I’ve pondered for some time why the Federal Reserve has very publicly committed to a 2% annual inflation rate. Why not 3% or 5%, or more importantly, 0%? Wouldn’t the ideal inflation rate be zero with prices overall neither increasing nor decreasing?
This goes all the way back to Greenspan who had a charming way of bamboozling Congressmen when testifying such that no Congressman wanted to ask for clarification and risk looking less smart than Greenspan. They took his word as gospel and it stuck.
When asked about this, Fed officials give vacuous responses about growing the economy, wage growth is positive, and so forth. But never a hard, conclusive response that seems to make sense, at least to me.
In the Fed’s own words:
Low and stable inflation helps the economy operate efficiently. The Federal Open Market
Committee (FOMC) judges that an annual increase in inflation of 2 percent is most consistent over the longer run with the Federal Reserve's mandate for price stability and maximum employment.
There you have it: Inflation is price stability! Sounds positively Orwellian doesn’t it?
The Wharton Public Policy Initiative says:
For over two decades now, the Federal Reserve has targeted a 2% inflation rate per year. … Yet, the 2% inflation rate serves as a point of stability and reliability for the public, which was one of the main reasons it was chosen in the first place.
Again more doublespeak: Inflation is stability and reliability.
I finally concluded that 2% inflation is an annual deficit reduction tax applied to all Americans to pay down the deficit by devaluing the US dollar.
Inflation is just another way of saying currency devaluation, because inflation erodes the purchasing power of currency. Because loans are repaid in future dollars, inflation / currency devaluation means those loans are repaid in future dollars that are worth less than today’s dollars. And when the Treasury sells a 30-year bond, or occasionally longer-term bonds, that 2% compounded adds up to a considerable reduction over a 30-year period.
$1.00 * 0.98 * 0.98 * 0.98 .... 0.98
Of course, the Fed can’t publicly say that 2% systemic inflation is a tax because only Congress can impose taxes. And calling it ‘currency devaluation’ is also a no-no because that sounds much worse than calling it ‘inflation’.
Why devalue the currency at all? Simple. Does anyone think the Federal deficit can ever be repaid? The last two times we had federal budget surpluses were during the Clinton and Kennedy administrations. That's not a political endorsement, just a comment about how infrequently they occur. So regardless of the party in power, there seems to be no real appetite for paying off the deficit. Hence, the need for a 2% annual stealth tax.
That’s my two cents… or should I say two percent?