Central bankers rethink their devotion to slaying inflation
reuters.com
reuters.com
It would be really good for me and people like me. I have a mortgage that's taking a huge chunk out of my income and will do for the next 20 years while I'd get about half what I paid if I sold the house now.
Inflation would be bad for the people living off their savings, generally the elderly.
But then I think they in turn benefitted from an inter-generational wealth transfer in the 70s when there was double digit inflation for most of the decade.
So the money supply must generally keep growing in a growing economy. How should that be effectuated? For a long time, we tied expansion of the money supply into how quickly we could mine gold and put it into vaults. Given the exponential growth of the economy, and the distinctly non-exponential nature of gold production, it's obvious that wasn't going to work for long. So we have what we have now, with a central bank controlling the money supply.
That's the justification for the existing system. Are there alternative mechanisms that don't involve someone with their hands on the big money supply dial? Maybe, but I haven't seen any convincing ones yet.
Yeah, you sure wouldn't want the purchasing power of your money to increase, would you now?
There are economists out there who hate the idea of having a central bank control everything--they tend to argue for rule-targeting central banks. Examples include the inflation+unemployment target (the Taylor rule) or rules based on the circulating quantity of money (NGDP targeting). So some people think there are ways to have a currency that is simultaneously economically good and manipulation-proof.
"Deflation is actually a good thing, because in a deflation prices drop and money becomes more valuable, so deflation encourages people to save money. Deflation rewards the prudent saver and punishes the profligate borrower. The way a society, like an individual, becomes wealthy is by producing more than it consumes. In other words, by saving, not borrowing. And during a deflation, when money becomes more valuable, everybody wants money. They want to save. Whereas during an inflation, you want to get rid of the money. You want to consume. You want to spend. But you don’t become wealthy by spending and consuming; you become wealthy by producing and saving."
http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-d...
I also think that if the middle class is not vigilant, and it does not keep demanding higher salaries from their employers, they will quickly wake up in a situation where their money are "not enough" anymore to buy the stuff they used to buy constantly, because the value of the currency has dropped much faster than their salaries have increased.
And history is telling us that the middle class isn't actually that vigilant:
http://money.usnews.com/money/blogs/flowchart/2010/10/15/how...
I understand why the central banks want to do this. They want to not be restricted by anything. They want to create as much money as they want, and assuming they always intend to do good things with the money, then they want to be able to do that so they can "fix" things. But I think in reality it gives them that much more power to screw up things even worse. Basically this means that the central banks will centralize the economy, and will be much more able to manipulate it how they see it. But centralized economies are very vulnerable, and humans are not always right, or they may be too confident in a certain strategy. I think in the end this will just create more bubbles by the Fed, and it will be the majority of the population that will suffer from rapid currency devaluation.
And saving is always good. (Except when it isn't.)
Do you know what happens to nominal investment returns during a period of deflation? They become negative. The money will be worth more tomorrow than it is today if you "save" it -- not necessarily invest it, just save it. So why go out and invest it in something where you could risk losing your money if you can just stick it in your mattress and have it be worth more tomorrow?
In consequence the people with disposable income don't spend or invest, they "save" by purchasing and storing money, investing in currency itself because it has a better ROI than other alternatives. It's an economic catastrophe. It has been credited with causing the Great Depression.
There are ways to promote investment (as opposed to "saving") over spending if that's what you want to do. Adopt consumption-based taxes rather than income-based taxes so that wealth remains untaxed until spent, incentivizing investment over spending without promoting currency hoarding.
>They want to create as much money as they want, and assuming they always intend to do good things with the money, then they want to be able to do that so they can "fix" things.
Central banks don't really "decide" what to do with the money. The Fed just buys treasury securities with it, which lowers interest rates because it reduces the market supply of those securities by taking them off the open market. This generally does stimulate the economy because it puts the newly created money in the hands of whoever would otherwise have held those treasury securities, who as an investor will now have to invest in something else (because fewer treasury securities are now on the market). In other words, it creates demand for investment securities of all types by reducing the supply of the safest forms, pushing investors toward higher risk securities (like stocks) that may better provide funding for business opportunities that create economic growth.
It also has the effect of lowering interest rates on treasury securities, which makes it cheaper for governments to borrow money (and plausibly thereby increases their propensity for deficit spending). But it also lowers the interest rates they pay on outstanding debt, which leaves more tax dollars to go toward (theoretically) useful programs rather than going to paying higher interest rates on the debt. But creating the money is not the problem in itself (provided the level of inflation remains within reason), the problem is when governments take it as an opportunity to deficit spend on wasteful programs.
You can't be producing and saving without somebody consuming and spending (unless by 'saving' you mean just hoarding the stuff you produced, but even then you have to be spending in order to produce)
No there isn't. There's some fringe people like your citation that try and make the case but they're on the fringe for a reason.
Deflation is bad because if I can get more from my dollar tomorrow then I shouldn't buy your goods which means you shouldn't produce as many. This begins a downward spiral that leads the economy into recession/depression.
Now if you want to completely rebuild the economy from the ground up including the way investment, debt, currency and wages work you could probably do it so that deflation wasn't terrible but there's no evidence you won't end up breaking something else in the process (cf Law of Unintended Consequences). Meanwhile back in the real world we live in, deflation still sucks.
Central banks need to be controlled by inflation or we become Zimbabwe or Iran and people stop using their currency(and banks as they could not trust them anymore) as it has no value.
Lord keynes: "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth."
Those that inflation enrich are the central bankers and the people in power. Today the number one debtor country in the worls US of A announced that they are going to print dollars ad infinitum, the same thing the ECB and the bank of Japan said as they need to export(look at Japan companies stock like Sony or Sharp or Panasonic versus South Korean like Samsumg or LG).
There is a currency war for being the first western country to go the hyperinflation way.
Bad thing are going to happen.
J.K. Galbraith 1975 Money Whence it came, where it went
If you want to discourage leveraged consumption - increase the cost of leverage slowly.
Deflation is bad. It rewards people for doing nothing with their money. It's just like giving someone who breaks the law money instead of a fine.
Now, with that in mind, why on earth should the government try to dictate the 'correct' level of short term vs. long term financial planning? Why should long term planning, which leads to the formation of new businesses and increases society's wealth, be penalized in favor of consumption and debt? Aside from its ugly totalitarian implications (the government should decide for everyone how they use their money), it's completely economically wrongheaded and disproportionately harms the poorest members of society.
Your last argument is emotional crap. Tell me again how the poor suffer so much as compared to 100 years ago.
Furthermore the government sets a lot of things we think are necessary. Taking your argument to the extreme: Who is the government to say child labor is illegal? We are denying the world productive labor and consumption!
This is absolutely false. Inflation primarily punishes investors -- those who made fixed-income, dollar-denominated investments. People who bought corporate bonds, government/municipal bonds, banks who sold homeowner or businesses loans -- they all have fixed-income returns, and they all get a haircut. The longer-term the investment, the more it hurts them, and the less likely they could have predicted (hence priced in) inflation.
This isn't ideological or arguable; it's basic economics. Inflation punishes creditors.
Inflation is just the kicker to get them to suck it up and help fund the next Google.
Bond holders should be punished for taking money out of circulation
The money goes to the company or government that's borrowing it, quite likely because they want to build something or expand. It's not out of circulation, it's changed hands.
When one pulls low yields one shouldn't complain about the government, one should find higher yields.
They already get lower yields in proportion to their risk. Why punish them further by fiddling with yield curves, forcing the spread to be artificially larger?
When one pulls low yields one shouldn't complain about the government, one should find higher yields.
If you want government to purposefully manipulate yields, than of course that would become a political complaint.
In the past we've had wars, which have been paid for with inflation. If a war, or some other cause of inflation does not come about, won't the bankers soon have all the money? How does this work out?
http://www.treasurydirect.gov/RI/OFNtebnd
We can only hope that it's done smoothly.
Regardless of the merits of each, they can't both be right and they can't be the products of substantially different readerships. It's as though people are upvoting people simply for being contrary.
Inflation is stealing, the recipients of the pilfer are the ones who print the money out of thin air and spend it, and the ones who are the pilfered are the ones who work hard to save money, and store it away, and return to it to find it worthless.
60 years ago new cars cost like $300. Today they cost $20k. Had you stored "A car" in cash 60 years ago, today you would not be able to buy one. A currency is supposed to be a stable store of value, not a one in constant decline. Gold is money, it does the same thing, but in reverse, because it can't be diluted.
This is a fundamental misunderstanding. Currency is nothing more and nothing less than a proxy for goods and services. It simply decouples bartering transactions.
Consider the scenario of saving in the present to buy a car 50 years in the future. Forget about money, and think in terms of the underlying bartering transactions. Say in the present someone will trade you a car in return for 1,000 hours of labor as a woodworker. How can you defer this bartering transaction, through a "stable store of value" without money? Nearly anything you might care to buy and save will degrade over 50 years. Meanwhile, improvements in productivity will devalue your productivity over 50 years, and improvements in technology will mean that the car you buy in 50 years will be much more intrinsically valuable than the car you would have bought now.
"Saving" is not a fundamental primitive of the economy. It has no real natural analogue in the bartering economy. It's something that only seems so if you confuse money with the intrinsically valuable goods and services of the economy.
It seems more accurate to say it's debt. When a person has earned/acquired currency it does not mean anything. Proxy for goods/services only goes so far as someone accepts it. Debt feels more accurate because in order to be debt someone must owe. Collectively our society has agreed that we will exchange currency as debt. A debt that someone else will desire to exchange goods/services for. This guarantee is enforced by the central banking system.
"Saving" makes much more sense when you view it as collecting debt for the future. It's in the Government's and banks best interest to inflate the currency to limit the repayment of your debts.
Other way around: inflation devalues existing debts. A small, predictable inflation is a little economic rule that says, "Actual goods and services today are this percentage better than a mere promise of goods and services one year from now."
This sounds like it's immoral, in a way, encouraging consumption and profligacy. But of course, your consumption is someone else's sale; what it really encourages is the production and sale of actual goods and services that hold value better than money (anything from steel to apples to video games). Predictable inflation is a check and balance on the otherwise-natural tendency of capitalism to eat itself by valuing capital assets above all else.
it'll help stimulate the economy if i print up some 100 dollar bills. yeah! why are people getting bent out of shape because of my contribution to productivity?
This cannot be overstated. All other points the monetary scientists try to make are simply distractions from this core point.
Inflating the money supply is the literal theft from everyone holding that money.
The main reason we have money is not to store value, but to make the economy run as smooth as possible.
it's akin to a thief seeing two men exchange potatoes for beans and getting in the middle and taking a fraction of the potatos and beans and running off and eating them without compensating the producers.
Inflation =stealing.
Gold = Money. When you get some in your possession, you have something people will covet, and continue to covet as long as gold can't be created from thin air.
USD = Not Money. It's a socialist shared bank account where others can withdraw from it without you knowing about it.