We’d be better off just sending low-income earners a check every month rather than raise the minumum wage. And actually, we already do that, except it’s folded into their tax payments and called the EIC: Earned income tax credit - Wikipedia
That’s probably a large reason for the minimum wage being at small ‘s’ level. Even if you’re 45 years old, if you have no skills and never graduated high school, you’ve still got to compete with kids taking a summer job.
Ah, but the margins are not always small. In fact, some of them are pretty damn high… but the companies still reduce their employment numbers. Why? To maintain PROFITS. If the company leaders tell the shareholders “Well, the economy is bad… our profits are going to be less than last year.” what happens? New management. So to protect their own jobs (with VERY high salaries) they trim away some costs… like jobs or benefits. Better yet, why not take the production overseas were there is no minimum wage for the same work?
Of course that’s Big Business, not the Mom & Pop stores. But Mom & Pop are not going to be able to compete with Big Business in the long run anyhow, b/c Big Business has the resources to create goods cheaper and in volume. The customers are going to buy their product because they need to make their money go farther b/c they don’t have a lot of extra cash because of rising costs and shrinking salaries.
There will never be a good time, because companies will never be big enough or make “enough” money. They will do everything they can to make the most money, period. And while the rich in this (and every other) country will always be able to make money, it’ll be at the cost of the middle class… because the poor have nothing else to give; Minimum wage will not pay the rent and allow you to eat without government assistance. The middle class with continue to shrink, the upper-class will get marginally larger while the poor will become the largest growing class in America. Why? Because in the world of International business, the American middle class is pretty well off, so there will always be someone in the world willing to do the job cheaper somewhere else. The worlds poorest will become a little less poor, while the American poor and middle class become poorer and the American wealthy will become more wealthy.
Inflation near 2% is considered “optimal”; slight inflation encourages spending rather than hoarding so is a Good Thing™.
Deflation is bad; both 7% inflation and 3% deflation are bad (and deviate equally from the “ideal”), but, as a “lesser of evils”, the 7% inflation might be less bad than the deflation. (This is due in large measure to the relative ease of fixing high inflation – just raise interest rates. AFAIK, successful Negative Interest Rate schemes are uncommon.)
IMO, a major reason for confusion in economic policy today is that many important prices (including those of investments like houses and stocks, and imports like oil) are not controlled by the usual government policy levers.
As someone already pointed out, “Raise the minimum wage and the price of bread will rise by the same amount” is just more right-wing gibberish. You need a new set of Internet Bookmarks if that’s the kind of economic “analysis” you’re getting.
Well that’s what savings literally means. Saving your money just means you’re accumulating it without the amount of money growing beyond what you add to it. You can save money under a mattress or in a coin jar or in a no-interest checking account.
But most people are actually talking about investing their money when they talk about saving it. They expect some amount of interest to be paid on the money they’re saving so that the money they accumulate will be larger than just the sum of the money they put in.
Spoken like a water cooler genius.:rolleyes:
By the way, the Fed’s target is 2% Consumer Price Index. Most economists believe that the CPI overstates inflation by about 2%. So the Fed’s actual goal is zero inflation.
I can’t believe no one corrected this yet.
This is totally wrong. Maybe other countries work like this, but your reference to the Federal Reserve System shows that you’re talking about the USA, and that’s NOT how it works here.
When the US Government (actually, the Bureau of Printing and Engraving, if I’m not mistaken - and the several Mints) manufactures new paper money and coins, and gives it out to the banks, it is only in exchange for old worn-out money which is then destroyed. This is not how money is “created”.
If the gov’t would create money in the way you describe, what would be happening is for them to spend more than they take in. That is exactly what happens when the budget is unbalanced. And to prevent the hyperinflation you’re describing, that’s why there are laws which limit how out-of-balance the budget is allowed to get.
I’m no economy expert. But sure that would affect imports and exports, which are a vital part of the economy?
Does stuff like house prices match inflation? Otherwise real estate would all become a very poor investment.
And saved capital - whether it’s under the mattress or in a bank, becomes valueless.
More on the situation in Brazil…
In the 80’s and early 90’s the money was undergoing dramatic inflation. Not exactly “trillion-dollar-bill” inflation, but they did chop zeros off of the notes and stamp them every once in awhile.
They went from Cruzeiros to Cruzeiros Cruzados, to Cruzeiro Real to …
When I visited family there in 1992, the dollar was worth ~5000 cruzeiros at the beginning of the week and was up to 5500 at the end of the week. A 50,000 cruzeiro note was essentially a ten-dollar bill. I went back in 1993 and they already had printed 100,000 and 500,000 notes—I liked the 100,000 note and still have one.
The monetary unit was changed to the “Real” in 1994 and they must have done something right because it has remained at around 2 or 3 reals (reais) per dollar ever since.
One clear impact of the cruzeiro inflation was that many transactions such as rent and large purchases were quoted in terms of minimum wages. The government would readjust the minimum wage on a monthly basis—I believe the value of minimum wage hovered around a hundred bucks. This became an ad-hoc currency unit.
As in: “I’ll charge you three minimum wages for the brick work” or “His salary is X minimum wages”
This means of discussing value still persists today even though the money has been stable for over fifteen years.
Clearly this kind of stuff introduce friction into the economy, affecting the flow of money, though it is nowhere near as bad as reverting to bartering.
That’s high. The Boskin Commission, for example, estimated around a 1% over-estimate.
This is incorrect in every particular.
New money – the monetary base – is created pretty much as Frylock said, at computer terminals at the Federal Reserve. The Fed purchases assets from banks, and then credits the banks’ accounts. They’ve expanded the base money supply by a couple trillion dollars in this fashion. The mint and the bureau of engraving etc do provide cash and coins to replace the old, but they also supply new cash on demand to any bank that wants to replace its computer reserves with green paper. Monetary base on the computer and green cash are equivalent, and may be exchanged with one another at the banks’ discretion.
An unbalanced budget has nothing to do with the creation of new money. That is also just plain wrong. The Treasury borrows already existing money, and in turn issues government debt in exchange. Short-term government debt is a close substitute for money, especially at near-zero interest, but it is still not identical with money.
The limitation on the total amount of debt that the US government can create is a constitutional issue. It a matter of the law, not a matter of money.
If I’m wrong, then I want to learn. So here’s my questions…
Replacing the reserves with paper is not goingto create inflation, is it? They’re replacing something of value with a different thing of the same value. Net change is zero.
My understanding is that if they can raise the cash they need by borrowing it, then the budget is no longer unbalanced, and inflation will not follow. The gov’t is in deeper debt, but that 's all. The problem, as I understand it, is that when they go around those rules, and print more cash (or, equivalently, put more bucks into their accounts) WITHOUT compensating by borrowing it, THAT’S when hyperinflation will follow.
What did I get wrong?
When reserves are exchanged for cash, net change is zero in that situation, yes.
But the Fed can create new reserves at will, at pretty much any time they want. And those new reserves can be turned into cash at will. The initial creation of new reserves is done with the computer, and that is the inflationary part. And that is the process Frylock was referring to (although really, it has nothing to do with the minimum wage).
That’s not how people describe it.
Money is borrowed because the budget isn’t balanced. If the government spends 200 dollars, and taxes 150 dollars, then the budget isn’t balanced and they need to make up that shortfall somehow. Borrowing the money with bonds is a way to finance the deficit, but borrowing doesn’t mean the budget is balanced. The borrowing happened precisely because the budget isn’t balanced.
Put like that, it’s just a confusing terminology problem.
If the government creates new money instead of borrowing, to finance its deficits, then that is inflationary, yes. But the reason governments break this rule is because no one is willing to lend them money. When the budget isn’t balanced, governments always borrow as their first option. They only resort to money creation when no one is willing to lend them money anymore.
Really? With no limit? No being part of the budget? Without an okay from Congress? How is that legal?
It’s legal because Congress said it was legal. Congress gave them the power. No court has ever nixed the idea.
Delegation.
Power that’s been delegated can, of course, be taken away again. Naturally, the Fed is bound by law, but it’s a fairly wide mandate. They are ordered to focus on both employment and price stability, so if they believe more money would decrease the unemployment rate (and it would), without undue price pressure, then that falls within their dual mandate. The odds are fairly good they’ll start easing again before too long. None of this has anything to do with the federal budget. Treasury borrows money, and would never rely on new money creation unless they had no other choice. The Fed doesn’t operate within Treasury. They’re a semi-autonomous institution. Treasury taxes and spends, and the Fed controls the money supply, and though they communicate a lot – especially about the financial industry – their core jobs are very different.
Come to think of it, pretty sure there actually is a limit on the total number of greenbacks, but that doesn’t really matter because cash is chump change nowadays. There is no limit on total reserves that the Fed can digitize up out of the void. If it stays in the computers, it’s fine, which means there’s no effective limit.
Inflation pretty much has to happen at at least the interest rate the fed is charging or you will have deflation and an eventual shortage of money:
The Fed lends out, say $1000 now, and expects the lender to pay back $1010 at some future date. But all the money out there comes from the fed’s loans, so unless the money supply is expanding at the same rate, eventually all the money will be sucked up by paying back loans + interest to the fed.
Due to fractional reserve lending, lots of other banks can effectively increase the money supply temporarily. They charge higher interest than the fed, and this is also inflationary, because the fed has to increase the money supply to compensate for the money these loans will eventually suck out of the economy.
:smack: Interest rates are almost always higher than inflation rate. That that is not the case now is because central banks are furiously trying to stave off recession.
The borrower returns $1010 on a $1000 loan not because of inflation, but because he used the funds productively, building widgets or planting corn.
I really REALLY think people would have better common sense about economics if they ignored pieces of paper like banknotes. In another thread, discussing flood control, people talked about insurance and and Chicago futures contracts on future rainfall, with the obvious economic solution (building dams and reservoirs) ignored!
And here is yet another thread with Dopers focusing on the mechanics of money creation, with a vague undertone that Government is somehow doing something fraudulent. If instead of banknotes, we had pieces of paper saying “Joe – don’t forget I borrowed 5 bushels of corn last winter” no one would find them baffling, but Money seems to attract attention!
I suppose it’s true that if Government can print unlimited money, we could end up paying Zimbabwe prices for bread. It’s also true that if Government can force people to inject vaccines, they might foist drugs on us to make us hate the Baby Jesus.
I prefer to focus attention on America’s real problems.
Just to confirm that I’m not totally befuddled and haven’t missed it in this thread, two questions, please:
The root cause of inflation is the Federal lending rate being > 0 ? I assume that has to be right. Is it?
The cause of rate of inflation becoming greater than that due to Federal lending is due to “growth of the economy”, i.e. more people being employed & more stuff and services produced/provided (both planned and real)? Is that right?
Thanks!
No. Inflation has many causes. It’s a very complex issue and neither Federal lending rates nor Minimum wage are good as simplistic answers.
I will never understand this weird focus on interest rates.
The root cause of inflation is the effective money supply. There can be other factors at work, shocks to the economy, but the prime driver of inflation is now and will always be how much money there is and how quickly it’s bouncing around. When more and more dollars are chasing around the same amount of goods, prices go up. That’s the basic story, and that’s all there really is to it. Plenty of other aspects of money are difficult enough, but there’s absolutely no need to over-think this one.