frugalista Posted May 23, 2006 Share Posted May 23, 2006 Genuine question. Why is the BoE inflation target above zero at all? frugalista Quote Link to comment Share on other sites More sharing options...
El_Pirata Posted May 23, 2006 Share Posted May 23, 2006 Genuine question. Why is the BoE inflation target above zero at all? frugalista It's the lesser of 2 evils. Deflation is a far scarier beast. Unfortunately it is also what we will get when this bubble pops. Quote Link to comment Share on other sites More sharing options...
Wuluf Posted May 23, 2006 Share Posted May 23, 2006 Genuine question. Why is the BoE inflation target above zero at all? frugalista Probably due to the debt based monetary system and the time based value of money.. 0% == contraction (Methinks ) i.e. deflation Quote Link to comment Share on other sites More sharing options...
SHERWICK Posted May 23, 2006 Share Posted May 23, 2006 Genuine question. Why is the BoE inflation target above zero at all? frugalista apparently you need some (constant) inflation to enable some (constant) growth to take place. Learned this in economics last year but have forgotten the details... Quote Link to comment Share on other sites More sharing options...
Harry Sacks Posted May 23, 2006 Share Posted May 23, 2006 Because if it was zero the BoE would no longer be able to print new money and put it into circulation as debt. Inflation at 2% keeps a level of demand present, enough to keep the whole scam going. Quote Link to comment Share on other sites More sharing options...
thx_1138 Posted May 23, 2006 Share Posted May 23, 2006 apparently you need some (constant) inflation to enable some (constant) growth to take place. Learned this in economics last year but have forgotten the details... perhaps you need some (constant) inflation to give the illusion of (constant) growth? Quote Link to comment Share on other sites More sharing options...
MarkG Posted May 23, 2006 Share Posted May 23, 2006 (edited) It's the lesser of 2 evils. Deflation is a far scarier beast. So you'd prefer that the price of computers hadn't deflated, and your PC cost a trillion dollars, took up an entire six-story office block and consumed a gigawatt? Why is that? Why do you think that becoming poorer every year is 'less scary' than becoming richer every year? apparently you need some (constant) inflation to enable some (constant) growth to take place. Nonsense. You need inflation to keep the 'financial services' industry in business: you can easily have growth without inflation, if prices deflate instead. With deflation you stick pound notes under your mattress and naturally become richer as prices drop. With inflation you need an entire industry which exists solely to increase the value of your money by a similar amount. Inflation is just another tax to encourage people to spend and borrow rather than save, and to funnel more of our money to the banks. Edited May 23, 2006 by MarkG Quote Link to comment Share on other sites More sharing options...
JustYield Posted May 23, 2006 Share Posted May 23, 2006 (edited) A little bit of inflation is healthy - if supply and demand are in balance with demand creeping up slightly (because the economy is healthy) you will get inflation (and growth). Its the economy's lubricant. Too much inflation means suppliers are taking the p1ss or there are genuine shortages. Too little or zero inflation means there is weak demand and this could tip into deflation, where everyone holds out for lower prices and the economy tanks. That's the way I look at it, anyway. Good qn. JY Edited May 23, 2006 by JustYield Quote Link to comment Share on other sites More sharing options...
MarkG Posted May 23, 2006 Share Posted May 23, 2006 Too little or zero inflation means there is weak demand and this could tip into deflation, where everyone holds out for lower prices and the economy tanks. If 'everyone holds out for lower prices', then they're obviously not buying things they actually need... otherwise they'd buy them now rather than wait. So what's the problem? We've built up an entire economy based around people making tat to sell to others who spend their time making tat to sell to others in order to buy the tat they didn't need in the first place. How is this a good thing? Why would the collapse of the tat-based economy be a bad thing? Quote Link to comment Share on other sites More sharing options...
Magpie Posted May 23, 2006 Share Posted May 23, 2006 With deflation you stick pound notes under your mattress and naturally become richer as prices drop. No sure why that would be so good though? Wouldn't it just mean everyone putting their pound notes under their mattresses and gloating about how rich they were? And no one spending any money in the economy... Quote Link to comment Share on other sites More sharing options...
BayAreaBear Posted May 23, 2006 Share Posted May 23, 2006 The answer to this question is complex but here is a summary. The fact that we "need" inflation" is a lie. A Keynesian nonsense long recognized as a fallacy but nevertheless very convenient for the state because it allows them to take all the economic growth. In a sound money world we would not need a central bank at all. In a sound money world consumer prices would be constantly falling and that is how the ordinary person would see economic growth. Salary stays the same - falling prices - life gets better. There would be tremendous stability in the economy and that would enable business people and entrepreneurs to make better and more error free decisions. Free of the clustered errors caused by the central bank and resulting in the boom-bust scenario. Better still when the government wanted to subsidize good for nothings or have wars they would have to actually tax people the true cost. This the people would not accept. Therefore we would have fewer good for nothings, useless and overpaid civil "servants" and fewer wars. Ah what a wonderful world that would be!! BAB Quote Link to comment Share on other sites More sharing options...
Magpie Posted May 23, 2006 Share Posted May 23, 2006 A little bit of inflation is healthy - if supply and demand are in balance with demand creeping up slightly (because the economy is healthy) you will get inflation (and growth). Its the economy's lubricant. I agree with this. Modest inflation is not a real problem. It's only when it starts to get out of control that it is a real concern. In a sound money world we would not need a central bank at all.... Ah what a wonderful world that would be!! We used to have a sound money world, based on gold. It mostly meant tinpot kingdoms launching wars on each other to try and grab each others' gold. It wasn't much like this lovely warm fantasy. I understand all the nostalgic aspects of the goldbug argument, and I agree that some of the problems of excess liquidity and inflation around at the minute are iniquitous. But it's all a bit of a rosy view of human nature to think that chucking away modern economies and going back to gold will solve it all. Quote Link to comment Share on other sites More sharing options...
MarkG Posted May 23, 2006 Share Posted May 23, 2006 (edited) Wouldn't it just mean everyone putting their pound notes under their mattresses and gloating about how rich they were? If they don't have anything worthwhile to spend their money on, why is that a problem? Should they go out and buy tat just because they can, or should they continue saving their money until there is something worthwhile to do with it? At least you seem to recognise that inflation is a deliberate attempt by the government to punish saving. It's such a shame that policy is disastrous in the long run, and we're now reaching the end of the 'long run'. It mostly meant tinpot kingdoms launching wars on each other to try and grab each others' gold. Unlike today, of course, when tinpot kingdoms launch all-out wars on each other to try to grab each other's oil. At least in the 'bad old days' only the soldiers usually died (and most of those were mercenaries), not vast millions of civilians too. Edited May 23, 2006 by MarkG Quote Link to comment Share on other sites More sharing options...
Magpie Posted May 23, 2006 Share Posted May 23, 2006 There would be tremendous stability in the economy and that would enable business people and entrepreneurs to make better and more error free decisions. Except that the severe restrictions on borrowing in a "sound money world" would make it all but impossible for entrepreneurs to innovate and speculate. Until you started to issue bonds and shares, and charge interest and do all the terrible things that led to modern industrial society... Quote Link to comment Share on other sites More sharing options...
HAL Posted May 23, 2006 Share Posted May 23, 2006 perhaps you need some (constant) inflation to give the illusion of (constant) growth? No economist myself but would have thought that Interest Rates are needed when ever you have borrowing - i.e. it is an incentive to those that lend money to others. Inflation should simply be a reflection of supply and demand and when aggregated during periods of a growth will lead to increased prices wich is what inflation is - equally when growth turn negative this should lead to deflation (but seldon does see point below). So inflation and Interest rates are connected but is also complicated by the fiat system which has the effect of devaluing money (by printing more of the stuff) and acts as a positive offset to both inflation and Interest Rates. HAL Quote Link to comment Share on other sites More sharing options...
JustYield Posted May 23, 2006 Share Posted May 23, 2006 If 'everyone holds out for lower prices', then they're obviously not buying things they actually need... otherwise they'd buy them now rather than wait. So what's the problem? We've built up an entire economy based around people making tat to sell to others who spend their time making tat to sell to others in order to buy the tat they didn't need in the first place. How is this a good thing? Why would the collapse of the tat-based economy be a bad thing? No judgment about good or bad, just attempting to answer frugalista's question. If we all lived frugally the existing economy would also collapse. The smart ones don't play the consumerist game and protect themselves from inflation. But this is at the expense of the many who keep each other in meaningless jobs. JY Quote Link to comment Share on other sites More sharing options...
MarkG Posted May 23, 2006 Share Posted May 23, 2006 Except that the severe restrictions on borrowing in a "sound money world" would make it all but impossible for entrepreneurs to innovate and speculate. Indeed. That'll explain why there was no innovation before the 1930s when we scrapped the gold standard (or, if you prefer, the 1970s when Nixon scrapped the dollars for gold standard). Quote Link to comment Share on other sites More sharing options...
Magpie Posted May 23, 2006 Share Posted May 23, 2006 (edited) If they don't have anything worthwhile to spend their money on, why is that a problem? Should they go out and buy tat just because they can, or should they continue saving their money until there is something worthwhile to do with it? At least you seem to recognise that inflation is a deliberate attempt by the government to punish saving. It's such a shame that policy is disastrous in the long run, and we're now reaching the end of the 'long run'. I agree that there is a big part of the economy that is based on tat. But a modern industrial economy also supplies many useful things. Books, decent clothes, radios, medicine, all mass-produced, but not tat. Your argument sounds appealing, but you'd be throwing the baby out with the bathwater if you decided we all ought to be only spending money on what we absolutely need. Are a few fatuous commodities such a terrible thing seen as a minor part of an overall economic system? I agree that inflation discourages saving, but when inflation is moderate and interest is available at reasonable rates (as well as other speculation) it is possible to maintain your wealth. High inflation is a terrible thing. Modest inflation probably does encourage consumption to some degree, but it's not like you have to run out and spend all your money today because tomorrow its value will have halved. Indeed. That'll explain why there was no innovation before the 1930s when we scrapped the gold standard (or, if you prefer, the 1970s when Nixon scrapped the dollars for gold standard). I see the move away from the gold standard as merely one part of a gradual loosening of monetary principle that included the lending of money at interest (banned by Christianity until quite late). the issuing of bonds etc to fund capital projects (railways, canals, draining the fens - all only feasible once large banks were able to lend at interest, and bonds could be issued by companies) and so forth. All of these changes made money less "sound" (less "real" if you like) and were seen as the devil's work at the time. And they do create genuine risks and problems, at the same time as they are a huge part of the way that modern economies operate. Edited May 23, 2006 by Magpie Quote Link to comment Share on other sites More sharing options...
JustYield Posted May 23, 2006 Share Posted May 23, 2006 Modest inflation probably does encourage consumption to some degree, but it's not like you have to run out and spend all your money today because tomorrow its value will have halved. Cue "wheelbarrow of Reichmarks" picture. It's also an incentive for timely capital investments (whose returns protect the capitalists against inflation!) that in theory should benefit the economy. There is an element of not wanting the economy to stop, to keep the wheels turning and to discourage capitalists sitting on unproductive savings and becoming complacent about their wealth (heaven forbid!). JY Quote Link to comment Share on other sites More sharing options...
Tuberider Posted May 23, 2006 Share Posted May 23, 2006 Because if it was zero the BoE would no longer be able to print new money and put it into circulation as debt.Inflation at 2% keeps a level of demand present, enough to keep the whole scam going. IMHO above sums it up nicely Quote Link to comment Share on other sites More sharing options...
BayAreaBear Posted May 23, 2006 Share Posted May 23, 2006 Except that the severe restrictions on borrowing in a "sound money world" would make it all but impossible for entrepreneurs to innovate and speculate. Until you started to issue bonds and shares, and charge interest and do all the terrible things that led to modern industrial society... Who said there would not be bonds, shares and interest in a sound money world. There would be all these things. There would also be plenty of borrowing and lending. The difference would be that you could only borrow someone elses savings. Not your own future income. And it would not be lent to you without the lender being pretty sure shes going to get it back. Note also that the ordinary working stiff like you and me could save money without having to speculate. They could save gold and earn the average investment return of the economy. Thats what would be returned to them by falling consumer prices. In the world we live in now any attempt to save in fiat currency just results in impoverishment (witness the current housing bubble). Thats what you get when people realize its stupid to save currency - they save houses (or whatever the mania of the day is) instead. Investment must be financed with saving and fuels growth. In a world where savings are encouraged growth would be much larger. Soon the people will realize that saving houses doesnt work and clearly we are in a process of the world discovering sound money again. Worldwide people are saving gold again. Its awesome to behold. The remonetization of gold. Quote Link to comment Share on other sites More sharing options...
Magpie Posted May 23, 2006 Share Posted May 23, 2006 (edited) Who said there would not be bonds, shares and interest in a sound money world. There would be all these things. There would also be plenty of borrowing and lending. The difference would be that you could only borrow someone elses savings. Not your own future income. And it would not be lent to you without the lender being pretty sure shes going to get it back. Well, bonds are pretty much a claim on future income, and a lot of the modern economy is structured around limited companies, where lenders can't be that sure they'll get the money back. I know it's a complex argument, and we've gone a bit far on the side of dodgy money, but I would argue you need a balancing act rather than anything as simple as "pure" sound money. In the world we live in now any attempt to save in fiat currency just results in impoverishment (witness the current housing bubble). Thats what you get when people realize its stupid to save currency - they save houses (or whatever the mania of the day is) instead. I see the point although I think houses and gold share one thing which is that they have a long term safe value. (Not to deny that the condo speculation etc is a bubble but most property will have some ongoing value, even if it does reduce). If gold is a long term bet, so for many people is property. Investment must be financed with saving and fuels growth. In a world where savings are encouraged growth would be much larger. Don't entirely agree. Like it or not, growth tends to be encouraged by consumption. You can have consumption and savings and we are out of kilter on the balance, but if investment is restricted to saving you get a pretty restricted money supply, and reduced expenditure on for instance capital investment and major works. Soon the people will realize that saving houses doesnt work and clearly we are in a process of the world discovering sound money again. Worldwide people are saving gold again. Its awesome to behold. The remonetization of gold. See my gold vs fiat thread in the economics forum. I think this is a complicated argument but I think blind faith in gold is dangerous. I do however accept that at times of currency collapse gold becomes "real money" (or I prefer to say "emergency money" or "money of last resort"). But at all other times it is simply an asset subject to sepculative booms and busts (viz 1980-82). The key thing is whether or not western currencies are going to collapse and, if so, how soon. If it's soon then the gold argument will be vindicated. It's all about timing though. Edited May 23, 2006 by Magpie Quote Link to comment Share on other sites More sharing options...
Harry Sacks Posted May 23, 2006 Share Posted May 23, 2006 Who said there would not be bonds, shares and interest in a sound money world. There would be all these things. There would also be plenty of borrowing and lending. The difference would be that you could only borrow someone else's savings. Not your own future income. And it would not be lent to you without the lender being pretty sure shes going to get it back. Note also that the ordinary working stiff like you and me could save money without having to speculate. They could save gold and earn the average investment return of the economy. That's what would be returned to them by falling consumer prices. In the world we live in now any attempt to save in fiat currency just results in impoverishment (witness the current housing bubble). That's what you get when people realize its stupid to save currency - they save houses (or whatever the mania of the day is) instead. Investment must be financed with saving and fuels growth. In a world where savings are encouraged growth would be much larger. Soon the people will realize that saving houses doesnt work and clearly we are in a process of the world discovering sound money again. Worldwide people are saving gold again. Its awesome to behold. The remonetization of gold. Hmmm, either you have fractional reserve banking or you don't. I don't think there is anything fundamentally wrong with fiat money, just the way it's issued and by whom. Quote Link to comment Share on other sites More sharing options...
frugalista Posted May 23, 2006 Author Share Posted May 23, 2006 I believe the issues of fiat vs commodity money and fractional-reserve vs full reserve banking are orthogonal. You could have commodity money with fractional reserve banking, e.g. most of the world in the 19th century under the gold standard. You could have commodity money with full reserve banking, e.g. early medieval Europe, before goldsmiths started issuing "extra" warehouse receipts. You could have fiat money with fractional reserve banking (e.g. the world today) You could have fiat money with full reserve banking (dunno any examples of this) In the case of fiat money there are two paradigms, one where the government isssues it when it needs to do some spending (e.g. Guernsey today, 18th century American colonies with "colonial scrip") and another where the central bank issues it when it buys assets (normally government debt) -- most of the world today. So, there is yet a third dichotomy, which is whether to have a government, issuing unbacked (?) fiat money or a central bank issuing debt-backed fiat money. I think there is a lot of confusion amongst money reformers about these different schemes. frugalista Quote Link to comment Share on other sites More sharing options...
Father Fred Posted May 23, 2006 Share Posted May 23, 2006 Inflation is a bad thing as it adds uncertainty. In an ideal world there would be no inflation or deflation. Deflation happens when the economy is in trouble. Real trouble. People don't buy things today because they can buy them cheaper tomorrow. The whole economy goes seriously wrong! And the only ways out of that are government spending and lowering interest rates. But how can the government increase spending when it's tax income is falling due to jobs being lost? Long term real interest rates are about 2% (ie 2% above inflation). If we have deflation of 2% it implies nominal interest rates are likely to be about zero. But that is not low enough to stimulate the economy, and the BoE can't drop rates to stimulate spending. See Japan over the last 15 years - shagged, zero interest rates and not a lot they can do about it other than suffer recession for years on end and hope it'll go away eventually. Basically, inflation is bad, but deflation is 100000% worse. 0% target is sailing far too close to the wind, so they set it at 2%. [Having typed all this depressing stuff up I almost wish they'd set the target at 5% to make sure we don't get deflation] Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.