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Because inflation makes individual dollars worth less now than they were last month, last week, or yesterday the incentive is to spend your money when you get it. If you hold on to it, it will not be worth as much.
The Fed tries to keep inflation at a constant rate of 2% per year.
(Just read that last sentence a few times and commit that to memory. This is the official monetary policy of the US government.)
What this means is, if they are successful, if your wages do not increase by at least 2% each year, you will be working for less, progressively, each year that happens.
Saving is a superior form of spending. (In a properly functioning economy.) Retail spenders (you and me, buying the day to day stuff we need and want) do not have a significant impact on the economy--not enough money involved and dispersed over a myriad of purposes. By saving, that money is made available to the banks to lend to wholesale spenders, other than the government. Those entities then spend on the really big items that can impact the economy. When inflation is ever increasing, though, you have less incentive to save--dollars will be worth less when you take them back out then when you put them in.
Unless, that is, you are receiving an adequate return on your saving (that is, lending) in the form of interest. If, as currently, a *good* interest rate on a savings account is .95%, while the Fed is seeing to it that inflation increases by 2%....
Saving is spending. Saving is also lending. You put in the bank and lend it to them to lend back out in turn. Interest is *supposed* to be the cost of money. If supply and demand were controlling interest, if there were increasing demand for money to lend, interest rates would increase. But our interest rates are set by the Fed.
Inflation inflates everything. When we have a 2% rate of inflation and the GDP grew by 4%... it only really grew by 2%. When GDP is growing more slowly than inflation, you have negative GDP growth--which means that despite the reported numbers you can have recessions all while everyone says that the numbers say we are fine.
Inflation is theft. And the official policy of the US government is to steal from you.
The Fed tries to keep inflation at a constant rate of 2% per year.
(Just read that last sentence a few times and commit that to memory. This is the official monetary policy of the US government.)
What this means is, if they are successful, if your wages do not increase by at least 2% each year, you will be working for less, progressively, each year that happens.
Saving is a superior form of spending. (In a properly functioning economy.) Retail spenders (you and me, buying the day to day stuff we need and want) do not have a significant impact on the economy--not enough money involved and dispersed over a myriad of purposes. By saving, that money is made available to the banks to lend to wholesale spenders, other than the government. Those entities then spend on the really big items that can impact the economy. When inflation is ever increasing, though, you have less incentive to save--dollars will be worth less when you take them back out then when you put them in.
Unless, that is, you are receiving an adequate return on your saving (that is, lending) in the form of interest. If, as currently, a *good* interest rate on a savings account is .95%, while the Fed is seeing to it that inflation increases by 2%....
Saving is spending. Saving is also lending. You put in the bank and lend it to them to lend back out in turn. Interest is *supposed* to be the cost of money. If supply and demand were controlling interest, if there were increasing demand for money to lend, interest rates would increase. But our interest rates are set by the Fed.
Inflation inflates everything. When we have a 2% rate of inflation and the GDP grew by 4%... it only really grew by 2%. When GDP is growing more slowly than inflation, you have negative GDP growth--which means that despite the reported numbers you can have recessions all while everyone says that the numbers say we are fine.
Inflation is theft. And the official policy of the US government is to steal from you.
Posted in these groups: 
Economy
Economy
Posted 10 y ago
Responses: 3
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Good post, MSG (Join to see). A colleague and I were talking about just this topic this week, because he had heard a report about the dangers of deflation. Check out this article. Seems that some inflation is a good thing. Many are giddy about the falling price of gas, but that could be a bad sign in the long run.
http://www.economist.com/news/briefing/21627625-politicians-and-central-bankers-are-not-providing-world-inflation-it-needs-some
http://www.economist.com/news/briefing/21627625-politicians-and-central-bankers-are-not-providing-world-inflation-it-needs-some
The pendulum swings to the pit
IT IS a pernicious threat, all the more so because, at its onset, it seems almost benign. After two generations of fighting against inflation, why be worried if the...
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MSG (Join to see)
Deflation has only been a problem in US history, once; its dangers are overblown. It was Hoover's wage freeze that resulted in the deflationary spiral of the Depression. The New Deal prolonged recovery from it.
Gradual deflation is a normal feature of a commodity backed currency--money tends to become more valuable over time. But markets have natural cycles and this goes both directions.
Inflation has it's place. Inducing inflation, especially when the market wants to deflate, isn't it. If we must have a central bank they should be determining if we are in a deflationary or inflationary phase and adjust policies to match as Coolidge did in 1921, pursuing a deflationary policy; removing dollars from the economy.
The author of the Economist article subscribes to a belief that consumption drives the market and I cannot agree. Saving drives the market and today's policy should be a deflationary one to encourage that. There is such a thing as too much saving, but we are nowhere near there.
Gradual deflation is a normal feature of a commodity backed currency--money tends to become more valuable over time. But markets have natural cycles and this goes both directions.
Inflation has it's place. Inducing inflation, especially when the market wants to deflate, isn't it. If we must have a central bank they should be determining if we are in a deflationary or inflationary phase and adjust policies to match as Coolidge did in 1921, pursuing a deflationary policy; removing dollars from the economy.
The author of the Economist article subscribes to a belief that consumption drives the market and I cannot agree. Saving drives the market and today's policy should be a deflationary one to encourage that. There is such a thing as too much saving, but we are nowhere near there.
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MSG (Join to see)
I will admit that falling gas could be an indication of a problem. Gold prices are also falling, and gold is usually the canary in the coal mine for the value of our currency, which is clearly not rising (except, perhaps in relation to faster falling foreign currencies).
It could be that deflation has come, whether we want it or not. The question is, if so, will the Fed will try to fight the wave, or go with the current and just try to steer clear of any rocks? But its also possible that the oil market is being deliberately manipulated to reduce the revenue generation of both Russia and ISIS who are both dependent on petro dollars, never mind that that would also weaken Saudi Arabia and strengthen China.
It could be that deflation has come, whether we want it or not. The question is, if so, will the Fed will try to fight the wave, or go with the current and just try to steer clear of any rocks? But its also possible that the oil market is being deliberately manipulated to reduce the revenue generation of both Russia and ISIS who are both dependent on petro dollars, never mind that that would also weaken Saudi Arabia and strengthen China.
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CW5 (Join to see)
MSG (Join to see), I'm impressed by your knowledge of all of this economic policy, inflation, deflation, etc. And I'm more than a little envious. Good on you (a) for being so well informed, and (b) for sharing your knowledge with the RP community.
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I'm with Jefferson, Jackson, Lincoln and JFK regarding central banks.
President Jackson's Veto Message Regarding the Bank of the United States; July 10, 1832
http://avalon.law.yale.edu/19th_century/ajveto01.asp
"And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principles of spending money to be paid by posterity, under the name of funding, is swindling futurity on a large scale."
The writings of Thomas Jefferson 1743-1826 pg. 31
"The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, and more selfish than bureaucracy. It denounces as public enemies, all who question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me and the Bankers in the rear. Of the two, the one at my rear is my greatest foe.. corporations have been enthroned and an era of corruption in high places will follow, and the money powers of the country will endeavor to prolong its reign by working upon the prejudices of the people until the wealth is aggregated in the hands of a few, and the Republic is destroyed." - Attributed to Abraham Lincoln
Executive Order 11110 JF Kennedy, which would have undermined the private Federal Reserve Bank
President Jackson's Veto Message Regarding the Bank of the United States; July 10, 1832
http://avalon.law.yale.edu/19th_century/ajveto01.asp
"And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principles of spending money to be paid by posterity, under the name of funding, is swindling futurity on a large scale."
The writings of Thomas Jefferson 1743-1826 pg. 31
"The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, and more selfish than bureaucracy. It denounces as public enemies, all who question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me and the Bankers in the rear. Of the two, the one at my rear is my greatest foe.. corporations have been enthroned and an era of corruption in high places will follow, and the money powers of the country will endeavor to prolong its reign by working upon the prejudices of the people until the wealth is aggregated in the hands of a few, and the Republic is destroyed." - Attributed to Abraham Lincoln
Executive Order 11110 JF Kennedy, which would have undermined the private Federal Reserve Bank
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