I’ve been wondering this question for a while. Ignoring current events, why is a little bit of inflation desirable?
I do understand that it’s done to “stimulate” the economy so people don’t let their cash rot in a checking account, but isn’t it a zero-sum game? Everybody says that money is not meant to stay where it is, rather, should flow through the economy. But if the economy always needs injections of liquidity because otherwise it fails, isn’t the economy broken?
I feel like there’s something I can’t comprehend about that.
Focus on simplicity rather than details:
Deflation (opposite of inflation) encourages people to put money under the pillow and wait for it to increase in value. If everyone does this the economy stagnates.
Inflation encourages people to spend the money now or invest it. Your spending is someone else’s income and their spending is your income. Investing is you risking your money to have someone else buy something that hopefully makes them more productive.
Too high inflation causes loss of trust in the currency and people start hoarding bricks or something else non perishable and the economy stagnates.
So central banks say that they will manipulate the currency so that the inflation is around say 2% which is low enough for people to trust it but high enough to encourage spending/investing.
I think this deserves a bit more discussion actually. I don’t think it’s a given that the economy stagnates nor that an ever-growing economy is a good thing.
At the end of the day, people must spend their money to get things they need. Hoarding money isn’t actually sustainable unless you already have more than you will ever need.
I actually think it sounds kind of nice to have an economy that is neither inflationary nor deflationary: it’s just stable because the economy is sized perfectly to sustain the people within it and make them happy.
It’s the insatiable greed that drives economic growth (at any costs it seems). I’m not sure whether population growth inherently grows the economy, because each new person is both an asset and a liability.
I think OP isn’t suggesting deflation, but equation. As in, keeping the value of a dollar stable rather than constantly changing. Like that Rick and Morty episode where there’s that machine that sets the value of $1 to $1
Not seen the episode so I’m not sure how it’s supposed to work.
A small inflation greases the wheels of the economy.
The central bank never hits the goal exactly, if you aimed for 0% you’d end up with sometimes inflation and sometimes deflation.
What is the value of one dollar anyway? When it was pegged to the gold the price of stuff compared to gold still varied.
So inflation isn’t actually good, it’s an active economy that’s good
Yes, but a healthy economy becomes more active if there is a healthy inflation to provide additional lube. 2% is roughly where inflation offers pretty good lubricant without being a pita
It’s worth calling out that there’s no real justification for that 2% figure. It’s a number that was pulled out of the air by the New Zealand version of the Fed in the late 80s, and it seems to work well, so everyone copied it.
There’s pretty broad consensus among economists that deflation is bad, and that inflation above about 3-4% is bad. Beyond that, we’re literally just guessing.
I think it’s worth pointing out that it’s all part of the neoliberalism fad that originated around that time. There are other ways to run an economy, but this inflation target one works well for neoliberalism because the wealthy own assets which hold their value through inflation. The middle class and below have money, which loses value through inflation. They pay what money they do have largely (directly or eventually) to the wealthy who then use it to buy more assets.
Sorry I may have channelled too much Gary Stevenson there.
I have read that it’s also very hard to break out of deflation so you can’t just try it a little, and the same goes for hyper inflation. A bit like walking the razors edge.
Inflation itself is also good, assuming your salary goes up at the same rate.
If you take out a home loan, then over the 30 years you pay off the house, the mortgage payments make up a smaller and smaller part of your paycheck.
Same for car loans, and student loans.
Basically, inflation encourages smart use of debt.
That’s generally not true in practice though. Nominal interest rates on loans (the rate on paper) will adjust with inflation so the real interest rate (adjusted for inflation) is positive. As others have pointed out, the banks wouldn’t accept a loss just because of high inflation.
so basically inflation is good only if you are one of the wealthy ones. being able to get a job that pays enough so you dont have to live hand to mouth. can even get a loan, pay it off and still have some money left over to maybe live. Also having a job you can trust doesnt kick you off at moments notice is also required to even consider any debt.
Over the long term, wages go up. Over the short term, people get left behind.
There are lots of things that suck for individuals, but are good for the economy as a whole. There are also lots of things that suck for the economy as a whole and are great for a select few.
This is why the bedrock of any sane civilized population is public education. We try to give most individuals the opportunity to learn as much about how our society works as possible to give individuals the best chance at success available.
This is also why the current geopolitical situation was built on decades of undermining public education with homeschooling and “parent choice” initiatives. The USA’s “No Child Left Behind” Act created an entire generation of children ripped out of public schools after decades of defunding public education created such poor conditions that parents were duped into believing dismantling public education was the solution.
Uneducated kids become ignorant, easily manipulated voters. Social media algorithms were specifically engineered to exploit this mechanism.
Just want to point put the whole “Deflation makes people not want to spend” thing is bullshit conjured up by a wealthy economist.
In reality the inverse happens - deflation makes the general population spend and inflation makes people save. This is because if you’re expecting things to get expensive, you stop spending on things you might want so you can have money for emergencies and things you might need. This isn’t even theory - you can just look at historical spending patterns.
Inflation primarily benefits the wealthy, because hoarding billions is pointless under deflation.
I have read that it’s also very hard to break out of deflation so you can’t just try it a little, and the same goes for hyper inflation. A bit like walking the razors edge. What’s your thoughts on that?
It’s pretty easy to stop minor deflation - just print more money. You might have also heard why that’s usually bad - because it causes inflation. But in this case, if for some reason you want to limit or reverse it, printing is just one way. Others are by increasing exports and imports by decreasing / increasing taxes, raising interest rates on low, increasing taxes in general.
Of course, the difference is these measures strengthen a country, unlike control measures that deal with inflation. Even the first one is less harmful these days thanks to a very global economy and modern logistics, since spreading your currency has soft power benefits (it’s why the USA did so).
Controlling inflation on the other hand is more detrimental to a country, since the methods usually affect infrastructure (reducing taxes) or global trade (restricting imports to increase local spending). You can also print less money but that increases poverty.
Hence all the recessions in recent history.
This songs like it makes sense, but a reference would be very useful
https://360library.com/economics/deflation/common-misconceptions-about.html
This lists a couple of “recent” historical examples you can verify.
And here’s a more detailed analysis:
https://mises.org/mises-daily/deflating-deflation-myth
Could someone for once please explain what you guys actually mean when you say the wealthy are hoarding money? I don’t think I’ve ever gotten a straight answer to this.
Considering inflation causes money to lose value over time you won’t remain wealthy if you hoard it. What rich people have a lot of is assets that produce money, usually stocks and bonds.
It’s really just simple math.
Let’s say I make $2500 a month, and I buy a car. The payments are $250 a month, so that’s 10% of my income.
If Elon Musk buys a car, even though it costs $3 million, while my car cost about $35,000, he doesn’t even need a loan. He just buys it, and the change in his bank account is so small that he can barely see the difference. He could buy ten more cars like that and not notice.
And yes, he can keep buying cars, but at some point there just stop being more cars to buy. Lamborghini can only make so many new models every year.
Maybe I spend $25 on lunch. Maybe Elon spends $2500 dollars on lunch. He spent a hundred times as much as me, but he makes millions of times more than me, and he can only eat one lunch.
So at some point there’s just a limit to how much the rich can actually spend. Yes, it’s a lot more than any single one of us, but it’s a lot less than all of us put together. We spend, they save. Where my paycheck goes into rent, car payments, food, and so on, Elon’s money goes into investments. In fact, he’s mostly paid in investments. So my money goes to other people, whereas his money stays in his pocket.
Make sense?
No because it doesn’t answer my question. I asked about hoarding wealth - you’re talking about spending habits. Your average billionaire can’t just walk into a bank and withdraw, say 10 million. They probably don’t have anything even close to that much of liquid wealth.
From Elon’s twitter
Hmm. So, I think you’re struggling to understand how those two things are connected.
First off, when we talk about “hoarding wealth”, yes, we’re including assets in that. No one here is saying that Elon has 900 billion dollars in a big old Scrooge McDuck vault. Obviously it’s all tied up in shares, bonds, real estate, etc. That makes it technically less liquid, though in practice those issues are largely irrelevant, because a) as I was pointing out in my previous reply, what the ultra-wealthy spend is such a small fraction of what they own that in practice they rarely need to dip into their less liquid assets, and b) because even larger purchases can be handled by simply taking on very cheap debt using those same assets as collateral. Basically, your credit card runs at 20%, Elon’s runs at 2%.
More to the point, that huge hoard of assets is the problem. Because their ability to buy up investments (including things that really shouldn’t be investments, like housing) makes those things more expensive for the rest of us. They can buy all the housing and rent it back to us, instead of us actually being able to afford homes.
But ultimately talking about spending habits is the answer to your question, because those raw differences in what people spend versus what they make account for huge differences in how much of our wealth we can afford to hold onto. The fact that that wealth is stored in assets rather than a bank account is completely immaterial. Or, rather, it is material, but only further proves my point.
Think about it this way; Elon can afford to have 99.9% of his wealth tied up in assets where he cannot immediately access it, and can still live a life of luxury most people couldn’t imagine in their wildest dreams. Do you think the average 9-5 worker could afford to receive even 90% of their pay in the form of assets rather than money? Or would they just be selling those assets immediately to cover their daily costs? That, right there… That’s the problem.
I’m only focusing on the hoarding part here. I don’t understand what is being kept away from others. In the case of Elon, he owns shares in companies he founded. He’s not a housing investor. What seems to be implied here is that if you start a company and it grows too large then it gets nationalized or something. These are the specifics I’m trying to figure out here. Is Norway’s oil fund hoarding wealth away from the rest of the world? What you’re speaking of sounds more like criticism of the power that wealth comes with, but that’s not quite what’s being discussed here either.
OK, so let’s say you work in a company that makes cars. The workers make the cars. Their labour turns into products which the company then sells to make money. The company owner… Does nothing, basically. Management is done by managers, labour is done by labourers. Engineers designs the cars. Artists and marketeers sell them. Sure, maybe the owner is involved in a few tasks here and there, but even if they truly worked 120 hour weeks and obsessed over every little thing, their total contribution, judged as a percentage of the labour involved in making and selling those cars, would infinitesimal. Yes, they can make decisions about what new car to release, what direction to take the company, all of that, but they’re not the only person capable of making those decisions, they’re just the person who is allowed to make those decisions, because they own that privilege and no one else does.
And yet, that owner takes home billions, while the workers struggle to pay rent.
That’s the hoarding. That owner has those billions of dollars because their company sells cars. But they don’t make the cars, or even oversee the people who make the cars, they just… own it.
Now, I’m sure the counterpoint here would be that the workers have to use machines paid for by the owner. Except, the owner didn’t make those machines, they just bought them. Machines that were made with other people’s labour. If labour had access to the capital that the wealthy hoard, they could just start their own factory, sell cars that they make, and keep the profits (ie, a worker owned co-op). The wealthy owner isn’t providing, they’re gatekeeping. By controlling wealth, they control other people’s ability to deploy wealth, which in turn allows them to extract value from other people’s labour.
That’s the difference with something like Norway’s wealth fund. They’re publicly owned. The people of Norway benefit from what the wealth fund does. It’s a public good. But no one benefits from Elon Musk being rich. He didn’t even found Tesla; he paid the founders to give him the right to call himself the founder. This notion that he’s some kind of brilliant genius is a fabrication he invented about himself. He’s just a guy who had enough money to take ownership over the things that other people create. It didn’t take Elon Musk to come up with the idea of a company that makes rockets. We’ve been making rockets for thousands of years. But in a world where wealth is concentrated in the hands of a few, it requires an Elon Musk to permit people to make rockets, because he controls access to the wealth required to do so.
You’re right! They can’t just walk into a bank and withdraw 10 million!
Instead, they take out a loan for 10 million against a collateral of 20 million in stocks, expense the interest, claim 0 income and therefore no income tax, and have that transferred to their bank account. Then they withdraw 10 million, while their stocks continue to gain (or lose) value, and at some point they have to take some portion of their dividends as income rather than rolling them into more stocks or, God forbid, sell some of those stocks to pay back the loan.
In a technical sense, no, that money isn’t just sitting in a bank account, but there’s a weird effect. If you only have a small amount of stocks, say a few million worth, you can sell them off in a relatively short period without harming the stock because it’s just a blip at most in normal volatility. If you have a lot, say billions, you can sell enough to do whatever the average person would ever want to do with only slightly more volatility than is some nobody did it, and much of that is due to the visibility of a billionaire doing that. If that billionaire needs more than a few million, he can just follow the process outlined above with no impact at all to the stock market and a number of benefits to himself. So in a practical sense, if you only have a little stocks, say millions, accessing those millions may take days or weeks, but if you have billions, you can access it only slightly slower than I can withdraw $100.
This money is still in the economy and helping to economy to function overall, but the majority of that benefit is only experienced by one person, the billionaire. This is effectively them hoarding those billions, not because they’re sitting in an account but because a single person is experiencing the majority of that benefit while the rest is spread across thousands or perhaps millions of people.
I still don’t see what is being kept away from everyone else. Who is left without if I own a billion worth of stocks in different companies? The cartoon example would be me finding a cool rock that suddenly everyone in the village wants and I even get astronomically high purchase offers from the neighbouring villages but I choose to keep the rock to myself effectively making me the wealthiest person of the village - on paper. Is the rest of the village being deprived by that fact that I refuse to sell it and buy everyone a Lamborghini?
No, they are being deprived by the fact that billionaires are allowed to amass that amount of wealth without supporting society with it, i.e., taxes, labor laws that don’t allow the extraction of wealth from workers to the point that there is often an income disparity if 100000%, and comsumer laws that don’t allow vendors to charge exorbitant rates for basic necessities like food and housing and medicine. So someone can take trips to space and someone else can’t have food, in the more extreme examples.
You keep conflating artificial and unrealized value. Stocks have value, just like the cash in your wallet or the bits associated with your bank account. They aren’t physical things (even cash has no value based on its physical nature) but their value is real nonetheless. At least until society collapses and the only things that matter are the purely physical, anyways, at which point your cash will be just as worthless as stocks.
Note: I said hoarding billions - I didn’t say they’re hoarding it in literal cash. They’re hoarding it in value.
Inflation is beneficial if you have billions in value because what you can earn from interest rates and valuations (especially when you can tug at the strings of the stock market) alone will exceed what the inflation rate will be (barring economic collapse where there’s runaway inflation, like the Weimar Republic or Argentina).
This means that your purchasing power goes up since the general population’s and smaller business’ purchasing power goes down, since you can easily outpace inflation far greater than they can. This allows you to hoard more wealth by making it easier to buy up other companies or stocks - and the more you own, the easier it is to ensure that you control the general population’s wages or the growth of competitors and therefore increase your wealth further by staying even further ahead of inflation. If you’re an American even remotely paying attention to things, you might realize this cycle sounds familiar.
This eventually hurts the overall economy if never stopped of course (lack of general active cash flow), because eventually things become too unaffordable for the general population and they can only take so much debt… But if you and your cohorts keep at it, thanks to how the fiat system works, it’s fine. Because you’ll own so much of everything and have so much value hoarded that it doesn’t matter that inflation has crashed everything and your currency has lost significant global power, since you’ll be able to buy up anything else left that you don’t own (Btw, this isn’t hypothetical - this is how Putin and his cronies gained what they had, at the expense of a whole country). From there you and the oligarchs can basically run the government.
And that’s the big picture most people miss - it’s not about the money, it’s about power.
This is what I’m trying to get you to explain.
I’m gifted Mona Lisa, my net worth is now billion dollars. Am I hoarding billions in value?
I start a business and it becomes very succesful and it’s valued in billions and as a majority shareholder it makes my net worth now a billion dollars. Am I hoarding billions in value?
I don’t understand who is keeping what away from everyone else. What is being hoarded exactly? What is “value” here?
I’ll assume you genuinely don’t grasp the concept, and not arguing in bad fath.
If you are somehow 100% in charge in the production process of your business, and have no employees, and don’t meddle with politics, information distribution, pay your fair share of taxes, and (this is the important part) discovered a way to actually spend your billions in a way that actually reduces how much money you have so eventually you only have a couple millions, then no, you wouldn’t be hoarding wealth.
The reality is that all those things being true are extremely difficult and even more so rare - the only closest example I can think of in recent history being MacKenzie Scott.
Now, the reason the last point is important is because if you _don’t _ spend that money significantly, you actually start to contribute to inflation yourself because more money has to be printed so everyone else doesn’t run out, because otherwise you’d see economic collapse.
Except then comes the issue of spending billions - it’s extremely difficult to spend that money, _ without making more money._ A bit tongue and cheek, but to get an idea of how that would you can watch an old movie called “Brewster’s Millions” that’s a decent visual example. And in case you’re getting a little lost again, value = money. If you make more money despite spending it, you are, whether purposefully or not, hoarding it.
This leaves you with only 3 options to not hoard:
The government taxes the excess. This would also help control inflation. This hasn’t happened because of billionaires that want to hoard money. A recent example is the misinformation campaign in California.
Donating to charity. This is surprisingly difficult and takes years. See MacKenzie Scott.
Divvying up your value among all your workers. The easiest way to actually not hoard billions.
Here’s the most absurd part about it all - value is literally perception. It’s even worse under a fiat system because that valuation isn’t even tied down to something fixed and physical like with the gold standard, but can be tied to a commodity like oil.
The benefits are a country not rich in a certain resource can still generate a lot of value. But fiat still has many issues, like how easy it is to manipulate value. This leads to excessive inflation and way more economic bubbles and recessions.
So to recap; value = money = power. Value also = money^x when high and concentrated enough.
The relative amount of spending that rich people do to their net worth or whatever is much much smaller than the amount of spending middle class and poor people do.
If you think of a minimum wage worker who rents, nearly every dollar they make is back into the economy nearly immediately.
I on the other hand have maybe a third of my yearly income sitting in a high yield savings account.
Someone calculated that the amount that musk spent on the elections was the equivalent of a minimum wage worker spending like $30. He’s not doing that daily so he’s not using the equivalent amounts of money.
That is not what I asked about, though. The claim was that they’re hoarding money/wealth. This makes it sound like they have a lair full of chash somewhere like Scrooge McDuck.
Musk owns multiple succesful companies. His “wealth” is the value of these companies. You can’t buy a house by stating you own SpaceX, they want cash.
Not sure about the hoarding wealth thing, but
You basically can, since the bank will give you a loan at almost no interest with your shares as collateral.
Actually, you can say that SpaceX is worth x million dollars and offer it as collateral for a loan and because its an extremely large amount of collateral you’ll get an amazingly low interest rate and never have to use cash for anything. This is pretty much exactly how the Twitter purchase went down.