This is a minor nitpick. But no, it also reduces future debts if inflation is constantly increasing 2%/yr. Existing debt too, of course, but 2% is compounded annually so it has a snowballing effect of reducing future debt burdens.
Yes it does but from what I understand, in normal economic times, the bond guys are the smartest guys in the investment room. I imagine that they price expected inflation into what the interest rate that they are willing to loan at, right? If we were currently in a normal economic time and inflation was 10% (just using round numbers) do you think someone would loan me $250K at 5%?
Nope, they do indeed gain purchasing power if they were to, for example, get a 4% pay raise when inflation is 2%. Not a particularly unlikely scenario on average.
I understand that but if they only get a 2% raise they have not gained a thing. With 0% inflation any raise they get increases their purchasing power. I will get to the rest on this subject below.
I'm not saying, anywhere, that we have oversaved as a nation. I'm saying saving past a certain point, as a general rule, makes no sense. For example, the multitude of books and radio shows out there emphasizing being debt free, as in $0 in debt, hurts people's ability to actually use their money. Those that can responsibly use it, that is. Spending is vital to any economy, this is a universal law that outstrips any "law of exponents" that isn't even applicable to economic realities.
You are correct but we aren't saving at all. I would imagine that most middle class Americans have a negative or close to negative savings rate. Even if you exclude home and car loans I bet that a very large portion owes more on revolving debt than they have saved. That is not a good financial situation.
Poor returns in bank CDs isn't exactly unique in American history. In fact, I question the intelligence of any saving money in a bank looking for a good return. Mutual and index funds are far more sensible and far exceed inflation on average.
but right now you actually have
negative returns on most ultra safe investments when you factor in inflation. This forces people to basically take all of the money they would prefer to have safe and put it in riskier interments which imo isn't a good thing either.
2% is a stable price. 0% makes no sense, it becomes much harder to justify higher prices in an economy with no inflation. Just as it becomes much harder to justify pay increases. This is yet another universally well known economic reality of the psychology of people (well, at least Americans).
This is the part I don't understand. First of all, if we are getting more efficient (assuming everything else is the same) why wouldn't the price come down? And if the price of raw goods goes up then so does the price. Why do things have to cost more? As far as pay raises, my view has always been that an individual gets a pay raise for being more productive. We as a society have become more productive over the years and therefore we make more money. Regardless of inflation you must be worth what your employer is paying you in order for the employer to make money. If you make your employer $50K he usually can't afford to pay you $100K to do that job.
Are you trying to imply that it is inflation, and not increased productivity, that gets people higher pay? If that is so then eventually a wall is hit where the employer is paying you more than you produce for the employer and that simply isn't sustainable.
I'll try to find some links for you when I get a sec. Prolly next week, I'll have to look over some old textbooks as a google search doesn't list the texts online for reference.
Thank you kindly, I am really interested in reading it. It goes against what seems like common sense in my head but unlike some others around here I do try to learn and if I am wrong I have no problem admitting it.
Sorry I'm not sure what kind of point you're trying to make here?
Just that it seems that productivity increase and not inflation seems to me to be the reason for the increased wages.
Fair enough, though my personal rule of thumb is to take a long term view, as I rarely take <10 year trends too seriously.
Of course, I do too but right now its hard to deny that our monetary policy is hurting the poor and middle class.
Oh, and I disagree completely about the "outstrips the law of exponents". Its a law for a reason and math never ever lies. Hell, math is the "universal language" it is "true".
Facebook
Twitter