This is because inflation isn’t a bug it’s a feature.
Anything that transfers wealth up the chain, from working class to middle class and from middle class to upper class, is a feature of the western economic system.
For example, in England and Wales the Bank of England is charged with keeping inflation at a target of around two per cent. This means that the pound in a workers pocket is supposed to devalue. The advantage is that the government borrows money in its own currency so inflation means that its debt goes down (in real terms) when inflation goes up.
In other words, it’s similar to a tax in that the money you earn today, by the time you spend it, is worth less by design.
Inflation does has have a positive feature of encouraging investment and spending, rather than hoarding under a mattress. The money is put back into the economy because every day it isn’t, it loses value. If money were getting more valuable over time (called “deflation”), you’re incentivized to treat it like an asset—not a currency—and hold onto it as long as you can (like Bitcoin), rather than reinvest or spend.
Yes, this is true but you also have to factor in the marginal propensity to consume, or in plain English, the poorer you are the more of your income you have to spend on necessities like rent or groceries.
There are always high interest investments available to people with a large amounts of spare cash floating about even when inflation is low.
If your rent + utilities + food = your income then you ain’t hoarding money even in a deflationary spiral.
There are a ton of issues with our economic system, and there are a ton of structures in place to funnel money up, but keeping a moderate inflation is not one of those things.
Inflation is a specific counter-measure against people who already have a ton of money. It provides a reason for them not to just “take their ball and go home” once they have a pile of money.
To shelter their money from inflation, they need to either risk it on the open market, allowing that capital to do things like pay worker salaries, or buy things like GICs which are essentially loaning money to the government so the government can do things like build roads or fund social programs.
In either/all cases, inflation is designed to do the exact opposite of funnel money upwards, it’s a mechanic to wrench that money out of the hands of the wealthy.
I feel like this story is essentially propaganda at this point- at least in the USA where the ‘risk’ for the rich never plays out.
The rich don’t actually risk their money. They risk the government’s money and other’s lives and livelihoods. When they fail, they get bailed. Bailed out by the banks. Or they simply don’t pay their bills and lay off all their employees and let everyone else take a bath.
Rather than inflating everything, why don’t we tax the shit out of their held wealth? Seems more direct without all the side effects of making FOOD, HOUSING, AND HEALTHCARE UNAFFORDABLE
There isn’t anything wrong with the mechanic of inflation as a means to encourage money to be reinvested into the economy.
You’re right about cost of living not keeping up with wages. You’re right about fucked up taxes on the ultra wealthy. You’re right about a massive erosion of social services. you’re right that the USA healthcare system is fucked up.
These are all issues that are distinct from the plan of maintaining a moderate (2%) inflation rate.
Yes, we SHOULD get living wages, unions and legislation should do that. The top tax bracket SHOULD be taxed at 70% that’s tax policy. We SHOULD reinvest in social services that’s government poicy. You SHOULD get universal healthcare, that’s a government program. Inflation isn’t the thing keeping you from any of these things.
Yes, and the people at the top do keep their money in circulation, and as a result their wealth stays constant across inflation while workers’ wages and savings go down.
I have no idea why you don’t see that as a transfer of wealth.
You say it incentivizes the rich to not hoard cash. Well, they don’t. In fact, it incentivizes everyone to not hoard cash, but the rich are the only ones with sufficient cash to trade that cash for income-generating assets.
It incentivizes everyone by punishing everyone for holding cash, but only the upper class is able to evade that punishment by converting their wealth. Poor people don’t have though cash to transform it into wealth. Their cash is only useful to them as cash.
This is why the poor are feeling the inflation the worst. People who own no stock are the ones hit hardest when the government printed a bunch of money and injected it into the stock market.
What you describe would be worse without inflation. The rich would still have most of the capital, but they also wouldn’t bother investing it either, which at least recirculates the money and becomes income for others.
It provides a reason for them not to just “take their ball and go home” once they have a pile of money.
If that’s the reason for it it’s not doing its job. Investments are much like savings to high net worth individuals and their investments are managed by someone else and they simply lay in the cut and collect dividends. Yes there is a risk to investments but if you’re in a good wealth fund then over time you’re almost guaranteed to win even if you have disastrous months here and there.
If they’re invested in businesses, the capital gets recirculated in the economy and becomes someone else’s income.
Or just buy gold and bitcoin and other things that aren’t tied to the value of the dollar.
This is exactly how inflation is a tax on the poor: there are ways to counteract inflation, which only become available at a certain level of wealth.
Basically disposable income is safe because you can convert it; and non-disposable income is not safe because you can’t convert it.
yup, that’s exactly how it is, idk why ppl downvote me but upvote you, it’s saying the same thing lol, crypto bad i guess.
Gold is a shiny bauble material, but never grows. It can be a good investment for that part that you want to put aside and will just sit. Bitcoin is invaluable for money laundering, but very unstable for saving/investing. Look at how many have been fleeced when someone gets their keys, or lost their coins by a hard drive failure. It is costly in electrical use to mine.
There are far better things not tied to the value of a dollar. I would suggest very low-fee indexed mutual funds as one better alternative. They offer an accessible way for people to get a share of the means of production. My experience is that for people who can can learn to not be ruled by fear or greed can, over time, build enough wealth to live better lives.
Which are these far better things not tied to the value of a dollar?
Investing in a company puts your money in a non-inflationary asset. If inflation goes up, your land, machinery, buildings, raw materials as well as finished product just jumped in numbers of dollars of value, thus holding its real value. The same can be said of any hard asset, and dollars could also be switched with any country’s currency. I like large index funds because they are largely diverse. There are big swings, but I have gotten 9-12% average, over long periods of time.
Inflation is similar to a stock split. If you can understand stock splits, you have a rudimentary understanding of inflation.
Here is some extra information that may be too much info: Add in population growth, and realize how money supply has to at least increase to keep pace, for every worker to maintain the same pay. (in theory) Some nation’s citizens like the relative stability of the dollar’s value, and trade or have savings hedged with dollars. These dollars essentially drops out of money supply. Their trade velocity drops for these dollars. There are so many variables, that economists look at inflation measures to see how they are doing. These indicators are always 6 months or so behind, so they are always flying by only being able to look behind their plane.
A little bit of inflation is a fuel for economic activity. If money doesn’t lose value people have less incentive to put it to work; if it gains value(deflation) people have all the incentive to hoard money.
Currency has no inherent value, it’s purpose is to facilitate trades(economic activity). Products and services are the real value in an economy.
That being said inflation is a real tax and disproportionately hurts the poor.
I’ve been taught that inflation deincentivizes hoarding wealth too, but seeing how wealth is still hoarded, I’m not convinced it’s an effective tool.
That’s the difference, they hoard wealth and not currency. The value of assets do not go down when currency loses its value with inflation.
Wealthy have little to no cash that would lose value with inflation, they just buy everything on credit and have their wealth tied to assets and investments that probably gain value at least at the pace of inflation.
It’s still true that a deflationary economy would be a mess though. If we had deflation, the rich wouldn’t even bother investing and would literally just sit on a pile of gold like Smaug. I know trickle-down doesn’t work but an economy where nothing circulates would be hellish.
Wealth is hoarded; cash is not.
Inflation happens when rich people find out you’ve got more money and rush to fuck you out of that too.
That’s why any kind of tax break, stimulus or welfare is met with “but inflation!”
Experts in pseudoscience may claim “it encourages people not to horde wealth!” but it’s just another lie that makes rich people richer when it fails to deliver for the 1000th time.
Monopoly means inflation. No antitrust means inflation. Companies colluding to fix prices an essential goods? You guessed it: inflation
Monopoly means inflation. No antitrust means inflation. Companies colluding to fix prices an essential goods? You guessed it: inflation
Everyone seems to be missing the most dangerous part of deflation: If prices fall year over year, collateralize credit becomes incredibly unstable. If you borrow a million dollars from the bank to build a house and then in five years that house is worth half a million…well you would be stupid not to walk away for your loan and leave the bank with a half million dollar hole in its balance sheet. If the whole market does this consistently year after year then banking becomes impossible and the whole system collapses. Weve had this happen before, such as during the Great Depression and very briefly during other market crashes like in 2008. If a central bank has to choose between inflation and deflation, they will choose inflation every time.
So you’re saying that deflation hurts the banks? Oh no! Not the banks!
Fuck regular people, right? A home is obviously an investment first and shelter second. Why would anyone need a home to live in, if they can just rent it out for obscene amounts of money, because banks have to have infinite profits?
It doesnt hurt the banks, it destroys them. The modern economy is unable to function without banks. I suppose if you were in favor of entirely destroying the modern economic system, long term deflation would be the easiest way to do it. Dont expect some sort of socialist utopia to come out the other side though. Last time we had a serious deflationary run we ended up with a handful of obscenely wealthy robber barons and a world war.
Last time we had a serious deflationary run we ended up with a handful of obscenely wealthy robber barons and a world war.
Should we at least, differentiate deflation due to technologies, deflation due to stagnant economy and “price slashing” and those desperation crimes?
We should acknowledge deflation due to technology, right?
Couple it with no “passive income” pumping money for the “rich reservoirs”, overall prices gets cheaper in line with everyone’s active earning? (All it takes is remove the “passive income economy” that generates nothing but “financing”. Tax/donations does the same, without interest being created?
Yes, companies can save money because one person with a computer can replace a whole pool of secretaries or a room full of people doing mathematical calculation. You can buy a whole wardrobe of full of clothes for what a few outfits might have cost before, thanks to automation and cheap foreign labor. Weve seen quite a bit of that in the last 50 years. It means you can buy all the mass produced plastic crap you want, but you cant afford a house to put it in. And it has resulted in a MASSIVE boost in wealth equality, its just that it was a global phenomenon and it was the poor people in places like India and China that experienced it.
There’s a difference between sitting on a house for a decade to sell it at 10x the price and the simple fact that the builder of a house needs to make a profit over the cost of building it
If you borrow a million dollars from the bank to build a house and then in five years that house is worth half a million…
I don’t understand much. What so bad about house losing value, if we never intended it as capitalistic investment?
Everything suppose to be “utilitarian” basis instead of ever-inflating “profit” basis that hurt majority, no?
Just my curiosity why deflation is a bad thing, other than monetary incentive system broke down and no one working (right now, monetary system still broke down on opposite spectrum due to purchasing power collapse, I assume?)
Edit: clarification
Profitable or not, a house is a shelter, not renting or trading item? (This is what I meant by capitalistic mindset, not about corporation, but the very profit mindset of human.)
Edit2: clarification2
Yes, same opinion on investment and passive income. All capitalistic nature. Impossible to earn passively unless someone or some machine enslaved, right? Yet everyone love passive income idea so much, pumping profit everywhere, more money more inflation, no? In the past, people might save years to a house, now, people earn endless passive income to no house, I think that’s the very reason to it. Passive income is somehow bad. (Not to be mixed with voluntary welfare system, passive income is auto sucking involuntarily, iinm)
Edit3: clarification3
So about the house worth dropping. In bookkeeping, historical cost don’t drop. However, future value inflation exist thanks to “profit future inflation”. So, we still have to settle book value of loan, I don’t get it how the value dropped though? A liability is a liability, not to be messed with “
inflatingfluctuating market value”, no?Im not sure what you are trying to say exactly. If you are running your responses through a translator you might try using smaller words so more of the meaning comes through.
Say you owe the bank roughly a million dollars and the house is only worth half a million. If you continue to pay the bank, you are paying double price for your house, plus interest. If you defaulted on the loan you could show up at the bank auction in a fake mustache and get it for half price. There are people out there who would work themselves to death to pay their mortgage because they see it as their sacred duty to the bank. Those people are suckers, and they end up very poor in this scenario.
Now keep in mind that this isnt just house prices were talking about. Stock prices, salaries, food, land, machines, fuel, clothing, vehicles, every month the price of all of it goes down and the value of little slips of paper goes up. This is the ultimate passive income. If you are rich you cash out everything, put your paper in a vault and each month you become richer. There no investment, no economic growth, no liquidity. The economy strangles to death while the people with all the paper control everything thats left.
This is the dream of all the gold, silver, crypto bugs trying to create deflationary currency. They figure they can stockpile enough of the new currency now and come out the other end of the disaster as the new owners of everything.
Even if the value of money goes up, it’s by a paltry 1-2% and it still wouldn’t seem to make sense to hoard rather than invest, unless I’m missing something. In what scenario would any rich person just sit on their money? Likewise, the impact of 2% deflation on a bank loan is well within the variance in rates we see today, and I imagine in such an economy the rates would be adjusted somewhat to compensate.
Simply put, the difference between an inflating vs deflating currency doesn’t seem enough to drastically alter people’s behavior. In the short to medium term it seems almost a non-issue, at least for regular people, and in the long term people won’t get fucked out of their life savings. I imagine the vast majority of the population doesn’t invest their money. Which policy would they prefer?
Tiny short term changes either way will not be enough to drastically alter people’s behavior. If those changes are long term and predictable they will absolutely change people’s behavior. 2% may not be much year over year, but over a 30 year mortgage you can expect to take a bath on any house you buy, even with 1% interest rate. And people, rich and poor, do horde cash when they think that returns are going to become negative. In a very mildly deflationary world this happens much more often than in an inflationary one.
Let me try understand this.
Say you owe the bank roughly a million dollars and the house is only worth half a million. If you continue to pay the bank, you are paying double price for your house, plus interest.
Material cost or anything spent never change? We can’t regret buying expensive computers in past? Everything, even if loan. Loan only default on bankruptcy, “no property ownership ban”? Do people want that?
There no investment, no economic growth, no liquidity.
Incentive of “profit” system. Until it backfires with overloaded money. Active income generate economy of production + money. Passive income skip production, overloaded money, inflation. Without profit system, big projects can only funded by slower tax/donations. But no one creating extra profit/inflation.
So you now get my point? Deflation happens because of good automation (slaving machine). Stopping passive income investment stops inflation. While waiting new automation, things get lesser labour and no inflation to demand additional income.
Where’s the loophole in my opinion?
I agree, it’s only natural a house would decrease in value after it’s been built. Just like cars or anything else. You could mitigate that by renovating etc of course.
Thats depreciation, not deflation.
Well yes. I have a cold and can’t think but I mean inflation makes the price go the other way.
It’s almost like endless profit is baked into the system. Guess I’ll continue never owning anything and generational wealth will be the only wealth left soon
Because once a corporation increases prices due to “supply and demand” or whatever bullshit reason they make up that week, those prices never go back down if the reason changes. conveniently.
Every corporation will say “we need to increase the price on “x” because the primary supplier in Bolivia is facing economic turmoil…blah blah blah.” But once that turmoil is over and supply returns to normal, they don’t bother taking the prices back down and rely on the fact that modern society is too distracted by their “conveniences” to care.
“The people will not revolt. They will not look up from their screens.” – a stage play based on George Orwell’s 1984
They (the super-rich) have created a class of people beneath them who don’t notice or care that they’re being fucked over so long as they are provided with more and more vapid content to consume.
“The people will not revolt. They will not look up from their screens.” – a stage play based on George Orwell’s 1984
Striking line–now we just have to figure out how to get people off their screens and onto streets.
Things either need to be really, really bad and people are done or we need to find what they care about more than being comfortable. I was not always politically active. It took until my late twenties and seeing how bad things can really be. I have been an activist on the human rights front for about a decade. And it only happened because I really saw the issues in my country and continent. But while my family knows as I make sure they know, and some kind of care, it is not important enough for them.
But weirdly. My country had literal neo-Nazis as a minister and everyone with a brain thinks we still do as bids of the same feather and so on. And suddenly my leftist but not active friends became active, online and outside that. It is weird when I have been warning that this is the road we are on for the better part of a decade it took it to happen for people to take action. Thankfully we are still solidly democratic so this might work. At least for a few years.
Prices go down all the time. You literally watched egg prices fall like 4x this year.
Inflation is a tax on hoarding money. In an ideal world, it will push rich people and companies to reinvest their wealth in the economy, instead of hoarding it. Unfortunately, in the real world it doesn’t work on the very rich, so it only affects the upper middle class and the moderately rich.
all these takes kinda suck.
The people most affected by inflation aren’t the rich at all. Theirs a whole generation inflated out of housing. Some might understand that as modern serfdom.
Inflation is a tax on hoarding money.
It’s a tax on my savings and my retirement. My savings lose 2% a year, on purpose. This means I have to play in the investment game to so much as break even. I’d rather not have to play the stock market game and just save my money for retirement without it losing value.
I’d rather not have to play the stock market game and just save my money for retirement without it losing value
Which is exactly what they mean by hoarding money. Everyone would prefer that, and if everyone did, all that money would be taken out of the economy. Instead we’re all motivated to invest in things, which keeps the economy growing and healthier for all of us.
Yeah it only works on the money. Holding income-generating assets isn’t affected because people can increase rents to maintain the same income stream.
Income-generating assets are doing something to generate that income, which is presumed to have some beneficial effect on the economy more than cash sitting under your mattress does.
More than 90% of the money we use does not come from the central banks, i.e. does not exist as cash and is not backed by the government directly. Instead it is book money. Here is how this works:
When a bank lends you $1000 at 10% interest for a year, they don’t physically have that money. Instead, they write into your account: We owe you $1000. They also write into their account: Skaterboy42069 owes us $1100.
See how the $1000 you have in your account just appeared out of nowhere? They are of course balanced by the bank’s $1000, but there is an extra $100 (the interest) that was created permanently. It’s up to you to come up with a way of making those extra $100 in one year. Now apply that to the entire monetary system and the whole economy, and you see how the only way is up.
As an aside: This is also precisely the reason why we need ~2% GDP growth annually, and any standstill or even shrinking is an absolute disaster. Debts don’t get repaid and are defaulted on, and money literally evaporates. Ask yourself this: imagine GDP drops 10% over night and what that would do to the economy. Why would that be such a disaster if it would simply send us back to about 2018 GDP-wise (when we all lived in caves)?
A few good comments and quite a few… not so good. A lot of explanations that focus on 2nd order, downstream effects and the machinations of economists and politicians. Price is one of myriad ways to measure the past & current state of the economy and to make guesses about its future.
“Inflation” is what we call it when it costs $1.00 to buy a dozen eggs last year and $1.10 to buy a dozen of the same eggs this year. "Deflation"is what we call it if the price goes down to $0.90 this year. Just to set some terminology.
No one person or group or policy or activity causes inflation or deflation. It’s just a measure of buying power.
But there is one key difference between inflation and deflation: the latter has a limit. Prices can go up forever, but they can only go down to $0.
So when all the people are trying to craft policies that influence the economy, they don’t want the economy to go in the direction of the brick wall of $0 prices.
It’s probably the case that inflation is the only thing that can happen and have a functioning economy over the long term. If that’s the case, then keeping it low is the best approach, which is why the American economic establishment has a target of 2% inflation.
It depends on how you define things on if it has a lower bound. If you’re talking percentage, it’s infinite. It’s Zeno’s Paradox. If you decrease by half, then decrease it again the second halving is less than the first, and this continues forever, never reaching zero. It approaches zero as we take the limit to infinity, but we can never reach infinity obviously, and yes, we could divide a penny if we need to. Since inflation and deflation work on percentages, not descrete values, deflation could never reach zero.
Inflation is a useful tool though. It makes it so spending money now is better than saving. Deflation makes saving money better, which slows the economy. Basically, things have to go very wrong to make deflation happen because tools will be used to prevent that.
I’m a little confused and not knowledgeable on this at all so I’m genuinely curious: if inflation goes crazy for years, like 8% for 4 years let’s say, why is there no concerted effort to drop it for a while, like -5% for 4 years, to “bring it back” to the 2% aimed for originally? If that makes sense. It seems like if inflation gets insane we’re all just stuck with it for the rest of time?
No expert, but another advantage of inflation is to create incentives to invest/spend money. With a deflation you are rewarding people that keep their money in a pillowcase. Which is probably bad.
Additionally there probably are some control structures to increase or decrease inflation, but they will bring their own cost with them. So controlling Inflation may be not controllable enough/not worth it to do so.
Bitcoin is deflationary and why it has failed as an alternative currency. Nobody wants to spend it. HODL.
If prices go up, and stay up, eventually things like salaries have to go up too, at least a bit. If you need a certain amount per month to live when last year you could get by on less, you’ll need a job that pays you enough to live. In theory if the price of goods has gone up then the value of whatever you’re producing for your company has gone up so they can afford to give you the extra (in practice they take a lot of the extra as profit and pass on just enough to retain employees and no more). Of course, it’s the same physical item, so eventually it all sort of balanced out.
You can see this if you look at it in the long term. In 1970 the average salary in the UK was something like £1200 per year, and a house cost £4500 or something. Today the average UK salary is over £27,000 and a house is around £285,000. The houses haven’t got 61 times larger or anything, that’s just inflation. So, yeah, you kind of are just stuck with it.
There are many reasons for inflation, but the biggest in Capitalistic economy is the interest and that there is no Gold the money is tied to. Basically, they can print out as many dollars as they want. There is no Gold standard.
In 3 words: printer goes brrrr
Tldr our economy is designed this way. The federal bank sets monetary policy to maintain inflation.
I just took an econ-102 course intro to macroeconomics that covers this. It was free at my community college. I recommend doing it!
hints :
- inflation increases the nominal amount of tax on added value, good for countries balance sheets
- inflation decreases the real value of sovereign debts
- a company will never lower its prices as long as sales do not plunge
- energy actors only look at natural gas prices when it raises, never when it comes down
you could add your own items to the list, it’s a long one.
Deflation discourages spending at all levels, because why spend right now when your cash will be worth more later? This kills any economy.
Inflation (of the supply of money in circulation) is caused by an increase in the supply of money in circulation. As the number of US dollars in circulation increases, inflation (of the money supply) is experienced.
We experience inflation instead of deflation because the ones who control the supply of money have chosen it.
And while many commenters are defending inflation as good and necessary, there is an argument that inflation punishes individuals who save or are on fixed income. Inflation of money supply is also described as “devaluation of currency”- it is becoming less valuable over time. Inflation could also be described by a “loss of purchasing power” which means a person can buy fewer goods and services with the same amount of money as the currency loses its value.
To offset this “tax”, people must put their money in places that will grow. Government bond’s interests are close to inflation, for example, and are seen as the safest of investments.
Yikes 😳
Because capitalism = cancer. It survives on endless growth. it hates retraction, even if the host survives longer.
So they print money and target inflation. They take actions that MAKE it so things never deflate.
Because our monetary supply is controlled by an entity that can print new money but doesn’t have any good way to take money out of circulation.
Yes? Everytime a loan is payed back the money supply decreases.
Consider a series of transactions for a certain amount of money. Each transaction has a tax cost, that reduces that “certain amount” of money. On average, six transactions return all of that “certain amount” of money back to the treasury/ per Krugman.
Taxes don’t take money out of circulation. The government spends that money.
Taxes take the money out of circulation, and the government AGAIN spends the money. It is two transactions. This technicality is important. Following where the money goes and the steps that it takes to how it gets there is how you get some understanding of economics. Government bonds are the safe haven in that largely stays even with inflation. That funds the government in a large way. Taxes, to an increasing degree, pay the interest on that debt. The interest rates set by the government set the interest rates of corporate bond, of the giants to the little consumer rates by risks taken. These, together, fund loans, which fuels America’s economic engine. High interest means slowed growth. Low rates spurs growth.
Poor people are dependent of governments to survive. And when people are dependent, they’re easier to control when you can threaten to take that away.
