hblask, on Wednesday, January 4th, 2012, 8:31 PM, said:
LOLTo answer the question, I think it is clear that inflation hurts the poor and unsophisticated the most; many people seem unbothered by that, which I find to be a bit of a mystery. Deflation seems to be more harmful than inflation, though, so the optimal policy seems to be minimal inflation without suffering through periods of deflation. Obviously getting it exactly right would be the best policy, as would happen in a competitive commodity-based currency market, but the people who want to spend unchecked will never allow that, so 0-2% inflation as a goal is probably the best we'll get, as that only harms the poor a little.
Very glad to have not gotten a contemptuous, dismissive return here. In response:I certainly would be bothered by your premise if I thought it were true; I would argue that inflation is not merely a one-way street, harming the poor with the rising cost of goods and services. Inflation also, in effect, transfers wealth from lenders (the powerful) to borrowers (everyone else) because it lowers the real cost of making a fixed stream of payments, e.g. the real cost of repaying a 30y fixed goes down because its costs are locked in. Small levels of controlled inflation also benefit output and therefore employment, which helps everyone.Deflation results in major cutbacks in output and hiring, which is kind of a big problem if you have an expanding population. It also results in a major rise in collateral requirements, which attenuates borrowing power and thus the velocity of money within the economy even further and these effects become additive and extremely difficult to combat. A money supply fixed to the physical supply of a commodity compounds these effects dramatically, and many economic scholars
have argued that the Great Depression was indeed lengthened unnecessarily by the gold standard.The Fed doesn't choose to not
get it "exactly right" and shoot for 0% inflation because they want unchecked spending; this is tinfoil hattery. They shoot for 1-2% because 0% inflation means short term interest rates will very likely be 0%, and you have no wiggle room while sitting at a level (0) where a very small decline in prices/wages, which will often happen simply due to noise, can cause a deflationary spiral. It's essentially a buffer against noise in the economy.