I would argue the opposite. If you compare US dollar to every other currency the value of their currency has decreased a lot compares to US dollar. This would be a plus to hold US dollar as their own currency has depreciated and holding more dollars has helped them reduce their losses. But it has one down side is that if you hold too much US dollar the country exposes itself to US monetary policy.
not sure there is a country on earth that you could save your money in the national currency and not watch inflation rip away the value of your earnings. The purchasing power of USD has declined 95% over the past century.
> Your expectation is that the money hidden under your couch should never go down in value?
Why should it go down? If there were a fixed or slowly growing monetary base (i.e. slower than productivity), the dollar would appreciate and this would be a good thing as we would all benefit from the gains of productivity and living in a prosperous society.
I never bought the idea that we need to inflate our monetary base and have inflation. It seems too convenient as the government uses it as a backdoor form of taxation. And every few decades it gets out of control. The argument pro moderate inflation never rang true to me. The biggest one is "people wouldn't spend money if they knew everything will get cheaper", which is on its face wrong because the hottest selling goods in this economy are quickly depreciating. This year's iPhone or car model depreciates very quickly but somehow people keep buying it and the world doesn't fall apart.
You ask why should it go down? My understanding is we tried other banking policy during the great depression and it didn't work out so well. When the economy collapses and the government lacks gold backed dollars to do counter cyclical spending because there's not enough gold reserves it doesn't go well.
So my response would be because great depressions are not desirable.
But what I really don't understand is the outrage that the money under the couch should go down- when assets like treasury inflation protected securities are available. (Yes they are not always available at profitable rates- though they currently are- and I don't think the people complaining about inflation are whining when stocks or Treasuries or bank accounts are paying more than inflation.)
> When the economy collapses and the government lacks gold backed dollars to do counter cyclical spending because there's not enough gold reserves it doesn't go well.
Probably shouldn't be using this logic when the dollar is no longer tied to gold or any other physical asset though. There's a world of difference between a dollar based on gold and a dollar based on confidence in the US government.
And I was saying that the dollar is no longer backed by gold, or tied to any other limited resource, so why would we assume that the same scarcity-driven dynamics are still in play?
Because the people on earth have created value through work and so the money supply needs to increase to represent the additional value that has been created through that work. If you cut a tree down and, through work, turn it into a table — then you created value where there was none before.
So the money supply must increase to represent human endeavour. That’s effectively what central bank interest rate rates are.
In a perfect world, we’d have an exact balance between work/value and money creation. Unfortunately, it’s not a perfect world.
As others have noted, deflation is problematic because people hoard money with the expectation that the value of the money will be more tomorrow. This reduces the activity in the economy. So a balance between money supply and endeavour is a reasonable solution. It doesn’t make money appear to be rare.
Money is ultimately a 'claim check on society', in Buffet's words. Unspent, uninvested money is a deferred claim. Why should the value of a deferred claim go up, if you haven't invested it in some productive use? Why should you be able to defer a claim in perpetuity, and expect to exchange it for exactly the same amount of goods and services at any point in the future?
Because its a claim. A claim is not less valid if you don't claim it. That kind of defeats the purpose of a claim. You contributed to society and you have a right to something in return.
This argument assumes there is a fixed amount of wealth in the world and you're taking some share that would otherwise go to someone else.
At the time the claim is created (you're paid your salary, you have a liquidity event, ...) you can exchange it for some quantity of goods and services roughly proportional to (the market's appraisal of) the social value you've contributed. If you stash that claim under your mattress, should it be equal to the _exact same_ quantity of goods and services 10 years in the future? 100 years?
If instead you stored the value you created (the lumber you fell and milled, the clothes you manufactured, the messages your software conveyed, the student you educated, ...) under your mattress for 10-100 years we would not expect them to have exactly the same utility they did at deposit
Money should be a _more_ efficient store of value than anything we might exchange it for, but I don't think it's clear that it should be a perfect store of value. If you want to maintain a claim on a fixed quantity of goods and services, you should have to contribute to the investments required to maintain the productive capacity to deliver those goods and services.
A monetary policy targeting stable, low, but positive inflation balances savers' need for a risk-free store of value with the social need for continued investment and consumption.
> A monetary policy targeting stable, low, but positive inflation balances savers' need for a risk-free store of value with the social need for continued investment and consumption.
I think both these purposes are served with zero or deflation. As a saver, I don't like my dollars being depreciated and people on fixed income also don't like that. And as someone who wants to promote investments, a lower deflation rate reduces my minimum expected return since it doesn't have to clear some inflation hurdle rate. And for consumption, like I mentioned in my original post, the hottest selling items are rapidly depreciating, so I don't think it would negatively effect consumption. So the only one the inflationary system works for are the politicians that use money printing as a backdoor form of taxation
Deflation means that I can make money (or more precisely, value) simply by leaving what I have in cash. That doesn't promote investment; it promotes hoarding.
That's the same as investment. If a part of society's resources aren't directed towards consumption, they are directed towards enabling future consumption. It's a tautology in economics that savings equals investment.
It's the same thing in economics. It causes the government to print more money to make up for the money missing from circulation, which will be invested. If the government doesn't do that, it increases the value of all other money in circulation.
But that’s under some weird, incorrect model of how money works. Presumably if we go down this route any further you’ll start talking about IS/LM and the money multiplier. All models are wrong, but there’s a better model that involves capital constraints and the Basel accords.
In any case, one of the major failings of modern macro is to assume you can think your way around the implications of economic actions. You have no way of knowing the consequences of stashing money under a mattress unless you actually do it, and even then there’s no guarantee the effect will be the same across different economies and in different eras. The world is just too complex for that.
care to cite some examples of deflation quickly destroying an economy? there are many such examples for inflation. Argentina, Germany, Zimbabwe, Greece
there is deflation that comes from shrinking of the monetary base
and there is deflation that arises out of productivity gains
often the "deflation" observed in bad economies is a symptom rather than the cause E.g. there were a few months of official deflation in the US following the global financial crisis, but this followed from the crash rather than caused it.
There is a huge difference between "this cash in my hand should never go down in value" (which nobody including the GP is arguing for) and "$1 today has the purchase power of $0.05 a century ago is good, or at the very least the natural state of things" (which you may or may not be arguing, but is how I understood it).
The impact of inflation compounds. I won't bother looking up if that 5 cent claim is correct but I did quickly look up average inflation rate, and the average inflation rate from 1941 to 2017 is 3.5 percent per year. Which would mean the value of the currency would halve every 20 years, but that's just how compound interest works, it's not particularly remarkable or surprising.
Nobody complains when compound interest makes their stocks or bonds go up, I don't know why someone would suggest compound interest in inflation rates is some sort of awful social issue.
I would expect less feudal outcomes in a world that calls itself free. Capital income does not reflect economic performance, its just a inheritable privilege.
Are you upset about seeing those unfortunate suckers, that dont have this privilege maybe coming to your country? Upset, that the world does work this way?
My hot take: currency is not meant to be held, it's meant to be spent. I know, I know: "store of value" is one of its definitions, but it's OK to have short-term and long-term stores of value. Money velocity is a healthy thing for the economy. Hoarding wealth isn't, and besides, everyone with significant wealth is already storing most of it in assets anyway. There's really no reason to want a particular currency to retain its value over 100 years; 1% to 2% inflation is quite healthy. It doesn't rip away the value of your earnings as long as salaries keep up with inflation -- which they don't, but that's the real problem.
1-2% inflation is "healthy" is a trope that nobody really justifies. Perhaps its true, and it is often repeated as gospel. the "2% inflation target" was derived just from the comments of economist Roger Douglas in New Zealand who thought that sounded about right.
We welcome and celebrate deflation in technological goods (cars, electronics), apparel but are constantly warned about the dangers of deflation and why "some" inflation is good.
What is the argument for why 1-2% _deflation_ in housing, education, and healthcare would be bad?
Does nobody really justify it? The argument for inflation is pretty simple I think. It encourages everyone to do something with their money now, invest or spend.
I think that is a valid argument and makes some sense. have to toss the hot potato. The argument for the trade offs are pretty simple I think. It encourages more concentration of wealth in assets and increases the amount of malinvestment.
The question is to what degree. I am saying there's no analytical argument for 2%.
I think most people would agree that 10% or 50% inflation would be bad. But why is 2% better than 1% or 0%?. Why is 1% better than -1%? it depends on the time horizon. higher inflation today will cause more economic activity, higher inflation in the long run encourages debt and misallocation of resources.
Inflation generally encourages economic activity (spend your money before it depreciates) while deflation discourages it (save your money because it will appreciate)
Lower prices are seen as positive for as long as they stimulate higher overall consumption. If prices fall but consumption does not rise, then most economists see that as a problem.
Your main point is the well-established modern consensus among economists, and nicely put. But what makes you think salaries don't keep up with inflation? In the postwar US, they absolutely have kept up over the long term. There are ups and downs depending on the strength of the labor market, and they don't always react instantly to short-term bursts of inflation (as in 2021-22), but over the long term they are steadily up even in the "great stagnation" period of the past 50 years:
Economics is a weird kind of physics that only requires some critical mass of people to believe or act like they believe and then it’s true, so arguing against the 2% ideal for inflation is a bit like debating gravity. From most people’s perspective it just is and understanding much less changing it is an impossible dream.
Whether salaries track inflation is also irrelevant as long as there are markets (like housing/education) that you are basically required to enter, and which have different dynamics. Would it matter if wages and inflation were in lock step if the toilet paper market was wildly out of control? Could people work around this issue by wisely waiting for a better time to use the toilet?
My first point was not that economics as a discipline is infallible, just that this was the opposite of a “hot take.”
Regarding some costs (especially housing) growing faster than the overall rate of inflation: of course they do, just as some grow more slowly or even deflate. The index here is computed based on the average amount people spend on these different categories (the consumer price index), so the need to spend a large share on housing (or toilet paper) *is already included* in the inflation measure.
That’s not a hot take it’s literally the agreed upon monetary policy of the planet.
Only on HN would a bunch of self righteous engineers argue with you about how you are wrong based on some localized wish fulfillment of how a perfect system works in their head.
