
Central bankers rethink their devotion to slaying inflation - mtgx
http://www.reuters.com/article/2012/12/20/us-centralbanks-idUSBRE8BJ0T120121220
======
barking
Inflation isn't a dirty word to me.

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.

~~~
smokeyj
I find it disturbing that so much power is in the hands of bankers --
regardless of their benevolent plans for me. Why should any group of men have
the authority to inflate or deflate a currency? We're talking about
manipulating the common denominator in most transaction -- the value of money.
I think the cost of unintended consequences will far outweigh any perceived
benefit.

~~~
rayiner
Think about it from first principles. What is money? Money is nothing more
than a proxy for goods and services. So, how much money do you need in an
economy? Well if money is a proxy for goods and services, it is no good for
the supply of money to stay fixed while the amount of goods and services
expands. Indeed, the money supply has to not only expand with the present
volume of goods and services, but also with peoples' willingness to enter into
contracts to trade goods and services over some future time frame (i.e.
loans).

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.

~~~
white_devil
> it is no good for the supply of money to stay fixed while the amount of
> goods and services expands.

Yeah, you sure wouldn't want the purchasing power of your money to increase,
would you now?

~~~
uvdiv
The purchasing power of my debts? No, not really.

~~~
white_devil
It's not like you can count on inflation to eat away your debts when
considering whether to take them on in the first place.

------
mtgx
There's also a strong case for deflation, and an economy oriented more towards
saving than towards consuming and borrowing money:

 _"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...](http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-
deflation/)

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...](http://money.usnews.com/money/blogs/flowchart/2010/10/15/how-
the-middle-class-is-shrinking)

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.

~~~
azov
> But you don’t become wealthy by spending and consuming; you become wealthy
> by producing and saving

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)

~~~
rayiner
It's incredible that people don't realize that a modern economy doesn't really
save anything. We're not hoarding away bales of hay and sacks of wheat for
future use!

~~~
cglace
I know many people that save gold and silver

~~~
akgerber
Gold and silver have very little inherent value, only trade value (other than
a few industrial applications, but they can often be replaced by copper). We
don't save very much food, or surplus housing, or surplus machinery or
petroleum or solar panels, mostly because these things degrade physically and
become obsolete when saved. Instead, we rely on today's economy to provide
these things.

------
forgottenpaswrd
Central banks never had devotion to slaying inflation, in fact central bankers
ARE the creators of inflation, as countries without central banking proved(US
before 1913) the prices of things remained more or less constant over big
periods of time.

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.

~~~
dataminer
Zimbabwe and Iran are bad examples, because hyperinflation in these countries
was caused by sanctions and significant drop in production capacity.

------
barking
_Attitudes toward money proceed in long cyclical swings. When money is bad,
people want it to be better. When it is good, they think of other things. Only
as matters are examined over time can we see how people who are experiencing
inflation yearn for stable money and how those who are accepting the
discipline and the costs of stability come to accept the risks of inflation.
It is this cycle that teaches us that nothing, not even inflation, is
permanent. We learn also that the fear of inflation which inflation leaves in
its wake can be as damaging as the inflation itself._

J.K. Galbraith 1975 _Money Whence it came, where it went_

------
confluence
Inflation punishes people who keep their money under the mattress instead of
consuming it or investing it. Too much is a bad thing - just like giving life
in prison to someone who was speeding just over the limit is a bad thing. A
fine is necessary to disincentivize bad behavior but not so much as to be
extraordinarily punitive. A small fine is a good thing. Do you really want
people to be rewarded for not helping grow the pie?

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.

~~~
uvdiv
" _Inflation punishes people who keep their money under the mattress instead
of consuming it or investing it._ "

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.

<https://en.wikipedia.org/wiki/Inflation#Effects>

~~~
confluence
Then maybe those creditors shouldn't be lending and should instead be
investing. Bond holders should be punished for taking money out of circulation
and instead of investing or consuming them at good yields they invest in bad
yields.

Inflation is just the kicker to get them to suck it up and help fund the next
Google.

~~~
uvdiv
Bonds are an investment (?) Do you have some sort of ideological position on
debt vs. equity, I didn't know that was even an issue.

 _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.

~~~
confluence
Bonds have low roi for a reason - they aren't taking on nearly as much risk in
developing new products as their equity counterparts. However we want to
encourage new products. Hence we punish those who don't want to take risks.

When one pulls low yields one shouldn't complain about the government, one
should find higher yields.

~~~
uvdiv
_Hence we punish those who don't want to take risks._

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.

------
jacoblyles
Scott Sumner has been beating the drum for nominal GDP targeting for a few
years. His blog, The Money Illusion, has gotten quite popular among economists
during the recession.

------
Expez
Fractional reserve confuses me greatly, because I always end up thinking there
will be more interests due than there is "real money" in existence. Which
leads me to belive we need periods of very high inflation to reset the economy
every now and then.

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?

~~~
DasIch
Independently from central banks money is continually being created due to
lending, which causes inflation. In a healthy economy central banks actually
destroy money to keep that inflation at acceptably low levels.

------
aristus
They don't have a lot of choice. Prime interest rates have been near zero for
over ten years. It's got to give at some point. Inflation-protected bonds have
been bidding at both negative rates and 10% markup for a very long time, too
-- lots of people are worried about the coming hangover.

<http://www.treasurydirect.gov/RI/OFNtebnd>

We can only hope that it's done smoothly.

------
cynicalkane
Right now, the top post on the frontpage pro-inflation article is anti-
inflation, and the top post on the frontpage pro-deflation article is anti-
deflation.

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.

~~~
Jare
People upvote for being insightful, relevant, well thought out and well
written; for adding to the discussion, not for being right. A contrarian post
will usually have more to contribute than a post that basically agrees with
the OP.

------
greesil
4 years too late, but whatever. If your goal is full employment, the interest
rate to get full employment is less than zero, and the political will for
stimulus spending does not exist, you can use inflation to set a nominal real
interest rate to get full employment.

------
Tycho
Most articles like these commit the perfectionist fallacy. They point out that
bad stuff happened under some governing system, but then we would really need
to know 'how bad it could have been' to judge that for sure.

------
maeon3
The greatest deception ever is the one where individuals expect the dilution
of their hard earned money as something a healthy economy must suffer.

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.

~~~
rayiner
> A currency is supposed to be a stable store of value

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.

~~~
pjzedalis
That's why I dislike the currency = proxy for goods and services.

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.

~~~
eli_gottlieb
_"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.

~~~
pjzedalis
I don't disagree. Some get upset about governments and banks "printing money."
My point was they are not upset/concerned to do so as it benefits them.

~~~
maeon3
if printing money without earning it and collecting on those debts were a good
thing for the economy then it wouldn't be a problem if everyone did it.

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?

------
pebb
Everyone will be a billionaire soon!

