I’m intentionally not citing anything so as to not introduce a bias from any particular media outlet.
Just watching the headlines, it seems that bankers in particular, and I suppose economists in general, are concerned that inflation is not high enough. I’m not an economist, so feel free to dumb it down: why is this a problem?
Bankers don’t want high inflation, and they especially don’t want unexpectedly high inflation. High inflation means they get paid back with dollars that are worth less than the dollars they originally lent out. If the inflation is expected, they can charge higher interest rates to compensate, but excessively high inflation can mean a high variance and it’s harder to judge exactly how much they should be charging for loans.
Some economists want higher inflation, in certain cases, because it would help the economy, in certain cases. The basic idea is that in a time when everyone collectively is trying to save, we collectively fail to save. Higher inflation encourages people out of stagnant savings vehicles like cash and into productive savings vehicles like new investment. With inflation, holding cash carries a penalty. If it becomes more painful to hold money, the money is encouraged to circulate more swiftly through the economy.
Bankers very much do not want high inflation, and very few, if any, people think that inflation is not high enough (so your question is based on completely false premises). The austerity measures (spending cuts and the like) that many governments, including the US, have been taking, mainly at the behest of bankers and the very wealthy (who also hate inflation, because it makes their money worth less), are largely designed to keep inflation low.
On the other hand, there are many economists, generally aligned with the political moderate left , who argue that austerity measures are the worst thing to do in a depressed economy such as the one we have all been living in during the past five years or so, and that putting money into the economy via deficit spending is the way to get the economy moving again, producing wealth and providing employment. (Obama’s “stimulus package” was designed to do this, but the economists in question argue that this was far too small and insufficiently sustained to do much good. From their perspective, we need much more stimulus.) One of the main risks of this strategy is that it is likely to cause inflation to increase. However, the economists who favor this plan argue both that in current conditions the inflation increase is not likely to be too large, and that this is a small price to pay for reducing unemployment and increasing growth, production, and wealth creation. It is not that they think inflation is a good thing as such, but that it is not nearly as bad as high unemployment levels and economic stagnation.
Although high levels of deficit spending by the government will also increase government debt in the short term, it will not cause the government to go broke. Governments can (literally if necessary) print as much money as they like, and it is argued that once the economy is in a healthier condition it will be much easier to pay off the debt because tax revenues will increase (even if tax rates are not increased, maybe even if they are cut) simply because more money is being made and exchanged by people and companies, and is thus subject to taxation. (This is essentially how the deficit was paid off, and a surplus achieved, during the economic boom of the later part of the Clinton administration, not by higher taxes or spending cuts, but through higer levels of economic activity and private-sector wealth creation.)
It is also worth noting that moderate levels of inflation are advantageous to people who are in long-term debt, such as middle class homeowners with mortgages (and governments with deficits!). Inflation means the value of what they owe is decreasing. I think it is pretty much universally agreed, though, that very high levels of inflation are bad, because they lead to economic instability. At the moment, however, inflation is very low and could undoubtedly stand to be larger without causing disruption. It is also pretty much universally agreed that deflation (i.e., the value of money increasing), even at quite moderate levels, is very bad for an economy, because it leads people to sit on their money, and deters them from investing in productive enterprises. If anybody is concerned that inflation,as such, is too low ( can’t say I have heard this) it is presumably because they think that its rate is in danger of soon sinking below zero, i.e., becoming negative, which is the same thing as deflation.
The argument, then, is between those who think it is very important to keep inflation very low and stable (mainly bankers, the very wealthy, and those who beholden to them, which includes many governments), and those who think a rise in inflation (provided it is not allowed to go too far) would be a small price to pay for lowered unemployment, economic growth, and higher wealth production.
I’m wondering if the OP is referring to central bankers. In the US, there are several members of the Federal Reserve who think we need higher inflation (and this is part of the purpose behind QE), and in Japan, it appears that the central bank has come around to that view for Japan. AFAIK, European central bankers pretty much do not want higher inflation.
If you have a short position on bonds you would, so some bankers might.
Central bankers don’t want inflation pet se, – they just don’t want deflation. A deflationary regime is bad because then you can make profit by just hoarding cash resulting in an economy where people are rewarded for not doing anything for as long as possible, because that strategy lets them hold on to their cash the longest. Since a healthy economy is one where goods and services are produced, not one where pieces of paper are slavishly guarded, this would be a Bad Thing.
To put it another way, inflation can only happen if sellers are able to increase their prices and still make sales. If consumers are all afraid of losing their jobs, living paycheck-to-paycheck, they’re all going to be pinching their pennies and producers won’t be able to increase prices at all without losing sales (or may have to lower prices to attract sales). So a small amount of inflation is a sign that consumers are not overly pressed.
Some economists do think higher inflation might be a good way forward from the present economic doldrums.
For one thing, low interest rates are a main tool for stimulating the economy, but since nominal interests cannot be less than zero, real interest rates cannot become less than the negative inflation rate. (Obviously proposing negative real interest rates is drastic, but the economic malaise is severe.) However, this would be largely a one-time adrenalin shot: low interest rates could not persist once inflation expectation catches up with reality.
A more important advantage of inflation relates to wages. Most wages are not tied directly to cost of living. If prices rise 5%, while wages remain unchanged, the employer is paying 5% less for labor. This means employers will be eager to hire, rather than to lay-off. This is very stimulative.
Consumers burdened by debt would be aided by inflation. Again, this is stimulative.
U.S. inflation might push down the dollar’s exchange rate, increasing U.S. exports. Again, this is stimulative.
My impression, perhaps quite wrong, is that economists advocating inflation are looking for a burst of 5% inflation for only a few years, rather than long-term inflation.
Actually to my knowledge it’s Europe where deflation is of the greatest concern. International Business Times:
And the Telegraph, for whatever it’s worth: “Europe repeating all the errors of Japan as deflation draws closer / The whole eurozone must have a higher inflation rate to lift the South far enough above the deflation line to gain breathing room”
Deflation goes hand in hand with depression: it’s a bad thing.
Edit: But if by “European central bankers pretty much do not want higher inflation” you mean the austerity-loving, you-mußt-be-punished-für-your-fiscal-misdeeds Germans, you may have a point. They’ll happily see the south strangled in the name of keeping a tidy balance sheet.
Of course, this is not an advantage to everyone. To the worker, inflation functions as a quiet salary cut.
European central bankers don’t want inflation because Germany doesn’t want inflation, in turn because German banks are creditors to the debtor nations of southern Europe.
That is not really what is usually meant by inflation, which involves both prices and wages rising more or less together. Furthermore, it is probably not (in most circumstances) going to be stimulative at all, but rather the reverse. This is because people will actually have their purchasing power reduced. They will thus be able to afford even less of the goods or services that businesses can provide, so sales will fall and the businesses will have to lay off even more people (even though they might be able to afford to hire them) because there is simply not enough work for them to do. Raising prices without raising wages may (temporarily) put more money into the pockets of business owners, but it does so by taking it out of circulation (teh process of actually buying and selling things). This is not stimulation but depression of the economy.
Raising wages without raising prices is much more likely to be stimulative. (Profits as a percentage of revenue would be reduced in this scenario, but not necessarily reduced in absolute terms as there would be more revenue.) People would be able to buy more stuff, thus more stuff would be made to meet the demand, and more people would be hired to make it.
Of course, in the real would in this scenario, price increases would probably follow, i.e., real inflation would set in. Nevertheless, there might be sufficient lag time before this occurs for a real stimulus to happen.
In a capitalist economy, however, this is all largely moot because governments can’t do very much directly either to raise prices or to raise wages (although raising the legal minimum wage might help). Governments can best stimulate the economy by spending money, thus putting more money out there that people can buy things with. (Lowering taxes can also help, but is unlikely to be as effective a stimulus as government spending.)
The point is that wages tend to be rather inelastic. Obviously people already employed who suffer real wage cuts will suffer in the short term, but employment and spending increase over all; the economy improves; benefits will “trickle down” to all. 
Such a short-term inflation burst is not a general panacea. It might well be a way to break the present doldrums and put the economy on an upward trend.
ETA: I’m not qualified to have an opinion on whether this is a good plan or not. I’m simply trying to present the case as I understand it.
See
or
Wages are the price paid for labor so long term inflation increases both. Short term however, wages tend to be sticky. So if business needs to decrease wages by 5% it can cut salaries by 5% and anger their workforce or pay in money that is worth 5% less and most workers won’t realize what is happening. Once wages are deflated to a market clearing level hiring will resume and unemployment goes down. Once unemployment goes down, wages can start going up.
In economies, such as Japan, with lots of older people inflation is harder. This is because if you are on a fixed income such as a pension, prices go up but the pension does not. Thus inflation makes those living off of savings poorer since they saved in the expensive currency and get pension payments in the cheap currency.
Thus some inflation is good for the working people but bad for the savers. Different societies have various ratios of the two and thus prefer different monetary policies.
I agree with this as the answer.
Perhaps that’s who I mean. I do recall that the ECB actually raised rates in the past at points when they were well below their stated inflation target.
I wasn’t particularly talking about how wage cuts will cause people who have their wages to cut to suffer (although it will, of course). I was talking about how wage cuts will inevitably mean that people will have less money to spend, and so will depress demand, thus, contrary to what you are saying, leading to more layoffs and deeper recession. The notion that widespread cutting of wages would lead to “spending increase over all” is pretty much as close to a outright logical contradiction as you are likely to get in economic matters. How can people spend more money if they have less?
The other point you are perhaps missing is that decisions as to whether to hire more people or lay more people off have (in most real circumstances) much more to do with the need a company has for such labor than with its cost. No business owner, even if he has plenty of cash in hand, hires more people if he does not have work for them to do, and of course how much work he has to be done depends on how much business he is doing, how much of whatever goods or services he provides he is able to sell. Cutting wages increases the amount of cash on hand (in the short term, anyway) but it decreases demand because there is less cash out there to buy stuff. By contrast, even if the business owner has little cash on hand, if he gets more orders (because there is more cash in other people’s pockets they can use to buy his stuff) this probably will not stop him from hiring the additional workers he needs. He will borrow the money and pay it back out the increased profits made from the increased business.
Cutting wages may be something individual businesses sometimes have to do in order to not go bankrupt. Doing so as matter of general policy is not, however, a way to get a stagnant economy going again, on the contrary, it is a recipe for further recession.
I must have phrased my point poorly. The idea isn’t to “cut wages.” It is that “stickiness” of wages is an inefficiency which general inflation would address. (A merchant can raise the price of apples while lowering the price of oranges, but employers have difficulty in general to lower wages. General inflation reduces this inefficiency. With, say, 5% inflation productive workers might get a 10% raise where they’d have had a 5% raise without inflation. But unproductive workers might get no raise at all.
No one proposes that the government force the prices of goods up unilaterally. :smack: Rather, a stimulative cycle could be created where increased demand (and hence increased prices, and increased wages for productive workers) would follow. Freedom of employers to deal with unproductive workers is just one minor part of this.
In other words, your “depress demand … leading to more layoffs and deeper recession” would be incompatible with any policy I was speaking of.
Less clear to me is exactly how the U.S. government would stimulate higher employment and inflation. I suspect that, for many FRB policy-makers, expansionary inflation is a deliberate goal of their QE program and they are disappointed it isn’t happening.
Yeah, sorry, you originally said increase prices whilst keeping wages the same. However, the point is the same: in terms of value there will be less money around to buy goods, so less demand, so recession deepens.
This seems to be something quite different from what you originally said. I am not arguing with it. (Which is not to say I necessarily agree; I am just no longer clear what you are saying.)
Here is what you originally said, in post #7.
That certainly looked to me as though you were saying that price rises without wage rises would be stimulatory, and that is what I have been objecting to (as being pretty much the reverse of the truth). If you are now saying it was not what you meant, well ok.
Oh come on, this one is easy! It has been talked about plenty, and is what was done (but insufficiently) in the “stimulus package”, and what was done successfully in the “New Deal”: the government begins or expands programs of public works, financed by deficit spending, building and fixing roads and bridges, and levees and sewers, etc. There could be other projects too, like more money for various sorts of scientific research, or for the space program (which did a lot to stimulate the economy in the ‘60s). Taxes cuts, especially for less wealthy sections of society who would actually spend any extra money they got to keep, might also help. All this would put money into more people’s pockets and stimulate demand.
There are two downsides. One that it would increase an already large (but not really as scarily large as some like to pretend) deficit, and the other is that it would cause rising inflation, which is not a good a thing in itself (and, in particular, not good for bankers and the rich), but which is, from most perspectives, a small price to pay for getting out of a recession, provided it is not allowed to go too far.
As for the deficit, that can be paid down once more revenue is being generated by the increased levels of economic activity. At that time it also might be wise to increase taxes (even if the government does not really need the extra money now), and maybe scale back on the spending programs, not only to pay for the deficit, but also to stop the inflationary process from getting out of control and leading to a boom and bust.
We do not get these actions largely for political reasons. Due to endemic corruption, bankers and the very wealthy have far too much control over government policy, and, even if they didn’t, in the United States, at least, the government is so hobbled by constitutional restrictions, anti-tax hysteria, and the economic ignorance of most of the public (who have been told that government debt is like household or business debt), that it is almost impossible for them to take the actions they may well know to be appropriate.
Yes, political failure to provide stimulus is, IMHO, a reason why alternative approaches are under consideration.
Less clear is that inflation is bad. Some economists claim a predictable 5% inflation might not be much worse than 2% and would have benefits. (And why is inflation bad for bankers or rich? Inflation is only particularly bad for creditors who made fixed-interest loans when inflation expectations were lower.)
I’m happy to see such a thorough discussion on this. If you guessed I was thinking of central bankers, you were correct. I’m seeing laments about low inflation every time I read an article about the Fed. Since 1. it is the same message from every source and 2. it is basically a bare assertion in every source, it just ‘feels weird’, like somebody is talking to every news source at once and they all run out and print a story.
The NYT is presenting the same message, here’s from an article from yesterday:
So, while there is little discussion from any quarter about getting more money into the hands of the poor and middle class, everyone at the central banks are wringing their hands about what effects more or less freshly-printed money will have on inflation. They seem to be implying that they want to peg certain unemployment rates to certain rates of inflation. The whole issue is novel to me- I can understand not wanting deflation, but there seems to be more to it. I don’t think I really understand what is going on with $1 trillion Fed bond buying programs.