It is not hard to remedy it is just that because it favors the old over the young it is politically difficult to do in aging society. See Japan for an example.
uh, see Japan. They have the highest national debt in the world-and the worst deflation. It is hard to remedy public attitudes and feelings. Printing presses are not a magic solution.
They have the highest national debt in the world because they have been spending money they don’t have, not because they have been printing money. If the Bank of Japan wanted more inflation they could have it, but they don’t.
They’ve been spending more than they take in taxes, but the Bank of Japan has bought a large chunk of the resulting debt. That is printing money. How else do you imagine it’s done?
A bigger money supply, which is principally composed of electrons saying people have money in the bank, only a tiny % is paper bills, will cause inflation if the so called velocity, the rate at which it moves around in the economy, stays the same or doesn’t drop enough to offset the increase in amount. In not just Japan but the developed world as a whole since 2008 (Japan for much longer) inflation has been running below central bank targets, central banks have enacted policies which increase the money supply, velocity drops, and inflation still doesn’t reach the target.
Another problem with deflation is the potential emergence of negative nominal interest rates.
The nominal interest rate is going to be equal to an underlying real interest rate plus the expected inflation rate perhaps plus a risk premium.
If the underlying real interest is rate is, say, 3%, and there is no risk premium, then if prices are falling by 5 percent per year, a lender will “charge” negative 2 percent interest. This is not impossible, and has been done in parts of Europe, but it is weird, and sets up some strange incentives. For example, someone who might otherwise buy a bank CD could just withdraw a lot of cash and put it in a safety deposit box, and consider herself a savvy investor.
It sure is a big change from the 70s and 80s when everyone was sure that ridiculous inflation was an inevitable symptom of the modern world, because the plebes would always vote themselves bread and circuses or some such.
Right, and what you’re paying for then with your negative interest rate is simply for some professionals to keep your earthly treasures safe from moths and vermin and thieves who break in and steal. Money in a bank account in today’s modern world is a lot safer and more convenient than banknotes under the mattress. Or a safety deposit box, but you’re paying a fee for that box also.
Inflation and inflation expectations were higher back then. But the politically tinged part is more doubtful IMO. ‘Healthy’ inflation is also a way for govts to reduce the size of, or real growth in, debt loads they pile up from the body politic making ever increasing benefit promises to itself. Without that inflation, and with slow real (inflation adjusted) growth that has tended to accompany low inflation in the developed world in recent times, that fiscal outlook becomes even bleaker.
And giving eg. Japan as example of how rich countries issuing in their own currency can borrow without limit is doubtful inductive reasoning IMO. The farmer goes out and lifts up the new born calf, then again the next day and days after and inductively concludes he’ll always be able to lift up the calf. Nobody AFAIK can give a really plausible chain of events where Japan’s situation (200+% govt debt relative to GDP, persistent very slow growth) ends happily, though nobody knows the exact how and when it ends unhappily. The current situation can’t be directly compared to eg. post WWII where the winners had similarly big debt to GDP ratio’s, there was also substantially higher real and nominal growth.
I’ll mention the key points in the order presented in-thread, not necessarily in order of importance.
(1) deflation is better than inflation
Of course I agree with all of Ramira’s remarks.
Whether deliberately or not, government policies will be choosing among criteria like employment, wage/living/producer inflations, interest rates and money supply. Details are beyond the scope of this thread but I would certainly prefer a 3% inflation target over a 2% target. I’ll guess several Fed members agree with me but can’t say so outloud – it would lead to a discussion of how fragile the world economy continues to be.
Stipulating that deflation is generally bad does not mean admitting that even small deflation is always a problem. In any event, I think the inflection point is fuzzier than the Grand Canyon.
(2) Continual downward pressure on some prices (not just wages) serves pruning/lubricating incentives.
(3) Inflation, if any, is best if occurring at predictable levels.
Yes, Predicted inflation of, say 9%, is much better for the economy than sudden unexpected inflation of 6%.
(4) Expanding money supply has relatively little effect on inflation, despite very low interest rates.
This. Suppose that the Central Bank simply added 3% to its interest rates and announced that it intended, sternly, to target 4-5% inflation immediately and throughout the foreseeable future. What would happen? (This question deserves its own thread.)
First thing that would happen: Bond prices and stock prices would plummet. Exaggerating from another perspective, we can say that the present bubble is built on a house of cards. If inflation does hit, the reaction could be brutal.
Some of the problem in U.S. concerns where the added money actually goes. Instead of being given out in the form of higher wages (which would be spent), funds are essentially given to very wealthy executives and shareholders, whose contribution may be to bid up asset prices (stocks, fine art, etc.) rather than increase real activity. IOW, there is inflation, but it’s been in asset prices rather than in prices labor of labor, consumer goods or raw materials!
(5) Negative interest rates are highly inconvenient.
I like the way different knowledgeable Dopers completed the several pieces of the answer, one by one.
(4) and (5) may be avoided with directed can be addressed with cash helicopter drops, rather than QE: Pass the money directly to lower- and middle-class Americans rather than corporate profiteers and politically-connected rent-seekers. Target the 0.1% that pays “death” tax(*) for added tax revenue.
(* - Am I the only one bothered that Mnuchin prefered the term “death tax” over “estate tax.” Has Sec-Treas job fallen to a semi-literate partisan hack?)
The U.S is already, in effect, doing exactly this. Ignoring middle-men (Treas. auctions), a press at Treasury is printing FedRes notes by the trillions and passing them as interest on debt or to whomever Congress designates. Inflation seems to be holding steady about 1% so the policy is “working.” The interesting questions are:
- (A) What is happening to all the printed paper? (Computer bits is more like it, these days.)
- (B) Why is the economy not responding with inflation to expanded government spending?
(A) is especially interesting. The inflation of paper wealth is affected by stock market prices, etc. Even homes, or rather the mortgage deeds backing them, are also an important component of this “paper wealth.” The diversion of income from labor to capital is a big part of the answer to (A). So answer (B) and get your answer.
(B) With interest, inflation and wage-growth rates all low, prices of stocks and bonds rise. This further increases the already-large share of the pie now going to corporate profits. Many U.S. workers are effectively in competition with low-paid foreign workers, so cannot expect wage hikes. Even workers in the service economy (setting aside the very most skilled) are stymied and unable to ask for wage hikes: They are foiled by laws against union shops, legislatures and regulators in the pockets of big business, and, soon enough, a restored fear of losing employee-provided health insurance.
A most important reason for continued low inflation is the increasing globalization of the world economy. Prices of most producer goods and factory labor respond to a global market. Many low-skilled Americans workers cannot expect wage hikes (or even a job) – factories for most (unfinished) goods and service phone-centers will move to low-wage countries.
Thus the U.S. economy can proceed with high spending and low inflation, with most of the mining and much of the manufacturing done overseas, as long as our foreign suppliers accept U.S. paper (banknotes, bonds, stocks). U.S. human workers will continue to get a dwindling share of the pie, as work is done by foreigners or robots.
Protectionism, i.e. bringing jobs back to America despite the higher prices of the resultant goods, would lead to some inflation in the U.S. and might not be a bad thing – but a hamstrung Trump is not the man to pull this off despite his “promises.”
What favors the old and why?
No… no you simply do not understand at all, the following is corrrect
Indeed the velocity of money is the key question and a factor which is not really possible for the Central Bank to control on the slowing side.
There is the assymetrical policy problem.
This makes no sense. If a central bank wants to target higher inflation, it will cut rates.
Huh?
This makes no sense whatever.
Deflation: I have $1.00, but I see prices dropping. Better I hold onto it so that in 3 months this dollar has more buying power.
(Hyper)Inflation: I can buy a loaf of bread for $1.00. In a week, that loaf of bread will cost $3.00. I’m going to buy everything I can right now.
–
With a little common sense and a studious understanding of economic history, it should be obvious why these 2 scenarios are equally unenviable.
(In realty, hyperinflation can be dealt with using monetary tightening. Deflation is virtually untreatable by anything other than years of suffering. Just ask Japan.)