> massive inflation/deflation spikes in ~10yr cycles
A 1914 dollar is worth $33 today. Great job, Fed!
A 1914 dollar is worth $33 today. Great job, Fed!
Making sure that the nitwits stuffing their mattresses with dollar bills maintain their net worth is not the goal of our monetary policy, nor is a good goal. The goal is to ensure predictability.
We can make certain assumptions that the rate of inflation won't be far off from this when we evaluate certain financial risks.
Just as in modeling adjustable interest rates for compounding interest, we can make r depend on t, and at that point, it becomes an ODE problem: dP/dt = r(t) * P(t).
Of particular note, debt instruments are denominated in nominal dollars, and they're paid back in nominal dollars, but what concerns the creditor is the real value of those nominal payments. Economic growth has this pernicious habit of pushing nominal prices upward, and if the money supply and credit system don't grow commensurate with the resulting increased demand for liquidity, the real burden of existing nominal debts can rise sharply and unpredictably.
This means that borrowers can find themselves underwater on, e.g., mortgages while the nominal obligations remain fixed, and banks will swiftly foreclose on them and tighten credit when considering their balance sheets. Many of the panics of the 1800's included a lot of this very dynamic.
It's a very bad time.