Ask HN: Why don’t governments target zero inflation?

What they're really targeting is not to have negative inflation/deflation. It's traditionally thought that if prices are going down the economy will stagnate as people wait to make purchases later, which results in less output and a recession.

Because reaching a steady level of inflation is hard due to the nature of the markets, economy and the tools available to central banks they aim for 2% so it can wiggle around that - rather than around 0%

It's interesting that more recently economists have started to disagree that a little deflation is a bad thing - for example Switzerland last decade (but Switzerland is a small very stable economy).

https://www.investopedia.com/articles/markets/111715/can-def...

wewxjfq · 3 years ago

I never understood the argument that people would delay their purchases. Most purchases can't wait, like you don't wait with your groceries when your fridge is empty. And even if the purchases can wait, would you wait 5 years for a 10% discount on a sweater? Lastly, even without deflation, many things do get cheaper over time and it doesn't stop anyone from buying them right away.

sokoloff · 3 years ago

I'm waiting on buying a used car right now. Our older daily driver is a 2005 with ~230K miles on it and starting to show significant rust from New England's salted roads. In normal times, I'd have replaced that car last year. In current times, with the used car market so screwed up, I'm waiting to delay this ~$10K purchase specifically because I expect deflation in the used car market.

I don't think that my situation is particularly uncommon.

fomine3 · 3 years ago

As a younger Japanese (virtually never had experienced inflation but always deflation, until 2022), I finally understand how inflation works for buying intention. I bought items what I wanted to buy, before inflation and weak Yen rate applied.

basch · 3 years ago

If you look at money as a tool, and that tool only has value when it is used, and its primary purpose is to be half a liquidity pair in barter situations, to facilitate trade, having that same tool also be a store of wealth can cause a conflict of interest. As much as we try and hide it, using this tool has a cost each time, whether its a transaction fee, the management/storage/processing of cash, the physical money production itself. The convenience of everything being tradable with anything else, with only one conversion in-between is valuable.

On one hand you want the velocity of money to stay up, so people use the tool frequently, and WANT to use the tool, because that's where it derives its usefulness from, from being used. On the other hand, you don't want to disincentivize savings, but may want to disincentivize hoarding. What's the difference?

I've thought for a while now, that an optimal solution may be multiple currencies. In Singapore they have a savings account that acts like an HSA and you can pay rent from. Other nations have sovereign wealth funds propped up by the extraction of natural resources.

Maybe it is time to have a forced checking account and a savings account and a living account trichotomy, denominated in three different currencies. Maybe the checking account is pure USD, the living account is untaxed TIPS, and the savings account is a conservative state managed investment portfolio. They can then control the exchange rate between these accounts if people need to move money from one to the other. Force point of sale systems to correctly tag what is eligible to be spent from the living account, and deduct part from each. There is room for a lot of automation, especially when you add a one month line of credit.

isleyaardvark · 3 years ago

The argument I’ve read is that deflationary spirals are much more difficult for governments to deal with than high inflation.

kneebonian · 3 years ago

That may have made sense before fiat currency, but I literally can't think of what could be simpler than print more money*

The real problem is economics isn't a science, it is more akin to reading pig entrails or sheep's bones than anything that is scientific.

* I know it's not actually printing money, it's changing the reserve rate, playing with interest rates etc.

caeril · 3 years ago

> people wait to make purchases later, which results in less output

This sounds like an absolute nightmare scenario. Christ, can you imagine what would happen if we actually addressed carbon emissions with monetary policy instead of just begging people to "reduce, reuse, recycle" in PSAs with teary-eyed Native Americans whilst running a monetary policy explicitly designed to redline consumption?

Zero inflation means that a risk-free way to hold on to all of your value forever is by just holding it. Inflation incentivizes people to buy/invest as opposed to just holding onto money.

Holding onto money is bad because every dollar you spend, another man earns. A lack of spending from one party is a lack of earning for another. The economy functions not on people having money, but on people continually spending that money and moving it from one party to another to incentivize work being done and problems being solved.

_Algernon_ · 3 years ago

What does inflation accomplish that a wealth tax of 2% doesn't accomplish. Such a wealth tax would be more honest and transparent (ie. politicians would have to justify it, they couldn't just outsource the PR hit to an unelected central bank), and could additionally be more nuanced (eg. marginal tax rates). Inflation mostly hits the relatively poor, because they are the only ones holding a large proportion of their wealth as cash.

sokoloff · 3 years ago

A wealth tax hits assets and currency equally. Inflation hits primarily currency while supporting assets (or leaving them relatively untouched).

Further, the administrative effort of any wealth tax is enormous (if you're trying to reach the equivalent effect of taking 2% of the purchasing power away from the money that's literally in my jeans pocket) and subject to substantial judgment (what is my family pizza place really worth?).

Inflation has no judgment required and no per-person book-keeping, reporting, nor auditing effort required.

WJW · 3 years ago

Inflation is much easier to sell from a PR perspective. New taxes typically lead to lots of protests and are politically difficult, while inflation has no such problems.

In addition inflation benefits entities with lots of debt, such as homeowners and governments. Since homeowners are often a significant voter block in most democracies and governments are, well, governments, it is easy to see why appeasing both those groups would be appealing to politicians.

lamontcg · 3 years ago

Inflation causes interest rates to rise which increases the cost of borrowing.

Arguably we should be running closer to 5% inflation which corresponding increases in interest rates, which would put a damper on our asset bubble economy.

HDThoreaun · 3 years ago

Inflation devalues cash, not wealth. Positive inflation encourages people to use their cash to invest which the government wants because it increases economic activity.

88913527 · 3 years ago

Inflation rates experienced by individuals vary based off types of goods/services purchased. A wealth tax would instead apply evenly.

lm28469 · 3 years ago

> incentivize work being done and problems being solved.

Work on more and more meaningless tasks and resolve more and more meaningless problems

Once upon a time money moved with a purpose, now the purpose _is_ moving the money

primroot · 3 years ago

I agree with the sentiment that there is significant absurdity hiding beneath all the economic abstraction around employment and investment, which obscures the origin of money as a requirement. The way I see it (and this is a rather centuries old observation) is that the economic system is set up so that most of the population requires earning money for their survival. Earning money is a social requirement not a biological one. But if the resources are cheaper now that money is more valuable, what is the problem with earning less money for one's work? The problem is that some people would rather keep charging the same for what they sell. If one doesn't own much, then one can't afford waiting for a better deal. In this situation having power means owning money, houses, land, machinery and little debt. This makes workers require the same salary in order to survive and perform their jobs, this contributes to the (abstract pseudo-)problems of less employment, less consumption, less debt obligations being fulfilled. The real problems is on the one hand the resources required for survival being out of reach, and on the other resources, machinery and skills going to waste. For many, directly tackling the real problems may come dangerously close to disregarding social requirements. Hence, we keep talking about this problems in abstract terms, so that important members of society can live off the rent, by convincing the rest, by whatever means necessary, of the survival-money exchange rate. Money is a peaceful mean to make them follow orders.

alexb_ · 3 years ago

I'm not going to act as if the current American system is perfect, hell I'm not trying to argue any of that - I'm just explaining why a small amount of inflation is healthy.

throwaway6734 · 3 years ago

This is a hyperbolic argument.

We're more productive than any time in human history

oli5679 · 3 years ago

This actually goes the other way, inflation adds an arbitrary friction incouraging people to take too many 'trips to the bank' to deposit cash in savings assets to avoid the costs of inflation and so is welfare reducing.

https://en.wikipedia.org/wiki/Shoe_leather_cost

radford-neal · 3 years ago

You're confusing money with actual wealth. If someone puts a big stash of dollar bills under their mattress, that does not interfere with real wealth being created. Whereas putting a big stash of hammers under your mattress would mean that those hammers can't be used by carpenters building a new house...

alexb_ · 3 years ago

> If someone puts a big stash of dollar bills under their mattress, that does not interfere with real wealth being created.

Yes it does! When cash is hoarded instead of invested, it stops it being used for transactions that increase value. Imagine it happening at scale.

trappist · 3 years ago

The only reason to hold money is for future consumption. Every dollar you spend today is a dollar you can't spend tomorrow. The only person harmed when I save my money is myself, and only because inflation is eroding its purchasing power.

helsinkiandrew · 3 years ago

misja111 · 3 years ago

Governments create inflation by generating (aka 'printing', but nowadays it's ofc all digital) money. The more money they print, the more income is generated to finance government spending.

> Western governments all seem to target 2% annual inflation

2% is seen as a sweet spot: it still allows governments to print extra money but the inflation rate is not so high that it would lead to an inflation spiral that would run out of control.

vinyl7 · 3 years ago

To encourage growth. If money is continually losing value, you have to continually work harder to outpace the loss. This encourages workers to keep working, and encourages businesses to keep innovating.

datadata · 3 years ago

And the law of unintended consequences gives a huge unintended consequence here.... Rather than worker harder forever, which people really want to try to avoid, things other than money will be used as a store of value, since money is by definition leaking value. Housing, stocks, gold, crypto, etc.

Investors look for a return after accounting for inflation. If inflation is 5% and interest rates are 10%, the return is the same as if inflation were 0% and interest rates were 5%.

Although recent years have been a puzzling exception, it is typical for real interest rates (nominal rate minus inflation rate) to be positive. If someone is inclined to just live off their accumulated savings, this is just as possible with inflation as without, as long as the real interest rate is the same. It is true that the value of savings tend to be destroyed in episodes of hyperinflation, when real rates don't keep up, but hyperinflation is certainly not a road to a well functioning economy.

Jemm · 3 years ago

Growth, like any good Ponzi Scheme

cguess · 3 years ago

Except in this case the growth comes from building and selling real things.

belltaco · 3 years ago

Can you explain how economic growth is like a Ponzi scheme. Lets take an example, lower income people being able to afford buying computers and use them, so computer sales go up. How is that a Ponzi?

mypastself · 3 years ago

And paradoxically, the much-maligned conspicuous consumption attributed to Western-style capitalism - buying things you don’t need - actually seems like a result of heavy-handed government policies such as lowered interest rates.

llimos · 3 years ago

I'm not sure I'm cynical enough to say it's the reason, but inflation helps governments by reducing the real size of their enormous debts.

gruez · 3 years ago

That doesn't make sense because creditors will bake that into their interest rates. Instead of charging 2% with 0% inflation, they'll charge 4% with 2%inflation.

conductr · 3 years ago

And you just explained why inflation is expected. It’s a byproduct of interest/cost of capital. If there was some completely free capital available, there would be no inflation. But it would have to be available to everyone and would have to be risk free; so not possible.

Governments have to pay higher interest rates on their enormous debts because of inflation.

fileeditview · 3 years ago

Only for future debt.

SideburnsOfDoom · 3 years ago

> inflation helps governments by reducing the real size of their enormous debts

What is the reason that you think that governments care about the size of their debts? Do not assume that "government debt" is anything like "household debt".

bluGill · 3 years ago

Because governments still have to pay back their debts at sometime. While they can default that doesn't work out very well - local residents get mad about losing their investments, and foreign rich people learn their lesson and won't borrow more money for a while (at least not on good terms).

There are significant differences, but in the end governments also pay back debt.

AmericanChopper · 3 years ago

Inflation doesn’t really help with this, but GDP growth does.

tuyiown · 3 years ago

Governments loans in their own currency, indexed on inflation.

BirAdam · 3 years ago

Many people here seem to have rather generous views for governmental motives. I don’t.

Inflation is a hidden tax on the population. Instead of taking the numbers out of their bank accounts or dollars out of their hands, they can just print the money. This erodes purchasing power of individuals but also allows the government to spend more than they could from traditional tax hauls alone. The people think that they’re getting something for nothing, and politicians get re-elected. Additionally, such a scheme allows for the military actions that the USA loves to engage in. Without inflationary spending, the taxation becomes onerous enough that people wouldn’t passively accept it.

The other reason is “growth”. With low interest rates and a decent amount of printing, you get two major effects. First, lenders are more willing to lend because they’re not paying high interest. The price of money is lower, and therefore money is easier to part with. The second reason is a follow on from that, monetary velocity increases. Monetary velocity generally helps your local government as sales taxes get paid.

The problem with low interest and moderate inflation is that the lenders do not scrutinize things very well (because money is cheaper), so you get a lot of investments that don’t play out as a consequence. Likewise, the inflation is typically tied to assets at first (land, equities, metals) but eventually it does hit product prices and this results in moments of severe inflation. This usually occurs when the P/E ratios get bad enough and the equities markets crash. It also creates problems like 2008 given a long enough cycle. Every time these crashes occur, governments usually try to assume more power as they advertise themselves as the saviors for the problems that their own monetary policy created.

Full disclosure, in a philosophical sense I consider myself a bit of an anarchist (just straight black flag, non-aligned), but in a practical sense I consider myself a mildly left but small government person. For example, I would happily trade constant war and standing armies for a public health care option, or even trade the war on drugs for a national rehab service. Due to the realities of finance, however, I do not believe that everything can be had, and giving the most corrupt people in a society (the politicians) unlimited power is Avery bad idea imho.

majinuub · 3 years ago

I'm seeing some rather naïve explanations here like it incentivizes spending and encourages economic growth.

There's absolutely no need to artificially incentivize spending. Humans naturally require and desire goods and services. Allowing people to store their economic energy without risk of devaluation would actually help bring people out of poverty. Inflating the money supply incentivizes high time preference behavior like excessive spending and borrowing. This leads to boom and bust cycles, and an increasingly growing wealth gap.

All inflation does in terms of growth is increase the nominal value of things in the economy. It does not encourage the growth of real wealth. The increase of wealth we experienced is due to the markets functioning despite an inflationary monetary policy and excessive regulation.

The real reason why the government is in favor of a "slightly inflationary" monetary policy is because they're incentivized to do so. They can spend it before price adjustments due to the new inflows of cash can happen in the wider economy. Its essentially a hidden tax. Governments, central banks, and their political/economic allies can benefit from this effect at the expense of everyone else in the economy.

https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_the...

incomingpain · 3 years ago

>Western governments all seem to target 2% annual inflation. Why is this?

When currencies operated via the gold standard. Inflation of gold was out of their control, gold mining, gold rush etc. Which tended to be about 2%. This goes back to antiquity. Roman emperors clipped metal off their coins and thus created inflation. Inflation doesn't exist in economics, inflation is a political tool.

This is it though, that's why it's 2%, nobody has ever had the courage to aim at anything lower.

But now that it's not gold standard, what is the 2%? This is actually government being able to print money for free. 2% of total money supply pays for quite a significant amount of government. This is compounding obviously, so it's not a long term strategy. However, this is what makes large currencies so powerful.

>Why not target 0% to make financial projections simpler for businesses and households?

The government has to raise taxes(not going to work) or reduce spending(very very not going to happen)

So aiming for 0% isn't plausible not because of economics, but because of politicians.

Something did happen in 2020, usa/canada/others no longer targeted 2%. They targeted >10%. The government printed a ton of money to pay for extreme spending. Canada for example put more debt on the books in the last few years than all other prime ministers in history combined; inflation adjusted. Someone will pay for this eventually or retirees are coming back to work.