They could have chosen 0 or -2% but they like to reap that 2% free money premium..
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.
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.
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 difference is the spending for a one time use vs production of new goods.
But you’re still going to want and need things to consume. Much, much less sensitive to inflation.
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.
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.
The goal of inflation is to motivate productive work before the opportunity is lost due to idlenss.
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.
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.
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.
Deflation is everybody else working harder than last year to beg cash hoarders to spend their money back into the economy.
I think "postpone buying stuff because your money will be worth more in the future" is exactly what we should be doing at this point in time.
But if your goal is just to blow up the economy, then sure, a deflationary spiral is a potent poison.
You'll end up with stagflation -- prices going up but no one working tomorrow valuable stuff.
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).
Yes, savings should have a cost and/or risk associated with them. Furthermore, it’s insane to expect otherwise.
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.
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.
There are countless examples of countries where that trust was broken.
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.
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.
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.
Coincidentally my religion enforce around 2.5% wealth tax which sounds almost exactly the inflation target.
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...)
If you think negative inflation (deflation) would be a good choice to make, perhaps look at the 1930s.