25% in ten years means les then 2% each year. House market has to collapse as we have seen so many markets collapse. Its not that dramatic in the long run as it first appears. It 'll mean the grabbing for space to live in many places stops and there is grabbing for other resources. (Like space to farm.) That shortage in food however is a reason to worry about the future.

edit: on average we're all poorer then back in 2000 despite technological progress. That is an indisputable fact, agree with you there.

> xeno syndicated wrote:

> First of all, inflation rate is a meaningless stat.

Actual inflation is the key indicator.

Here:  http://www.westegg.com/inflation/infl.cgi

Before you call inflation rates "meaningless," perhaps you would care to explain the difference between my inflation statistic and your inflation statistics?  Interestingly enough, yours states that it's based on the CPI, which... is the exact same as mine... do they use different math, then?  Or is the only difference in question the fact that your data adds up my data for a group of years?

> What cost $100 in 2000 would cost $125.33 in 2010.

Think about this.  In the last 10 years, total inflation has been more than 25%

That is, in order to simply break even on your investments over the last 10 years, you would have had to make total gains of 25%.

That would be an annual return of 2.5%, merely to cover inflation.

And yet the rate of inflation is still speeding up, and very soon bonds will no longer offer returns high enough to cover inflation.

What will happen then, you think Zarf?

The problem with that argument is that it assumes inflation is something brand new.

In practice, business contracts account for inflation in their investments.  For example, banks will set their interest rates for loans at the inflation rate+whatever rate they want to charge to pay for business operations and produce a profit.  In the same way, when bonds are sold with an expectation that inflation will be an average of 2.5% per year, the interest rate on those bonds is likewise set at inflation rate+interest rate, not just an interest rate ignoring inflation.  Remember, adding that extra 2% to an interest rate doesn't add to the real cost of a loan, so it doesn't actually change the transaction itself whether we're talking about a 4% loan in a no-inflation society or a 6% loan in a 2% inflation society.

The thing about the past 10 year's inflation rate is that it's exactly what you want to see in the rate.  There's inflation, yes.  However, since it's at a stable percentage within a relatively small margin, businesses can generally cancel out the impact of inflation, both on the supply side by factoring inflation into expenses, and on the demand side by giving in to inevitable worker requests for additional money (let me put a golden star next to this part for later).

Plus, I just want to make one other note: If you're in a mutual fund that can't even regularly outperform inflation, it's not a problem with inflation.  Your mutual fund sucks at its job. 

Oh, one other note:
This "crisis" you describe is empirically disproven by just about every point in US history.  I took the liberty of testing inflation rates in various other points for comparison.  I just went through years divisible by 5 (to get a relatively unbiased sampling) until I could find some period where we see lower inflation rates.

What cost $100 in 1995 would cost $127.98 in 2005.
What cost $100 in 1990 would cost $131.39 in 2000.
What cost $100 in 1985 would cost $141.12 in 1995.
What cost $100 in 1980 would cost $158.57 in 1990.
What cost $100 in 1975 would cost $200.42 in 1985.
What cost $100 in 1970 would cost $212.61 in 1980.
What cost $100 in 1965 would cost $170.64 in 1975.
What cost $100 in 1960 would cost $131.10 in 1970.
What cost $100 in 1955 would cost $117.74 in 1965.
What cost $100 in 1950 would cost $123.06 in 1960. 

Take a moment and think about that.  You're trying to frame this as some sort of crisis.  However, it took me 55 years of running these numbers to find a scenario with lower 10-year inflation rates than we've had now.  If this was a legitimate crisis inflation situation, the US economy should have collapsed in 1970, 1975, 1980, 1985, 1990, 1995, 2000, and 2005... not including 10-year windows in periods that aren't divisible by 5!

Your own website's statistics disprove the uniqueness of our current inflation situation, and thus of your crisis story.  Are you ready to concede this one yet?

EDIT: Actually, one other note.  In finance, investors actually generally use bond holdings largely as a hedge against bad economic times.  They understand that bonds, especially Treasury bonds, aren't going to produce much growth.  However, they trade growth for the fact that it's probably more stable to buy a US treasury bond than, for example, stock in a US company (because if the US treasury bond suddenly became worthless, the company with stock wouldn't be too far behind).

> Before I respond to your other points, will you concede that if the inflation rate doesn't turn negative for at least a decade, there is serious danger of the global economy collapsing entirely?

Not a chance in hell. 

I've had this debate at home a few times.  There's two extremely important problems which people miss when suggesting a deflationary pattern:

1: Let's play a little roleplaying here.

Scenario 1: You get your paycheck.  You're thinking of buying, let's say a book.  The book is $5.00.  You could buy the book now.  Or you could wait a year and keep your money, at which point inflation would make your money on hand 2% less valuable, and the book would probably be marked up.  Do you buy the book now?  Probably, but it really won't make much difference.

Scenario 2: Now let's ratchet up the stakes.  Pretend you live in Weimar Germany at the time.  Inflation was at a rate where the value of money would drop in half every 3 days.  Insane, right?  But exactly what happened.  Anyway... now what do you do?  There's no question.  You get your paycheck and immediately run to the bookstore to buy that book before the value of your money diminishes (this is actually exactly what happened in the post-WW1 German economy... workers would immediately spend every last time they earned every day in order to outpace inflation).

Scenario 3: Okay, now let's go with your theoretical ideal world.  I'm thinking of buying a book.  I could buy it for $5.00 now.  Alternatively, I could sit my money under my mattress.  In a year, the money's going to be worth 2% more.  Now, I might be willing to buy the book.  However, if I'm absolutely sure I'll see a continuing pattern of deflation, it's going to be more and more difficult for me to actually go buy the book, and it instead becomes more likely I'll put the money under my mattress.

Okay... so what happened in each of these scenarios?  Let's go through them.

Scenario 1: At this point, inflation may be a factor in my decision.  It may not.  However, it's generally a good assumption that if my money sits under a mattress for 10 years, I'll be a net loser of money.  If I want to save money, I still can, but I need to find investments that can outpace inflation.  Either way, though, considering inflation, it becomes a better idea for me to either spend my money or save it in some sort of investment.  Both of these actions help stimulate the economy by injecting capital into other projects.  The result?  The inflation creates an incentive to use money in some way, stimulating growth.  However, it doesn't encourage a particular use of that money.

Scenario 2: So what happened in Weimar Germany?  How did the people react to hyperinflation?  The case studies here are really interesting.  The few banks that did exist ran their interest rates in the thousands of percents, to try making a profit over top of the inflation rate (note: another piece of evidence to prove my statement at the top of the post, stating that business contracts account for inflation).  The consumers would, en masse, spend their money as soon as humanly possible in order to ensure they get the most out of their money.

Okay, so why do I bring up Weimar Germany?  No, it's not just because I like typing.  There's a couple behaviors I wanted to note:
1: Individuals can make assumptions about inflation rates.  In Weimar Germany, the average people were experiencing a period of rapid inflation, and were able to identify both the existence of inflation and the rate of inflation.  Remember, we're not talking about economists here.  We're talking about average people with no economics background.  As a result, exchanges based on future money would be able to take this into account with banks huge interest rates meant solely to account for the huge inflation rates.
This doesn't assume these individuals are constructing economic models of inflation.  Rather, they simply follow patterns from the previous year.  So if inflation was 2% last year, businesses will assume inflation will stay around 2% for the next year, just like how, in this scenario, individuals assumed inflation would remain a constant.
2: Individual spending habits are influenced by inflation.  Simply put, it demonstrates that when inflation does change, people will change the rate at which they purchase.
3: Individual spending habits have aggregate effects.  Remember, every individual is going through these calculations.  Some individuals, such as bankers or anyone working in a mutual fund, may consider inflation to a stronger degree than average individuals.  The result, though, is that the people who do make decisions represent a larger percentage of people making that same decision, having a larger aggregate effect on buying habits.

Now that I've gone into that, what does the deflation scenario mean, then?  If an individual in a deflationary world expects 2% deflation for a year, it's in their interest to hold their money for a year, and gain a 2% return due to the increasing value of their dollar over the course of the year.  So they either put it in a bank account or just hold the money under their mattress.  This means the currency creates an incentive for people as a whole to stop spending money outside basic necessities.

What does that mean for the economy as a whole?  If people are discouraged from actually spending, it first means GDP's going to see an overall drop due to lack of sales.  That's bad thing #1.  Second, the lack of use of money would decrease what we call the velocity of money (the rate at which money is used in transactions).  Money velocity is actually an inflationary trend, multiplying the effectiveness a single dollar has in acting as a medium of exchange.  Anyway, this means the loss of money velocity will accelerate the deflationary trend, which itself further entrenches the incentive to save, creating a cycle of depreciation.

Meanwhile, this actually creates a completely different debt problem for the United States.  While future bond contracts can be adjusted to account for inflation, existing loan contracts can't.  This means it's generally nice to be a debtor when inflation rises (if your loan was written with an understanding that inflation would be 2% per year and it suddenly jumps to 3% per year, your loan effectively became 1% cheaper).  But what about during a deflationary period?  In the same way, if the US offers a 2% return on a Treasury bill and there's a deflation rate of 2%, it means the US is, in effect, paying 4% interest on that bill.  That just effectively doubled the rate of interest paid on that loan.

There's another problem.  How do you actually decrease inflation to a deflationary level?  Depending on the economic perspective to which you prescribe, there's different methods.  However, each method has different problems.

For example, one model of inflation, the Phillips Curve, suggests that short-term inflation is a function of 3 variables: The difference between the natural unemployment rate (the stable unemployment rate for a particular economy, generally 5-6%) and the current unemployment rate, the expected inflation rate (the rate people as a whole consider in price/wage determination... in normal economies, the expected inflation rate is generally the same as last year's inflation rate), and a separate variable for each nation, meant largely to determine the strength of the unemployment variable in influencing inflation rates.  I'm not exactly sure, but I believe in the US, this third factor didn't matter much (the variable for the US economy was close to 1, so if we rounded it, a 1% increase in unemployment would reduce inflation for that year 1%).  This model has actually shown to be correct for short-term inflation, indicating that inflation has a directly inverse relationship to unemployment (meaning to trigger deflation, you have to trigger unemployment).  The implication of this, then, is that if a nation wants to decrease inflation, to do so they need to increase unemployment (or, in the case of the current economy, keep unemployment near current levels).  Long story short, though, to get a deflationary economy actually requires that you force higher than normal unemployment rates, perpetuating economic problems even before the actual deflation occurs (To be fair, according to the Phillips Curve model, it would only require one year of higher unemployment.  After the one year, the public perception of future unemployment would adjust to assume prices would deflate, so the goal could be reset to normal unemployment).  But the Phillips Curve is only one portion of the puzzle.

A monetarist model, in contrast, argues that inflation is largely a result of money supply changes, determined both by the amount of currency and the velocity of money.  This one creates its own problems for a deflationary scenario in that deflation suddenly becomes hard to stop.  Let me use an equation here:

C*V=M
M=Money supply, C=Currency, V=Velocity of money.

This is the actual monetarist equation used to determine total money supply, barring the fact that I changed the symbols.  But they mean the exact same thing.

Let's assume that, before a deflationary trend, M=1,000, C=100, V=10

Deflationary trend begins.  Some money was pulled out of the market.
999*10=9990

Now, as per my description above, in a deflationary trend, people will be encouraged to not spend as much, reducing the velocity of money.  Let's assume, for the purpose of simplicity, over 10 years, the currency amount drops 10%, and the velocity of money drops 10% total.

900*9=8100

Let's also say this is the change from last year's money supply rate in a 10-year trend, described as:
905*9.1=8235.5

Now what happens when the government wants to reverse this trend?  Remember, the economy hasn't necessarily been healthy during this period.  In addition, the government will want to retain overall control over the money supply to ensure it can still be manipulated.  Now, the velocity of money half of the equation is largely a result of expectations of inflation.  Thus, in order to stop that velocity drop, the government needs to actually create an inflationary trend.  Otherwise, it will be useless.  So 8235.6 has to be the minimum result to restart inflation and end the future expectation of deflation.

915.07*9.0=8235.6

Remember, the money velocity was being held back largely because of the expectation of inflation.  So what happen the next year?

915.07*10=9150.7

Boom!  The velocity of money jumpstarts... 10% inflation!  Now we have two problems.  On the government side, the government needs to retract its move and buy back more currency to stabilize the supply.  On the consumer side, we just had a deflationary trend, followed by inflationary overcompensation.  If there's any scenario at which people can't create bonds and loans that account for inflation, it's when inflation is moving in an unstable direction between multiple distant points.  THIS is where you would see the bond collapse you described, if anywhere.

The problem is that the only way to overcome the loss in money velocity is to print too much currency in order to make the people expect inflation to start.  However, once you restart the economy, the result is a rebounding inflationary period, which must then be controlled.

> xeno syndicated wrote:

> I mean, Zarf, if we can't agree on the obvious, how can we have any constructive dialogue?

When yields on t-bills no longer cover inflation, interest rates will have to rise, and then the housing market will collapse, but this time finally.

And then what?

The question of what is "obvious" is often up for debate.  For example, as a student who actually studies economics and reads the works of economists who studied and created economic models that can accurately predict inflation, I think my side of this debate is extremely obvious.  That being said, if two people recognize that what they think may be "obvious" actually has ground for where an educated argument would still see disagreement, there's just as much ground for people to understand one another as there is with an issue that isn't "obvious."

What cost $100 in 1995 would cost $127.98 in 2005.
What cost $100 in 1990 would cost $131.39 in 2000.
What cost $100 in 1985 would cost $141.12 in 1995.
What cost $100 in 1980 would cost $158.57 in 1990.
What cost $100 in 1975 would cost $200.42 in 1985.
What cost $100 in 1970 would cost $212.61 in 1980.
What cost $100 in 1965 would cost $170.64 in 1975.
What cost $100 in 1960 would cost $131.10 in 1970.
What cost $100 in 1955 would cost $117.74 in 1965.
What cost $100 in 1950 would cost $123.06 in 1960. 

These are huge inflation levels. 

1% inflation is sustainable, not 2%, and certainly not 10%

It is a crisis, and has been a crisis since the 1970s when the gold standard was completely abolished.  Now people are dumping the dollar for gold, especially the Chinese.

it makes it a lot easier to argue without listening to you ^.^

without knowing what technology will be discovered within the next 50 years i see it impossible to predict how rough or long a depression would last. as long as people continue to put effort into the financial market i cant see it collapsing, there may be points of drastic measures or financial shifts, but the system will still be there in some form. it will most likely take a major advance in technology to make a large expansion possible

I'm not ignoring your posts.  I simply don't have time to go through them thoroughly and respond to each point you make.  I honestly wish I could, though.  That is not to say your points aren't valid and sound.  Some of them I totally agree with.  The problem is, though, that we differ on foundational principles, such as whether recent levels of inflation are sustainable, and the relevance of the inflation rate as opposed to actual inflation.

Therefore, when I take one of you points, for example "the interest rate on those bonds is likewise set at inflation rate+interest rate", we come to an impasse.

Apparently the total cumulative inflation for August 2009 - August 2010 was only 1.15%, with an inflation rate of only 1.63%.  This doesn't sound bad on the surface at all, right?  Fully sustainable, it seems, doesn't it?  However, the total cumulative inflation for the 10 year period prior (August 2000 - August 2010) was 26.34%.  Yet the inflation rate (annual) remained a seemingly sustainable 1.63%.  How could we have gotten a 26.34% increase in inflation over 10 years with a seemingly sustainable inflation rate of only 1.63%.  Well, it is because it is compounded.  A 1.63% increase of $100 in one year brings us to $101.63 the next, and the next year the 1.63% inflation rate is attributed not to the original $100 but the new amount of $101.63.  This exponential rise give us over the period of 10 years the 26.34% rise in prices, in ACTUAL inflation, which is the true indicator.

So let's take a look at yield on bonds:  http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

With the inflation RATE for this year and subsequent years expected to be in the 3% range, the bond market is speculated to collapse.

Basically, this article makes my point:

"In early September, the yield on the 30-year Treasury bond sank to a new low of 3.2 percent, while the 10-year note fell to 1.9 percent. If the inflation rate stays anywhere close to its current modest 3.6 percent pace, long-term investors will be guaranteed to lose money after factoring in inflation's toll.

[...]  'I wouldn't lend money to anybody for 30 years at 3.2 percent, especially not the U.S. government,' says Carl Kaufman, manager of the Osterweis Strategic Income Fund, which has delivered a peer-beating 7.3 percent annualized return over the past five years.

[...]  With the likely returns for Treasuries so low, Inker believes that emerging-market stocks are actually less risky than Treasuries for long-term buy-and-hold investors."

http://www.bloomberg.com/news/2011-09-13/the-risks-lurking-in-treasury-bonds.html

Zarf, we have to admit there is a crisis here.  Prolonged low interest rates, high inflation, and high unemployment means that eventually interests rates will have to spike and thus havoc would ensue, meaning another colapse of the real-estate market.  In essence, there wouldn't be anywhere safe to put one's retirement funds.

And remember, Zarf, Even if your numbers tell a different story, it is the perception of investors, remember, which drives the markets.  When investors buy gold instead of t-bills in their rush to safe haven (which is what's happening now) you know something serious is happening.

Zarf said:

"There's two extremely important problems which people miss when suggesting a deflationary pattern:"

I'm not suggesting a deflationary pattern.  I'm suggesting a hyper-inflationary spike, followed by either a massive war or massive erasure of government debts, and, quite possibly, ultimately, a new global economic paradigm.

As for the war causing the economic collapse. The inflated house prices was a bubble waiting to get burst. The war may have been the primary cause of the bubble bursting when it did; but the bubble was going to burst sooner or later, and in all seriousness it is probably a good thing that it did burst as soon as it did. If the bubble got substantially larger before it burst, it probably would of been too big to recover from. It is very possible that the war on terror saved the west economically.

> xeno syndicated wrote:

> Zarf said:

"There's two extremely important problems which people miss when suggesting a deflationary pattern:"

I'm not suggesting a deflationary pattern.  I'm suggesting a hyper-inflationary spike, followed by either a massive war or massive erasure of government debts, and, quite possibly, ultimately, a new global economic paradigm.

That is a pretty big contradiction with the following:

> xeno syndicated wrote:

> Before I respond to your other points, will you concede that if the inflation rate doesn't turn negative for at least a decade, there is serious danger of the global economy collapsing entirely?

@Zarf  There's no contradiction.  Hyperinflation = economic colapse, and it will happen whenever China wants it to (maybe now):

http://english.aljazeera.net/indepth/features/2011/09/201199175046520396.html

Re-read the quote, Zarf.

I said:

"Before I respond to your other points, will you concede that if the inflation rate doesn't turn negative for at least a decade, there is serious danger of the global economy collapsing entirely?"

That is the inflation "RATE" needs to be negative for the economy to survive catastrophe.  In other words, the rate of increase in inflation needs to slow down.

Let me explain:

For instance, let's say the inflation is 2% for year 1.   Let's say the inflation rate for year 1 has been 10%.  That means after the first year, inflation (or total rise in the CPI) will be a total inflation of 2.2%.

If the inflation rate for year 2 is -10% the total inflation for that next year will be back down only 2%.  There is still inflation, mind you.  It is not deflationary.  That is, for the second year prices still rose, but only at 2%, for a total inflation over the 2 years of 4.2%.

Inflation rate doesn't refer to the rise in prices.  Inflation itself does.  What the inflation rate refers to is the rise in the speed at which inflation increases.   

Think of it as driving a car:  going forward is inflation, going in reverse is deflation.  Accelerating forward at a certain speed is a certain positive inflation rate' while decelerating or breaking at a certain speed while still going forward is a negative inflation rate.  Accelerating in reverse at a certain speed would be the positive deflation rate. And decelerating in reverse at a certain speed would be a negative deflation rate.  Being at full stop would be 0% inflation AND 0% inflation rate.

Our economy is traveling forward in inflationary terms faster than ever before in history AND we are accelerating faster than ever before in history, and what nobody seems to know is whether or not there is a curve ahead nor any clue as to how far ahead a curve might be.

Zara email ;-P

I see a couple problems with this.

First of all, even if we assume this is a problem, there's absolutely no way to stop the trend you describe without deflation.

For me to show what I mean, let  me use another model to describe both the functions of each inflation system and what we do about it.

Year 1900:
Base year for a basket of goods:
$100

Assume that we have a normal 3% inflation rate per year.  By my running of the numbers (the formula being a compound interest run, 100*1.03, multiplying the result by 1.03 until we get the doubling), it means you get a doubling in 24 years.  Let's assume, for the sake of argument, that this is the ideal doubling rate in your scenario.

So after 24 years, our basket good price is about 203.  So let's keep that 2% inflation and see what happens.

The result... is that in 14 more years, the basket price ends up at 307.  This is while under a 3% inflation rate, the normally accepted inflation rate.  It takes another 9 weeks (for 23 weeks total) for the goods basket price to reach 400.

So what does this mean for your inflation model?  Under a conventional system of observing money supply, we would say that prices are doubling every 24 years.  So in this case, there have been two doublings.  It's a consistent rate... relatively slow... yeah, we would like this inflation rate!  The Federal Reserve bankers would be patting themselves on the back, then going out for lunch while they make sure to keep doing whatever they're doing. 

But in the xeno inflation model, it would signal a crisis.  The first year saw a 100% increase in the basket of goods in 24 years.  The second period, though, saw prices increase at twice the speed, even at the low interest rate.  SO... what would the xeno model have the central bank do to keep inflation low, by their definition?  Knock down inflation... duh! 

Okay, so let's pretend that second year never happened under the xeno model.  The central bank wants to set a target inflation as their goal of keeping the doubling rate stable.  Running the numbers, it looks like a 1.7% inflation rate is the best way to achieve this.

Okay, so how does the bank continue this trend?  Next inflation period's up... time to figure out a target inflation rate again!  The new inflation rate to keep the same price increase is 1.2%

I'll assume you notice the trend.  Under your inflation story, the central bank has a smaller and smaller ratio of what is considered acceptable inflation.

Now, regardless of what is considered an acceptable inflation rate, the lowest possible inflation rate never changes: It's always 0, due to the deflation issues I described previously.

So, under the conventional model of inflation, target inflation rates are... somewhere between 2-4% per year inflation.  Under the xeno model, however, target inflation will be determined by how far from the base year you are.

The problem is when you get later in the inflation system.

Let me make this clear:
Under your interpretation, assuming 1914 is the base year in question, for the United States to have an inflation rate within your level of acceptability, the inflation rate would have to be .2% (this would actually be a high estimate, actually).  So if xeno ran the Federal Reserve, the range of acceptable inflation would be between .2% and 0%.  Otherwise, you're changing base years, which is no different from what is done now to determine the effectiveness of inflation.

There's actually two problems here with implementation.  First, this is 100% unachievable.  Central banks can influence, but can't dicatate, inflation rates.  That's determined by the economy as a whole... its buyers, sellers, banks, consumers... everyone.  This theory is demanding the equivalent of telling a central bank to fly through a small trench on a massive space station and fire a 1.8 meter proton torpedo into a 2 meter exhaust shaft to hit the station's reactor core a couple thousand kilometers down the exhaust shaft.

That target inflation rate's no bigger than a womprat!

In fact, this will be 100% impossible because, if you look at some economic schools, this would run counter to economic growth.  Keynes described inflation, in part, as a natural course of economic growth through price/wage negotiation.  People will demand higher wages from employers, employers will respond by raising prices, forcing employees to ask for higher wages, etc.  While this can't be used to describe all inflation, it's probably safe to assume there's some level of inflation triggered by this.

So if we divide up total inflation by its causes (Keynesian and Monetarist descriptions, with monetarists focusing on the money supply-focused issues)... let's describe it as:
i=K+M
(NOTE: This isn't any sort of official formula... I'm just using it as a representation)

Central banks can only control the M side of inflation.  So unless you want the government stepping into price negotiations... which has serious problems in itself, and means I get to add a list of problems with communism to the problems here... the K side of the equation will always have inflation as long as there's economic growth.  To counter this, the central bank would need to actually fight this by perpetually decreasing the money supply.  They'll be trying to guess price-based inflation rates, and trying to counter price-based inflation rates, within margins of error in the fractions of percents.

This leads to my second problem: what happens when you miss?  Now, a miss is definitely more likely under your inflation target than the conventional inflation model, because the window of acceptability will decrease as inflation increases.  So what happens if each of our models miss their target?

In your theory, the real danger is a downward miss.  The central bank would be encouraged to press for a disinflationary (not deflationary) trend in the money supply to counter the inflationary trends of price negotiations.  So in practice, the Federal Reserve's job would be trying to guess how much wage-based inflation will occur, and counter it with monetary contractions, to an accuracy within hundredths of percentage points in accuracy.  Now, if, by chance, the central bank undershoots its inflation controls, there wouldn't be much of a short term problem, except that under the acceptance of your economic standard, the central bank would be given a lower threshold for what's considered acceptable inflation, forcing them to be even more aggressive in fighting inflation in the future and thus more likely to overshoot inflation in the future.

But what about if they overshoot inflation?  As I said, inflation always occurs, in part as a result of wage negotiations.  The central bank would have to either counter this inflation or ensure it's generally the exception, not the norm, to fighting inflation.  That means the bank would need to slowly pull money out of circulation to fight inflation.  This would mean the bank is likely to eventually overshoot on its disinflationary trend and create a deflationary trend, the result of which was described extensively in one of my previous posts.  This is much less likely than under the conventional system because a slight miscalculation in the effort to reduce inflation still puts the economy within a 0-2% inflation range... not necessarily good, but not crossing the deflation threshold.

Even if you assume and factor in that a high-end miscalculation on inflation would trigger "high" inflation rates of 4-8%, that's still not nearly as bad... it hurts incomes of certain people, yes, but it's a short term impact that can be corrected the next year.  Deflation, however, is a self-sustaining cycle that requires drastic action to overcome... action which can easily be overdone, resulting in an inflationary trend and meanwhile driving up debt by the government programs necessary to overcome the debt (e.g. unemployment, stimulus programs).

Okay, that's problem #1.

Problem #2: You assume inflation is a long run problem.

In the long run, the economy corrects for inflation.  Prices increase by 2% one year, so employees will generally ask for 2% increases in wages to overcome this issue (if this doesn't happen, then it's not inflation... it's generally a change in non-inflationary market conditions... such as an excess labor supply).

Instead, investors look at inflation from a short term perspective (I say "investors" because I know there's crabby old people complaining about how, in their day, they could buy a pop for a nickel to drink while they walked 15 miles uphill both ways in the snow to and from school).  Wages are given to an individual with the assumption that the wages are worth the value given at the time they're given, which means the wages correct for inflation (if prices were all halved, your wages would be halved as well).  Spent or invested relatively soon, consumption hedges against inflation while investment overcomes inflation.  Personally... I couldn't give a crap what price levels were in 1914 when making my buying decisions... I wasn't even born there... if I compare anything, it's within the period where I'm a significant portion of the consumer/producer market.

Long story short, it's an interesting baseline, yes.  But because of issues such as the mathematical flaw I described above, and because the economy adapts to changes in the long term, this is a bad baseline, because it's just not used, at least in the sphere of economic analysts, investors, bankers, or most other people operating in the market economy.

Problem #3: I LIKE INFLATION (with limits)!

Remember what I described earlier during the deflation debate?  My first argument was a comparison of consumer behavior during a deflationary, inflationary, and hyperinflationary scenario.  There was a very simple moral to the story, which you pointed out: When inflation is low, or when it's deflationary, people are more likely to hold cash because it's a "safe" asset.  So if inflation was 0%, people who didn't want any risk would keep cash on hand as a safe investment.

That, by definition, creates deflation.  By holding onto money, you pull currency out of circulation, preventing it from being factored into the money multiplier effect... the result being an involuntary deflationary trend as consumers make selections beyond central bank actions.

> xeno syndicated wrote:

> If the trend continues, in our lifetime, Zarf, we will see the value of our money diminish much more severely and far more rapidly than our grandparents did.  And let me ask you this, if the safest place to keep your money was to hold it in cash (not bonds, not gold, not real-estate, not stocks), how much would you complain about the 3200% reduction of the value of that cash over your lifetime?

1: I wouldn't actually give a crap.  The thing is... in the long term, money's just a number.  Yeah, if I had $500 sitting under my mattress, I'd be penalized.  But that's actually the worst possible use of currency... something a government should discourage.

Why?  If currency is sitting under someone's bed, in a Scrooge McDuck safe, etc., it produces no economic growth of any kind.  Meanwhile, it means the government has to actually print more currency just to sustain currency supplies (which is a serious problem because when stored currencies finally enter the market, they create currency supply shocks).  Spend it, buy some property, get a 401k... do something to keep the currency moving around in exchanges.  Otherwise, you end up with the exact same deflationary trend I described in a previous post.

2: Actually, it's a bad comparison to say currency in the early 1900's was a safe store of value, but not now.  Modern currency isn't intended to be a store of value that you can just sit on forever.  In contrast, currency in the 1900's was still backed by gold, which means there was always something upon which to guarantee the currency.  These people weren't just sitting on dollars, then.  They were investing in gold, and the currency was just an intermediary.

And before you ask, no... backing the currency with gold would be a terrible idea (If you weren't planning on advocating a resource-based currency standard... this doesn't matter, and you can ignore it).

For one thing, it's just expensive to keep a trillion dollar stockpile of gold just sitting somewhere, and even to acquire the gold.

But more important, it means economies and monetary policies are completely stonewalled.  For example, there's a couple situations in which the Federal Reserve would want to induce inflation (in particular, during a deflationary period... like the Great Depression), for the reasons I described in a prior post.  Being required to buy gold whenever new currency is produced means th central bank can't induce such an inflationary scenario.  They could reduce the value of currency relative to gold to increase the supply of currency, but then you're really no better off than a currency unbacked by gold, except that you put unsuspecting people in a false sense of security.

More importantly, however, it actually creates a maximum limit on economic growth.

As a medium of exchange, all trades in a country necessitate the exchange of currency for gods and services.  That means currency is a requirement for exchange to occur, and thus for economic growth in a currency-dependent society.

Now, as the economy expands, the number of transactions, and the numer of people making transactions, will expand.  This inherently a necessitates an increase in the supply of money to meet the demand for money.  Without the money to meet the expanding demand for exchanges, the value of money will increase... creating a deflationary trend!  Remember, this isn't inflationary currency growth, because the increase in currency I'm talking about in this specific instance is basic requirements of currency expansion is matched by an equivalent demand for money.  This is an entirely different type of money creation, which a gold standard would hamper.