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Comment by diego_moita | Hacker News Reader

Sorry, but this is playing with fire.

What scientists, technocrats and economists forget is that public policy is rarely driven by rationality. It is driven mostly by private interests, demagoguery, blind ideology, prejudice and the public misconceptions.

The idea of taking a little bit of a very dangerous medicine is something that no one should take lightheartedly.

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There's a big difference between inflation and hyper-inflation.

An inflation rate of between 1% and 3% is generally seen as a sign of a healthy economy (There is sufficient demand for products that some prices can naturally rise, without causing economic disruption. It also implies a low unemployment rate, in that the economy is sufficiently close to full employment to be able to tolerate some price movements)

Some central banks even go so far as to formally announce a inflation target, which gives the markets a more predictable way to forecast interest rates. See http://en.wikipedia.org/wiki/Inflation_targeting

OTOH, hyper-inflation implies a lack of confidence in the currency and economy.

In a lot of ways this is similar to unemployment. Generally, low unemployment is good for the economy (and presumably society) until it reaches a point where businesses are unable to grow because of a lack of labor. When economists talk about "full employment" they usually mean this point - where labor constrains the economy - rather than an actual 0% unemployment rate. (While this sounds quite harsh, there are good reasons why any economy will have an unemployment rate greater than 0%. For example, often the centers of population do not coincide with the places jobs are)

The problem is that if you try to maintain no inflation, you run the risk of succeeding too well and getting deflation. Deflation is known to lead to persistent recessions, and is very, very difficult to fix once it sets in. (Just ask Japan how deflation has been for them. Or the USA how we liked the Great Depression.)

Therefore it isn't as simple as inflation bad, no inflation good. Rather it is too much inflation bad, any deflation bad, and you need to be in the middle. Which means that you want to maintain a small amount of persistent inflation - just enough to avoid the risk of miscalculating and going into deflation, but no more.

A big worry for the USA at the moment is that the current credit issues could lead to deflation.

Inflation is preferable to deflation. And the goal of no inflation is unrealistic from both practical and theoretical perspectives. There are a number of inherent incentives for a minimal inflation policy: to hedge against deflation, to reduce the real value of debt, to induce spending, etc.

It’s also “playing with fire” to, in the name of keeping inflation down, depress demand so much that it plunges the whole country into a massive recession. In other words, any economic policy can be taken too far, and the dangers of any approach can be caricatured and exaggerated. It’s not like the policy of inflation fighting isn’t equally driven by “private interests, demagoguery, blind ideology,” &c.

Fiat currency is used by the State to demand an equity stake in your money, and they define the terms. Any entrepreneur should know this is a bad deal, and it will always result in inflation. Imagine if VC's used a "living document" to govern your deal terms, their share will always get BIGGER, and your share will eventually dwindle to nothing.

Demand should be depressed because it was artificially stimulated before.

ie. if demand for homes was normal and not stimulated by easy money then there would not have been a housing bubble. a dotcom bubble. etc.

Government stimulated demand is the problem not the solution. (see my other post a few msgs above)

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