. Interest rates can be tweaked more frequently and (I think) directly impact a larger subset of economic players. That and the Fed doesn't determine tax rates.
Your point about how tax rates are set compared to interest rates is true, but could be changed.
I don't follow the second part though: pretty much everybody pays a significant amount of taxes, if only the likes of sales tax. Far fewer (though of course still many) players have substantial interest income or expenses.
The Federal Reserves implements interest rate increases by selling the bonds that they own (bought in the past) in the market in exchange for cash ("Open Market Operations"). This takes cash out of the hand of the public (in exchange for cash that can be spent in the future). That's about as direct as it gets.
Removing cash in the public's hand via taxation has several drawbacks, as mentioned by other posters. It's a very slow legislative process, because it has much more direct distributional effects (who is going to be taxed?). Additionally, most academic economists believe more taxation reduces real, as opposed to nominal, economic activity ("distortionary effects of taxation").
Why governments don't do monetary policy by fiscal means? Well, because the central bank is the authority on monetary matters, and the congress the authority on fiscal matters. They don't even usually agree on what direction to go. (Things are this way on every democracy.)
But that specific question, nobody would take money out of the economy by fiscal means, even if they could. You would need huge fiscal changes to have the same effect of a small monetary restriction. And you don't do huge fiscal changes, ever.
This way, you'd only be vacuuming dollars held by US entities (citizens, companies), while USD is a global currency held by everyone in the world. This policy would greatly benefit non-US entities, at the cost of US entities.
Do non-US entities tend to have more assets in USD or more debts? I'd assume the former, which means that a US interest rate increase is actually net beneficial to non-US entities.
Interesting. It isn't obvious to me how the Fed(a US org) setting interest rates necessarily affects non-US entities. Could you explain the causal chain?
Have you ever noticed you get raises roughly based on last year's inflation and not an estimation of next year's inflation? When the money printers print the people who touch the new money first get to buy assets before the price inflation occurs. Then, once the new money eventually circulates to the peasants, they get to use it to buy goods and services at the new, higher prices.
Inflation is a wealth transfer from the poor to the wealthy. It is not, by any means, necessary.
Isn't it amazing that Austrian economists completely ignore that providing liquidity creates costs for the providers of liquidity?
Businesses give money value by offering products and services, meanwhile the holder of money expects the business to keep providing this costly service at no cost. In other words, there is a constant flow of free liquidity provisioning services toward the holders of money which makes the providers of liquidity poorer and the holders of liquidity richer if they market that liquidity. After all, money is worth more than the purchasing power it represents, it can buy anything available in the payments network. Money that buys bananas and apples is more valuable than money that only buys apples even if both have the same amount of purchasing power. Since liquidity is paid for by the general enterprising public, the holders who have none of the costs can just loan out and market their liquidity for a price and they get to pretend that they are providing a service, even though they haven't done anything for it in any way.
People who still have a need to transact must now pay the costs of liquidity to someone who doesn't provide it when they borrow money.
The person who borrows money is now stuck with the costs of liquidity even if they spend it. When they spend it, they no longer benefit from liquidity but they must still pay for the liquidity that someone else owns. That person then can lend his liquidity out without paying for it. The end result is that liquidity costs must be paid twice.
This is an endlessly compounding system. Like a pyramid scheme.
Money acts like a perpetuity where the yield is paid out in liquidity which can through borrowing be turned into money. Previous perpetuities are paid by creating new perpetuities.
Very interesting scheme and Austrian economists are even denying the above so they are complicit.
Of course, that is almost a tautology. The devil is in the details. No inflation is bad because the economy stops. High inflation is bad because of erosion of purchasing power and negative impact on nearly every participant in the economy. So what do you do to get that sweet spot of about 1-2% inflation? I'd say raising interest rates was a pretty good start, if a bit late in the game.