What is a desirable level of inflation?

[Viking Prince]

An excerpt from a Bloomber.com article:

Federal Reserve Bank of San Francisco President Janet Yellen said ...“The U.S. economy is undergoing a sharp contraction,” with unemployment poised to rise this year, Yellen said. “The odds are high that, over the next few years, inflation will decline below desirable levels,” and the Fed must “emphasize its commitment to returning inflation over time to the higher levels.”

What is a desirable level of inflation? Is this something that the Fed should be conerned with maintaining or is this an issue that should have some political control?

[Farnan]

At about the degree of economic growth is the desired level of inflation. Too little and there is not enough money to go around, and foreign goods become more expensive.

[Andersen]

Around 2 %.

[Sphere]

What Farnan said. Your inflation should match roughly your economic growth, so the availibility of money (liquidity) is about the same year to year.

Deflation is just as concerning as high inflation. The thing is that deflation hurts producers most, (lower consumption, falling prices) while inflation hurts consumers most, (rising prices, devaluation of savings). But both lead to economic collapse.

[ivan_the_terrible]

1-3% is ok, generally.

[C-Rob]

1-2 percent is the generally accepted amount of inflation. Anymore and you have massive problems. At 5 percent you have some people cussing under their breath as their buying power is drained away, at up to 50 percent you have people getting very angry and your economy is failing. At 3 to 500 percent, it's economic collapse and epic ruin.

[CtrlAltDe1337]

I would think you would ideally want about 0-1% right now since the economy is not doing well.

[~Paine~]

I would think you would ideally want about 0-1% right now since the economy is not doing well.

No, in times of downturn, economic growth becomes the priority, so money supply control therefore becomes looser in order to boost aggregate demand.

There is a misconception in modern times, due to the experience of low inflation in the past 20 years (in Western countries), to believe anything above 5% will result in consequences equivalent to Germany in 1922. In reality 10% is roughly the real 'breaking point' which, if exceeded, leads to major economic problems.

However, in terms of what is desirable, 2% has generally been seen to be the best figure to satisfy all economic objectives. The main issue is the trade-off between inflation and unemployment - illustrated by the Phillips Curve. 2% is an inflation rate which has been demonstrated to cater for low unemployment - thus best satisfying the trade-off. If you regularly go below 2% then unemployment tends to rise, whilst if you go above you suffer from inflationary side-effects which eventually affect supply-side issues such as international competitiveness.

[CtrlAltDe1337]

No, in times of downturn, economic growth becomes the priority, so money supply control therefore becomes looser in order to boost aggregate demand.

According to Keynesian economics, but not classical economics. And we know how well Keynesian economics worked during the Great Depression

[~Paine~]

According to Keynesian economics, but not classical economics. And we know how well Keynesian economics worked during the Great Depression

Er, what?

Keynesian economics only came to being in the late 1930s after the publication of the General Theory of Employment, Interest and Money, so how could 'Keynesian economics' have possibly been used in the early 1930s before the formation of the idea and its concepts?

And classical economics became irrelevant after 1929 since its theories could not explain the Depression due its to ignorance of the importance of money supply and reliance on irrational assumptions regarding the perfectionality of market mechanisms.

It took Monetarism to fill the gaps and deduct the true cause of the Depression - a contraction in the supply of money. Are you going to claim that Friedman was a Keynesian?

The method of Keynesian economics to stimulate economic growth was through an increase in government spending, which just so happened to increase money supply. Yet the control of money itself was the key issue which caused the Depression, and its expansion under FDR, co-incidentally due to the increase in government spending, was what got the US economy out of the slump.

Please understand terms before you casually use them.

[CtrlAltDe1337]

Er, what?

Keynesian economics only came to being in the late 1930s after the publication of the General Theory of Employment, Interest and Money, so how could 'Keynesian economics' have possibly been used in the early 1930s before the formation of the idea and its concepts?

I'm writing for a forum, not a Ph.D paper, so I'm obviously simplifying things somewhat. I think you understand me, though.

And classical economics became irrelevant after 1929 since its theories could not explain the Depression due its to ignorance of the importance of money supply and reliance on irrational assumptions regarding the perfectionality of market mechanisms.

Eeehhhh? Please go listen to some real economists before you say something like that.

The method of Keynesian economics to stimulate economic growth was through an increase in government spending, which just so happened to increase money supply. Yet the control of money itself was the key issue which caused the Depression, and its expansion under FDR, co-incidentally due to the increase in government spending, was what got the US economy out of the slump.

The only reason we got out of the depression under Hoover and FDR's horrible fiscal policies was because of we joined WW2 and started full wartime production.

[Sven788]

2-3%

[Ishoss]

2-3%.

The last thing we want is deflation.

[roy34543]

For america as above 2-3% is fine, But not for every country, Some countries which want to alter the value of their currency might vie for higher or lower.

[~Paine~]

Economists that you will find in universities and across the country. They will tell you that the money supply is important, but they will also tell you that the classical approach is the best method for long-term growth and prosperity.

Have you actually been across the country and spoken to different economists? There is no convergence of view whatsoever, it's almost entirely divergent. The Austrian school will assert one thing, the Chicago school will assert another, the Keynesian school will assert another, the Stockholm school will assert another...

Of course they aren't going to all agree on one approach, not even your celestial classical approach, which most would actually criticise rather than laud due to its overly-optimistic nature regarding market perfectionality.

He also raised taxes, which didn't help the economy any. He was hardly the model economist.

Yet Hoover's approach was a classic (pardon the pun) example of the classical approach which you endorse. He raised taxes to balance the budget and, to use your words, prevent "the national debt soaring".

Some of FDR's policies helped unemployment, but the national debt soared and it still didn't save the U.S. economy. WW2 with its full-wartime production from 42-45 is what saved the economy.

[Viking Prince]

GDP is not the perfect measure of the economic health of the citizens since productivity per capita tends to rise when the less productive members become unemployed. Also, the introduction of technology is a displacement and can create unemployment while also increasing output.

The problem with the Great Depression was largely due to improved productivity and creation of unemployment among the less skilled members of society. The depression was already well under way prior to the unraveling of the financial system in 1929. WWII and FDR did not fix the problem, they simply aged out of the employment pool. The middle aged marginal workers in the 1920's are simply too old to be in the employment pool by 1950.

Getting a bit off the thread title but worth it!

[{BHC} King Jan III Sobieski]

I'd like to keep our current standard of living, however, go back to the 1930s when we could get gasoline for a couple pennies a gallon!!!

[Viking Prince]

I'd like to keep our current standard of living, however, go back to the 1930s when we could get gasoline for a couple pennies a gallon!!!

I wished that I was taller and younger also --your point of the post was???