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In the news today - the idea being mooted of a negative Bank of England Base Rate. In which its mentioned that the Gov has 'A target inflation rate of 2%'
We kind of accept inflation as a fact of life - prices go up over time, and broadly speaking wages go up because the cost of living has gone up and with higher wage bills the cost of making and selling things goes up so the cost of living goes up.
Its easy to think that pointless - so why is it a target for a government that inflation should happen? How is 'a sum of money being worth less this year than last year' that a measure of success for a government?. As an individual the only purpose it serves is a vague sense of reward from a pay rise without having to be good enough at your job to get a promotion (even though its cancelled out by the cost of everything you spend your pay on) and it provides a source of anecdotes for anyone over 40 who can tell young upstarts that when you were young a pint only cost twenty quid
What first made me wonder about the purpose of inflation was finding a confederate $1000 bill in a box of old foreign coins. Curious about what it would be worth (its not really worth anything actually- might as well be Monopoly money) I looked up the inflation rate for dollars through history
What surprised me was that from the late 1700s to the mid 1900s the value of a dollar didn't really change. What you could buy with a dollar when you were 8 was pretty much the same as what you could buy when you were 80.
So why did that change and why did we (collectively as per the actions of the governments we elect) desire that change?
Inflation kills off debt, kinda useful right now.
Inflation kills off debt
Does it kill it? Or is it a way of growing it. We haven't paid for the first and second world wars apparently - perhaps not even the battle of Waterloo. So planned inflation is a way of making debts seemingly shrink while adding to them?
I can see why a government would be motivated by that
Why do we play along?
I wonder who we owe money to for the Battle of Waterloo and how much interest we've paid.
The effect of *deflation* is that your money buys you more in the future than it does now. This in a way in which your money is worth more in the future than it is now. So folk put off buying stuff a bit where they can.
Everyone does this, so the economy goes slower, is smaller. Worthwhile things like investment in new machinery which bring productivity and create wealth are hard to do.
This a mostly a bad thing.
A 2% target is a way to avoid this cycle.
As for small inflation being a waste of time if prices & costs go up in step... well sort of. The point that it makes debts diminish over time is real, but leads to housing bubbles!
The fact that you can earn/charge interest on money where there is some small inflation also makes your money worth more in future (kinda like during deflation) but allows growth and investment to be wise choices shows the difference.
I Am Not An Economist: I’m sure they could do a better job explaining the theory. Whether we would listen to them is uncertain, whether the government would/could listen to them as a also murky.
The fact that it encourages investment in things that allow wealth creation is the thing that makes me ok with it.
We paid off WW2 a few years back.
And yes inflation reduces debt, a pound borrowed in 1950 v what a pound is worth in 2020.
Note. It never ends well this inflation malarkey
2% was set as a very low target, they were trying to keep inflation to that level rather than too far above, the risk of deflation is quite new. As above deflation is bad, no one spends anything they don't have to. Hyperinflation is also bad. 2% is an arbitrary amount which feels 'about right'
Basically low inflation means we should be printing more money, under the logic that runs the west. A hell of a lot more money, in the current situation. But of course even though successive tory governments have done so, succesfully, none of them ever want to admit it and they absolutely refuse to call it that, and they certainly don't want us knowing just how much they could open the taps, and still stay under 2%.
I don't think anyone can really predict how much it would be, but ****ing lots, is the technical answer. What are we up to for coronavirus "quantitative easing", £300bn a month? And yet hyperinflation mysteriously has not happened, and yet and yet people are still talking about austerity to come to "pay it back".
Truth is that not everyone even believes it would ever happen, at least within the bounds of reason, hence Modern Monetary Theory etc but even if you absolutely accept the standing logic of "printing money = inflation", it's clear that we could be doing far more. And if we could be then we should be.
(If you really believe that printing a lot more money would cause problematic inflation, you should still think it's the right thing to do up until you can see that start to happen. If you refuse to do it when inflation is rock bottom, it's either because you don't actually have confidence that it's true, or because you just don't want to)
Still I have to admit that the economics and psychology and social impacts of deflation are fascinating. Bottom line is our entire economy is completely used to operating in an inflationary world and a lot of it doesn't really work with deflation. But that's OK because a lot of it doesn't really work with inflation or stagnationeither, we just let it carry on not working regardless because if we admit it doesn't work we have no clue what'll happen. Like ork technology, it keeps working as long as you believe in it so we'd better keep throwing people's lives into the machine.
maccruiskeen
Full MemberI wonder who we owe money to for the Battle of Waterloo and how much interest we’ve paid.
According to the treasury we only finished repaying the loan taken out in 1833 to "compensate" slave owners and dealers for the banning of the trade, in 2015. Obviously there wasn't a loan taken out to compensate the slaves.
Deflation us much much worse so aim for a low level of inflation. Room for wiggle.
Deflation us much much worse so aim for a low level of inflation. Room for wiggle.
The entire economy is planned around an online cycle retailer?
Prices are a way for the market to give information to buyers and sellers of goods and services.
However prices have some problems - they tend to be "sticky" in a downward direction, especially in some areas such as wages.
Inflation is a way of solving the stickyness problem because over time prices that stay the same go down in "real" terms.
I think it's 'just' a case of High Inflation =Bad, Deflation = Worse, let's try to stick to near Zero, with a margin to try to ensure we don't get deflation.
It does help to reduce Debt relatively, not only for the UK but for the Public too, in the same way if you're lucky enough to be buying your home and not renting it, it's likely House Price inflation is reducing your debt as a proportion of your asset value quicker than any wage inflation is reducing the debt as a proportion of your income.
There's a lot of far more complex reasons around International Trade / Balance of Payments, Manufacturing v Service Industry and even Holiday Money exchange rates, which frankly a lot of Tabloids and their readers care more about than anything else.
Given the Current Crisis, coming just as the last one comes to a head, before the one before that has really passed, maybe a bit of deflation to help with the cost of living might be a good thing, but as we import some much in the UK, it's likely to go the other way, mix in high unemployment and a very slow jobs market and I can't see wages rising any time soon.