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    • 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?

    • I have written here on cake about how a real US silver dollar would purchase 5 gallons of gasoline in 1962. I know this because I did frequently purchase 5 gallons for one paper dollar in 1962.

      US silver dollars were still in circulation in Kansas City Missouri in 1962, and would occasisionally pass through my hands when I was working for minimum wage - 60- 75 cents per hour.

      That same silver dollar, sitting on a shelf, not in a bank account, without earning any interest whatsoever for almost 60 years, will still buy 5-10 gallons of gasoline at current market prices for gasoline and silver coinage. IF that silver dollar had appreciated at 3 or 4% for 60 years, it would literally buy hundreds of gallons of gasoline or other goods.

      I have often stated that the inflation that occurs with fiat currency is the greatest travesty to the working classes - because much of the wealth of working people is in their savings account, not in financial instruments such as equities or land which stand up to inflation much better than fiat currencies. Most folks just role their eyes at me, as a foolish old fellow, not seeming to comprehend the scale of the theft that has occurred to them and their fellow citizens.

      Like the present financial repression with zero interest rates - just imagine how much wealth has been extracted from the savers in North America or in Europe over the last decade or two. Is it possible that cheap mortgages have contributed to too many McMansions?

      I confess to believing that TINSTAAFL is actually true. Assuming that one is not actually stealing, in which case, is may seem that one has found a free lunch. For a while, anyway.

      I do agree, the Federal Reserve actually officially desiring 2% inflation - seems a violation of the Fed's charter, but what do I know!

    • Replying to @afisher

      Math is fun if it is easy - But I cannot do compound negative interest calculations in my head 30 times- so I went to -

      I calculated a 30 year period, once annually, at -2.0 % for one million dollars, and after 30 years at -2%, the loan value is $545,484.32 dollars which is essentially cut in half.

      But if one compounds at -2% for 40 years --- $445,700.40

      If I have not made any errors - so any mathematicians please check my work

      As an aside, I also calculated what one silver dollar at 4% for 40 years might be worth and the answer is 4.8 silver dollars, or almost 100 current paper dollars ( assuming an average price of $20 paper dollars for an average grade silver dollar).

      And at 60 years, per my discussion above, $10.2 silver dollars or close to 200 current paper dollars. Or in 60 years, an average lifespan, one's paper currency has lost 95% of its value... One dollar in silver, 60 years ago, now is worth roughly 20 paper dollars so 1/20th or 0.05 or 5% remaining value. The other 95% of value disappeared somewhere along the way

      It is hard to get ahead at that kind of table.

      And America has had one of the better currencies in the world over the last century. Some folks think those days may be coming to an end, if the dollar ceases to be a major reserve currency for the globe.

      One non-violent tactic of modern warfare is destroying the value of your foes currency.......

    • I’m with Paul Krugman on this. With interest rates so low the USA government is a long way from having to be concerned about printing money. USA economy and dollar is a safe haven for money thus far and will if anything cause the dollar to continue its rise. Helicopter drops and Keynesianism is here to stay in all advanced strong economies.