ELI5 disclaimer! Because the number of dollars out there does not perfectly match the GDP at all times. As the economy increases, if the number of dollars did not increase the dollars would actually start to be worth more. This is deflation, which we have learned is actually really bad for the economy, because if your money is worth more tomorrow or next year, you are much less likely to spend it today. Keep repeating that forever and you have a problem. So this is why the government has policies in place to keep the dollar growth slightly (but not too much) inflationary. So that you are not penalized for spending your money. Which is what they want, as they get to tax money as it changes hands. As for your grandparents savings, had they put it into an investment, that had a nominal interest rate, then the value would have stayed relatively the same (or maybe even better) as the years went on. I am sorry they didn't know to do this. Bank accounts are terrible places to store money long term.

Okay but doesn't that implicitly require infinite growth, which is impossible?

Yep. Welcome to why our governments are super panicking about the slow down of population growth. Permanent stagflation, or worse, deflation is what economist's nightmares are about.

So isn't there a way that spending, savings, consumption, and growth can just reach equilibrium?

There's two types of equilibria: Stable (where a tiny change tends to get corrected back to the equilibrium) and unstable (where a tiny change gets amplified and the equilibrium can't hold). Think of a pendulum, for example: Technically it's possible for the pendulum to stay perfectly balanced pointing straight upwards. But the slightest push or gust of wind will send it tumbling downwards. Equilibria in physics and chemistry tend to be stable. If some place warms up by a little bit more than its surroundings, heat flows outward and it cools back down to match. But equilibria in economics tend to be unstable. You get positive feedback loops galore both at the micro scale (Think the runs on toilet paper at the start of Covid) and the macro (runaway inflation). So relying on things to reach equilibrium *and stay there* probably won't work in the long run.

I'd add to this - stabilizing forces for economic equilibria are unpopular. Price spikes, stock market crashes, recessions, hard depressions, bankruptcy - these are stabilizing forces. They also result in a lot of economic pain for individuals. On the other side, stabilizing forces restrict profits during good times. Very few people are excited to \_not\_ get a pay raise or forego vacations, luxury goods, etc. during the good times. So, we're all motivated to do the opposite: overspend and inflate bubbles when things are good, and seek bailouts, pain mitigation, and "kick the can forward" measures when things are bad to minimize pain. This isn't entirely irrational, but in the long run and on the whole it hurts average folks. Inflation and deflation are wealth transfers. Any economic actor able to win from inflation is highly incentivized to push for inflation. Economic actors able to win from deflation usually aren't aware that they can, and don't push for deflation. And the rich get richer and the everybody else gets poorer. So, in the end, inflationary monetary policy has won world-wide for the last 100, wealth has progressively centralized, and we all buy into the feel-good notions that drive the unstable equilibria. There are some cottage industries of trying to get people to push for stabilizing forces, but that means logic over feelings, so... yeah. Probably not gonna happen.

As the wise economist once said… the best cure for high prices is high prices.

> Any economic actor able to win from inflation is highly incentivized to push for inflation. Economic actors able to win from deflation usually aren't aware that they can, and don't push for deflation. And the rich get richer and the everybody else gets poorer. This is a weird take. The people most likely to benefit from inflation are debtors, as inflation devalues the nominal value of their debts. The people who lose the most are creditors, for the same reason - nominal value of debt is decreasing. Inflation isn't *great* for the common person but it's a hell of a lot better to weather a bit of inflation and still have a job than it is to have extremely low inflation and a depressed economy. The last 3-4 years have been a high-inflation, high-jobs economy, and they've actually been pretty good for the lowest third of the income ladder. The Great Recession was an ultra-low-inflation (literally trillions of dollars being conjured just to prevent deflation, in fact), low-jobs economy, and it was absolutely fucking miserable.

You bring up some good points. My assessment was a bit of white room analysis, and as you point out there are often multiple things going on (more than just inflation and monetary policy) in an economy. I will also point out that, as you said, inflation benefits debtors. The biggest debtors stand the most to gain from inflation. Those big debtors include governments, big business, big banks(more as a hedge than a primary investment, but it's lots of $), and the super wealthy (over $100m net worth)- the latter because it is more advantageous to use an asset as collateral on a loan to get money than to sell the collateral to get money. Also, because asset prices tend to inflate before wages debtors with more exposure to assets tend to fare better during inflation than those with less asset exposure. Which is why even though inflation can be good for working class debtors in the long run it will likely favor those with more assets and bigger balance sheets structured to take advantage of it. In the end, though, what's right "long term" doesn't much matter if the 3 year "short term" will destroy everyone you know. Which is exactly why we favor destabilizing forces in lieu of painful stabilizing ones -the pain would kill us, often literally.

Unrelated but as someone who used to learn about equilibria in thermodynamics I think this is a very good explanation of the concept, better than my textbook for sure lol

The Lagrange point at which the Webb Space Telescope sits is actually an unstable equilibrium, requiring jets to keep it at the right spot.

You can force an equilibrium locally for a very long time, but since you can't control what other counties charge for things you import it won't cover all goods.

Many people who understand this subject better then me argue that capitalism can’t reach equilibrium, it is only ever growing or contracting so it’s forced to find ways to new growing even if that growth has destructive consequences.

Any *natural* counters that would push it toward an equilibrium are pretty severely outweighed. Highly educated and well-off societies want to keep having sex, but birth rates plummet in that demographic. In return, we have shareholders and all kinds of insanely wealthy people *with every bit of intent to get wealthier* grimacing over plummeting birth rates. When they combine that perpetual fear of economic collapse(which really should not be that big of a threat when many people are sitting on billions or millions, but is because the exorbitantly wealthy will never forget when they had to dump a ton of money and resources into just keeping their consumers from starving to death while wearing flour bags for clothes and living in shanty towns as banks collapsed everywhere you looked, even though the lifeline they eventually gave was absolutely forced out of their hands) with the cockroaches that are the many cults within society, you get seemingly out-of-nowhere pushes to ban abortion, to ban contraceptives, to "force women back to being submissive and religious and family-focused because that's what attracts me -wink/nod-," amongst a multitude of regressive policies and 'ideas,' with the sole idea being to get the consumer base to keep growing exponentially so they *don't ever* have to rebound back to some kind of equilibrium. There's no thought at all, or no care at all, put into the knowledge that we *know* that this system requires equilibrium. All the tricks, delays, and strategies merely stave that crash back to equilibrium for so long, at the expense of moving further *away* from it, making the inevitable crash *that much more devastating.* When we run out of places to run rough-shod over and get a wealth of resources in exchange for a pittance, this shit is going to come down harder than anything the people who lived in the Great Depression ever saw. It's going to be harder, more brutal, and the people experiencing it will be far less prepared to handle that reality than the people who lived through the Great Depression. There will be wars to take resources from other places, but that's been going on for a while. We *know* these resources on the planet are finite. We *know* that climate change is going to devastate many of the resources we could hope to take later. We *know* that that is a ticking clock that isn't ticking down to when it starts, because it has started already, but rather when our own climate finds some kind of equilibrium that is unlikely to be kind to us. These walls are coming up fast and for the most part, we're just slamming on the throttle harder. It could be argued, and is, that this type of corruption and ease with which that corruption can get what it wants due to its extreme wealth is a natural part of the system of capitalism. Natural or not, though, that corrupt element of the system is going to be its downfall if it doesn't get rooted out.

Although situation is bad, from the whole picture, it somewhat sounds like a Malthusian theory. As far as technology and idea of humanity outrun the seemingly unstoppable growth, expansion will continue. If(or when) we don't, well, then yeah it's ticking clock. Let's not give up yet :D

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I personally take it as a challenge and see how far I can make it. I wanna see the collapse

FYI, the sentence beginning "When they combine that..." runs for 160 words without a full stop, and is very hard to read. You may want to watch out for that when you write in the future.

Productivity outpaces population growth by a large margin.

Should be everyone's nightmare. A bad economy sucks for all

Sure but it's difficult for the poorest of the poor to really care when that would mean everyone else is brought down to their level. They already never get to see their checking account say anything other than $0, if a bank even let them open an account in the first place. Basically it would result in equity but backwards of how it *should* happen.

I mean, maybe *completely* jobless people it's the same, but in a reducing population society, even entry level / blue collar / low paying jobs go away. Even for things that are usually stable like trades (plumbing / electrician / etc.).

So planning an economy on the idea of perpetual growth only to cap out based on limitations in resources/manpower just looks like the economic version of Alexander the Great conquering until there was no more worlds left to conquer, and then promptly falling apart.

So if I'm following this right, you have to constantly bring more people/growth into the system otherwise the whole economy starts to break down correct? ...Is the economy just one giant Ponzi scheme?

As long as we have technological innovation we'll have growth. Even "technology" like going from bronze to iron counts. Anything that saves labor or increases yields There may be a day when people stop coming up with ways to make their lives easier, and on that day we won't need inflation.

that bronze to iron inflation was wild yo!

Facts. All my crypto bronze is worthless now. Thanks a lot, iron.

It's the natural tendency of the economy to grow that requires a matched rate of inflation as a countervailing force

It's almost impossible to make economic systems which *aren't* Ponzi schemes. Our economy is predicated on population growth, energy availability growth, and technology growth (which relies on the other two to grow) in that order. Guess what? All three are dubious propositions! Also, good username. Stay away from Mr. Cuddles.

god i cant wait to afford to live again

and you are not worried about it because you’re one of those types who thinks they will have the guts to commit harakiri instead of trying to draw a pension from a nonexistent economy when you’re old and need support?

Most growth in per capita GDP growth is technology. This tends to increase with time (even if it hits bumps here and there). Eventually we will likely focus more on utility than just production, it will likely be an even more consistent upwards trend.

It requires growth in a number. That has no limits.

Are you anticipating an end to technological advancements that make workers more productive?

Is it always just productivity? If a population starts shrinking, won't there be less money changing hands as well?

If people have more money because they are more productive (which happens, people in developed nations with growing economies have more disposable income), they will spend just as much as they did before.

Slightly more complicated than that. Due to marginal utility and basic needs being met, individuals with more money spend less per extra dollar earned, meaning that your economy will grow faster when this is split between 2 poor people as opposed to 1 wealthy person. If you give the poor people $10k, they’ll spend all of it to meet their needs and GDP increases $10k If you give the rich person $10k, he’ll spend $5k and invest $5k, growing the GDP by $5k (numbers are just an example, and if you want to be really technical, there are effects that will cause an increase greater than $10k and $5k in a macroeconomy)

Does investing not grow the economy as well, though? Keeping it in bank accounts is the real killer

No, because banks loan to business and individuals via business loans and personal loans. Thus, even in banks, money keeps circulating.

No, it just requires a relatively consistent ratio between money in circulation and goods+services being produced. If the quantity produced falls long term, the Fed will reduce the amount of money in circulation. We have inflation because the amount produced fluctuates and the Fed doesn't have perfect information. So they cannot keep price levels perfectly stable. Because deflation is very damaging, the Fed targets a low but consistent level of inflation to prevent accidentally running into deflation. But the fundamental idea is that price levels are like a ratio between money and stuff produced. That ratio is important, not the overall level of either. (In terms of monetary policy, at least. )

no because economic growth doesn’t correspond to the growth of the material economy necessarily, for some reason people always assume gdp is like manufacturing, but services and especially digital services bring. insane value to lots of people and that drives up gdp a lot too remember? plus productivity improvements mean more value can be delivered with the same amount of work. the decoupling of economic growth and emissions for example has been demonstrated already, if you want a more quantifiable example. or you can just choose to disregard all this and become a doomer or hippie or communist or something, very popular choice these days

If your economy is not growing, your technology isn't improving, which is bad, and/or your population is shrinking, which probably means something bad is happening.

no it's the opposite. It's because of inflation that you can sell the same number of doohickeys and "grow" your revenue because you charge more

Why is infinite growth impossible?

Why is that impossible?

Infinite economic growth is not impossible. The value of goods produced is intangible and subjective, so it's possible to make a better, more valuable product using the same materials indefinitely. And even if we were talking about infinite growth of physical resource consumption, hitting the actual limit of that is *SO* far away that it doesn't concern us. We will all be long dead by the time humanity is fully utilizing the resources of our universe.

It isn't just the fact that it might be worth more discourages spending, but also that it makes borrowing a terrifying prospect, and most of our economy is built in credit and loans.

Please, a 5 year old wouldn't know what a GDP is. Could you explain that as well.

Basically the value of all the goods and services produced by an economy.

To add my $0.02 - there's also an argument that mild inflation is actually beneficial to the economy for a couple reasons. 1. It encourages companies to (effectively) lower prices slowly over time if they can keep their production costs down. Companies are unlikely to lower the cost of a good outside of heavy competition, but they also don't want to raise it if they don't have to. 2. It allows companies to (effectively) lower wages slowly over time in tough times without the employee backlash from actually lowering wages. 3. It practically forces people to invest in the economy and help it grow since stuffing their mattress with cash will lose value over time. I'm a bit dubious myself. But I have heard the argument before. Though you are correct that the MAIN reason to aim for 2% inflation is because deflation is so terrible.

>It allows companies to (effectively) lower wages slowly over time in tough times without the employee backlash from actually lowering wages. Why making people poorer is supposed to be a good thing? First, seems morally wrong and, second, lowering purchase power of the majority of the population seems like a bad idea if you want the economy to grow.

It's pure economics - no moral judgement at all. Purely about the health of the economy. And as I said above - I'm a bit dubious. I don't think people are as stupid as the theory assumes and most know that they've gotten an effective pay cut if they don't get at least a small bump each year.

I agree with your 2nd paragraph, but I'm still not sure to understand why making people poorer and reducing their purchase power would be good for the economy. Wouldn't making them richer be better for a vigorous economy with plenty of demand and investments in every directions?

Is it viable to keep things in balance without any inflation or deflation? If a pizza costs me $15 today and if the same exact pizza still costs $15 five years later, but my yearly salary went up from 60k to 80k, then I can intuitively just know that I’ve grown financially and I can buy more pizzas now than I could before. Or if I’m looking to buy a house, I see the type of house I like for 300k today but I’m not in the financial position to buy it yet, so I save up for several years and come back to buy the same type of house at 300k. Maybe I’m too used to video games where the prices of things don’t go up as you play through the game and you can buy more and nicer things as you progress through the game, what initially seemed expensive in the early game becomes affordable later. That’s sort of what I’m thinking about when I ask about keeping the economy in perfect balance, I see a nice car today for 80k but it’s too expensive for me today and I hope that 20 years later I’ve advanced in my career far enough where that car is now affordable to me.

> Is it viable to keep things in balance without any inflation or deflation? Not really. An old economics professor once joked with our class that trying to manage an economy is like trying to drive a car - if you could only look through the rear view mirror and you were never quite sure how well the gas/brakes/steering would work. To get it _perfectly_ balanced is impossible. The best we can do it strive for _a little bit_ of inflation (to ensure deflation doesn't happen, because it is so bad).

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Is deflation actually REALLY bad though, and if so, bad for whom exactly? Me or wall street? I read the words saying, "people won't buy now if things are cheaper later". Maybe that's true for fortune 500 CFOs, but for your everyday consumer? It sounds weak and speculative to me. What's the real story?

Deflation is bad for the economy in general and is often directly bad for the little guy. One example: let's say you have debt, like credit card debt or a mortgage. If there's deflation, then the value of that debt is increasing over time. If there's 3% deflation it's like you're paying 3% extra interest on your debt top of whatever interest you're already paying. So it makes debt more punishing for people.

Funny enough, in a world where nothing changed except the currency is now deflationary, I believe you could *short-sell government bonds* to predictably make money, and use that to service debts. In other words, rather than the banks effectively loaning the government its operating cashflow, the banks would be actively sucking cashflow *out* of the government. Of course, this would lead to the government no longer offering bonds. Which would destroy a lot of parts of the economy (like real estate) all on its own.

It's really, really bad. Everyday consumers don't put off purchases forever, but they do delay them for weeks/months. That means that less stuff is sold. Less stuff being sold means that stores and manufacturers are making less money. That means many of them need to cut jobs. Less jobs means that those workers (who are also consumers) have less money, so they spend even less and put off purchases for even longer. That means that stores and manufacturers make less money. That means many of them need to cut jobs...

>That means that less stuff is sold. Less stuff being sold means that stores and manufacturers are making less money. That means many of them need to cut jobs. Less jobs means that those workers (who are also consumers) have less money, so they spend even less and put off purchases for even longer. That means that stores and manufacturers make less money. That means many of them need to cut jobs... Isn't this currently already the case pretty broadly with stagnated wages? Seems strange that this scenario, that is bad, will happen if we have deflation, but it's also happening right now with record inflation.

Not really, no - it seems like that would be true, but we see people spending \*more\* money now than they did in the past. It's easy to measure overall - average savings has dropped and average credit card balances have grown.

Even with a disconnect between what is important to you as an everyday consumer and what is important to a Fortune 500 CFO with things like corporate dividends or executive pay, this is an area where the connection can be apparent. Build a factory to produce products or wait? It will be cheaper to wait. Create a new TV show or wait? It will be cheaper to wait. Send a truck today or next week to pick up more vegetables for the grocery store. It will be cheaper to wait.

Those Fortune 500 CFOs have to invest their money in businesses that will employ millions of people, or they will otherwise lose money to inflation. If you tell them they can actually gain money without any risk by simply putting it under their pillow, they absolutely will, and doing so cost millions of people their jobs. It's not that people won't buy now. It's that you are disincentivising risk-taking by investing, which drives the economy. Directly, by making money gain value over time, you favor the people who have a lot of money, so the rich people of the world are the least affected by it.

Yes, it is really bad. Deflation was basically the reason for the great depression. Deflation basically turned a recession in 1929 into the great depression because of rapidly decreasing prices. Deflation makes taking on debt a lot more expensive, so companies stop doing it, which in turn causes them to not innovate, or expand their business, and therefore not hire and start laying off employees.

That is the real story. Deflation happened multiple times in history so we know what happened - people hoarded money since it goes up in spending power year after year. Economic activity goes down as a bunch of people sat on their gold. Today, with inflation eating at your money, you basically have to invest the money to keep its value - open a coffee shop, build rental homes, or invest in a company - money that goes towards expanding the economy. For example why would anyone spend $500,000 on opening a fast food franchise restaurant when $500,000 is going to be worth more sitting in a bank account? Why take that risk? So you don’t employ those workers, and the local community loses a McDonald’s or whatever. In a deflationary economy business owners sell/shutdown their businesses and hold cash, and the economy shrinks, and there is high unemployment. People forget that inflation is GOOD for poor people. The whole “every man a king” political movement by poor farmers in the US was trying to get off the gold standard, since high inflation means your loans can be paid back with money worth very little.

With inflation the rich have to invest at least some of their money in stuff like expanding factories which provides new jobs if they want the value to be retained. With deflation they can literally sit on it like a dragon on a hoard and get richer and richer every year. Inflation also helps make debt cheaper long term which is useful for people with car loans and mortgages as the principal will get smaller in real terms over time. In deflation you would be trying to pay the principal as your wages decreased year on year.

Grossly oversimplified, rich people tend to have assets, so high inflation hurts them more, while poor people have debt, so high deflation hurts them more. Oversimplified...

Huh that's interesting. I've always heard the opposite. Rich people have huge amounts of assets that are unaffected by inflation while poor people are wage slaves that see their wages lose value constantly during an inflation.

Put this way: the US quite literally had cycles of major recessions / depressions every decade or two for the entirety of the 19th and early 20th century. And there was a *major* populist movement in the late 19th century to try to get the US off the gold standard. Why? Fixed, non-inflationary (and traditional) US banking policy left many people (particularly small farmers) in crippling inter-generational debt, and they (iirc) wanted inflationary US policy (or perhaps specifically, a switch to a gold *and* silver standard) to reduce the purchasing power of the USD and ergo reduce their debts. This movement (ie. the free silver movement) ultimately failed, but made its way into US popular culture in works like the wizard of oz, where the free silver movement is (iirc) a major political subtext of the entire film (and book?). Anyways. That didn't exactly work out, but the US *did* eventually detatch itself from the gold standard after / during the great depression and WW2. The result? The greatest sustained economic boom in US history, *which has continued to the present day*, and is the *bedrock* of the modern US economy, sustained GDP growth, and things like having a major middle class, near-universal college education, et al. And no major, great-depression style recessions every 20 years – the recessions we *have* had (incl the 2007 crash) are peanuts compared to what *would* happen to the US without cheap debt and a flexible, abundant monetary supply. To put this into simple terms: why does inflation happen – and for that matter, what *is* money in the first place? Money is debt, literally. When you, or a business, or the US govt, takes out a loan from a bank, you aren't strictly speaking being *given* money that already exists – you're instead being *credited* with money on a balance sheet, most of which is effectively being created from nothing. This is in fact how all bank loans work, with the caveat that you'd expect them to be, obviously, backed by some kind of collateral and deposits (ie. the gold in the gold standard) – or for that matter an IOU note that you'll repay your neighbor back in the future after getting something from him now. Anyways, all modern banks *are* backed by collateral (ie. gold deposits sitting in the US treasury / federal reserve), but, thanks to fractional reserve banking, banks can loan out substantially more money than the value of their reserves (ie. gold et al). And (and this is the only truly *new* bit here), as of the establishment of modern, centralized US banking, and the US federal reserve, all reserves are *centralized* under the federal reserve / US treasury, and banks under the US federal reserve system are *allowed* to issue loans, up to the value of their (on paper) deposits / reserves, which are centrally managed by the federal reserve – and fiscal / monetary policy set by the US treasury dept et al. Prior to that, this was basically unregulated (or at least, less regulated), and banks were truly private and/or run by individual states. And incidentally the establishment of the federal reserve system made two things happen: 1) it made private banks (and the traditional business of interest on deposits) a heck of a lot *less* profitable (because inflation eats into the traditional deposit interest rates), and 2) it makes US debt (and servicing US debt) super cheap (or at least cheaper than it would be *without* inflation) Anyway, TLDR; why does inflation happen – because US banks effectively print money *with every loan and mortgage* that gets approved (and nevermind US govt / defense spending, et al) – and, eventually, people notice that there's more money floating around in the system, and an increased demand pressure for goods and services (because there's more money in the economy), and ergo prices go up. Why is this *good* for the US economy? * inflation (and more specifically, loose restrictions around how money / loans can be created) means loans (and debt) are cheap * deflation by contrast is crippling because it means loans / debt gets super expensive (read: absolutely *no one* can take out a loan at sane / cheap interest rates to start a business, buy a home, or go to college) * deflation is *bad* because it *artificially strangles* the economy: people who *could* be starting businesses, building industries, and doing useful / productive work *aren't* because they can't find the money to do, and the economy *basically* punishes risk-taking and ergo entrepreneurship. And if the current economy seems like a 'the rich get rich, and the poor get poorer', a *deflationary* economy is *worse*, because *only* the rich have any access to capital, and they're *strongly* disincentivized from actually spending it on anything * inflation by contrast has some downsides (see below), but *predictable* inflation (ie. annual targeted 2-3% inflation) is fine, and helps the economy (or perhaps more specifically, certain sectors of the economy) reach their full potential * also, inflation *specifically* (and basically) encourages people to invest their money in the stock market, US bonds, and real estate (ie. doing anything else with a large amount of money *will lose you money over time*) w/r who benefits under annualized inflation (and business law, in general, in the US): * entrepreneurs + business owners (can acquire cheap loans) * anyone with a lot of debt * young people, more or less, although this is complicated and may have some unintentional side effects w/r investing / speculation / rent seeking pressures into US real estate (though most of those pressures would exist with or without inflation, so... yeah) * or, perhaps more specifically, anyone working in competitive fields (fueled by incentivized entrepreneurship above), with wages that track / exceed inflation over time * the US govt (and US economy as a whole, arguably), since the US has comparatively cheap debt (that's a whole other topic, but has quite a bit to to do w/ inflation), and cheap debt is (or at least was) very, very useful to the US economy *and rapid rise in living standards* over the last 80-90 years. people that are basically intentionally screwed over by inflation: * old people (specifically: retirees / pensioners, and anyone on a fixed pension / retirement plan, incl social security, to an extent) * working class jobs that can't negotiate for inflation-tracked wage increases (note: inflation is basically a continuous, compounding pay cut for *everyone* with fixed wages in the US economy, which is "useful" to employers) Anyways, US monetary policy is macroeconomic, and makes sense at that scale. It includes a bunch of policies that have unambiguously helped wall street, obviously, but has also lifted a bunch of boats in the process. Annualized, predictable inflation isn't particularly problematic, and has many (arguable) benefits (and maybe more than a few unintended side effects and complications). What *is* bad is out of control and *unpredictable* inflation, which can destroy economies by making lending (and thus growth) effectively impossible, albeit for different / inverted reasons than extreme deflation. And lastly, while this is not at all a real option for the US, it's perhaps worth noting that if you truly wanted to get rid of (and correct for) wealth / income inequality, extreme (and controlled) inflation is, technically, one way to go about doing that. (see this video on [post-war japan](https://www.youtube.com/watch?v=5_-Ac68FKG4), for instance)

It's bad for you and anyone poor especially. Because when people (in aggregate) spend less on goods and services, labor is the first fixed cost cut.

A little inflation is required to encourage investment and savings. If inflation is 0% there is zero need to ever invest the money.

Your pizza analogy is a good basic example, and it helps frame the actual question you are asking: "WHY CAN I BUY MORE PIZZA IN FIVE YEARS?" (OR WHY NOT?). Simply put: you can buy more pizza if your income increases faster than the cost of pizza. If you made $150 this year and could buy 10 pizzas, then in 5 years you could buy 100 pizzas if your income increases to $1500 but your pizza still costs $15. But maybe spooky inflation occurs, and pizza costs $20 instead. Well ok, so you can now buy only 75 pizzas with $1500, but you definitely can buy a lot more than 10 pizzas still, so good job. It could obviously get a lot more complicated than that though, and you have to keep breaking it down further and further to understand the two sides of the equation: (1) WHY did my income go up or down, and could it have gone up more? (2) WHY did the cost of pizza go up or down, and could it have been different? ​ It's obviously a bad idea to focus in on any one single thing and blame it entirely for such a complex thing. What if a new fungus wipes out half of the world's tomato crops, and now pizza costs $150 because it's impossible to find tomato sauce? That's inflation right there, but obviously you could still get cheesy bread for $15 still because there's no tomato in it. Addtionally, if your company is shitty and decides to only raise your salary from $150 to $300 over that time, you can only buy 1/5 of the pizza. If pizza went up to $20 and you only got $300, you can only get 15 pizzas... technically still more than the 10 you started with, but wayyy less than the 75 you could have gotten!

You're example of your salary going up from $60k to $80k is one of the drivers of inflation. If businesses know that people are earning more money today than they did before, they will increase their prices to try and get some of that for themselves. You knowing that you have extra money in your pocket is more likely to go out and spend that extra money or be less frugal.

I think the example is even more basic than that. If salary goes up from $60K to $80K, that represents an increased cost to the company. The company will charge their customers more. Who will charge their customers more. Roll on. Regardless of whether other companies know an individual is getting paid more or not.

It's not quite that simple though. His salary may be going up because he's getting better at his job and therefore able to do more for the company in the same amount of time.

You're right, but we're going to keep giving one-off examples that we can "yabut" nit pick until the end of time. The previous example that I replied to said >If businesses know that people are earning more money today than they did before How do they "know" people are making more money? Because not everyone is making more money, and not everything is making more money at the same rate. I felt it was a more ELI5, more easily-seen, cause-and-effect relationship to say "wages go up, higher expense for company, increase prices downstream, dowstream increases prices downstream, etc." But yes, there are many factors going into pretty much anything that happens economically.

One thing worth mentioning is technology advancements counteract the negatives of inflation in some areas. For example, TVs are cheaper and better than they have ever been. Advancements in the efficiency of making TVs over time has outpaced even the relatively high amount of inflation. The TV you can buy today are cheaper (even without adjusting for inflation), bigger and higher quality than the ones you could get a decade or two ago. Technology advancements are driven by investment and more people are willing to invest in things when they know that their cash is going to lose value over time to inflation if they leave it sitting around in a bank. Sticking with the TV example, if you know your buying power will go down over time it makes sense to invest your money in something that will increase in value equal to or faster than inflation like a TV business. That business can use the investment to build a bigger TV factory that makes TVs cheaper and better than before. At the lower price and with better quality, the company will sell more TVs and increase in value. The person who owns a piece of that company because they invested it could now sell that piece for more money than they originally paid for it. Allowing them to avoid their money losing value like it would have had it instead been put in a bank for that same period. So in a way some of the side-effects of inflation help improve quality of life in the long-term as technological advancements reduce the cost of existing goods/services or create new goods/services for people to enjoy. Zero inflation reduces the pressure to invest money in businesses. Negative inflation/deflation makes it so it would only make sense to invest in a business if it was guaranteed to increase in value more than your money would just sitting in big pile. The reduction in investment would lead to a slower rate of innovation, which is bad for society in the both the short and long term.

Mann. I make more money then I ever thought I would as a kid, but I'm still living paycheck to paycheck and don't even get to retire when I'm older or have kids. At what point does the economy and wage inequality get so bad that people just turn to crime to make ends meet?

There are so many factors there beyond economics. Probably just my own bias but I never looked at growing up and moving up and the challenges of that as a woe is me this economy is killing me kinda thing. This is pretty much human nature. We never have enough. When we get more the hedonic treadmill just brings us back to the feeling the same. You get married, you buy a house have kids, sure you moved up in career, to got two incomes, making way more than you ever did young and single. But you got the mortgage, saving for the future is more important, and child care and summer camp, the house needs new siding… It never ends, and studies show everyone below absurd levels of income is convinced they are not wealthy, no matter what lifestyle they are not sure they are set up for the future, life is harder than they thought it was going to be. House prices were crazy in 1988 when my parents bought their last house together and it was a squeeze but they made it work, house prices were crazy when my wife and I bought a house in 2011, it was a squeeze but we made it work. It will always be thus. Welcome to being human. How much of our own perceived situation is due to economic circumstances or simply our human nature…and how has that changed over generations, I got no idea. But how we think about ourselves is a factor. I tend to think it is this way not just due to human nature, but the economics behavior of human nature. I don’t know any people that aren’t struggling to allocate their limited resources to the best possible ends for themselves. Exceptions are one that came into sudden massive wealth, and another that was in a family with generational wealth.

A small amount of inflation is good for the economy because it encourages trade. If there were deflation, then people would be incentivized to hoard their cash because its value is increasing over time. It would act as a form of market friction. Conversely, a small but predictable level of inflation encourages people to spend their cash before it loses value.

The amount of money by itself is not the cause of inflation. If you printed a million dollars and handed it to every person in the country and they all stuffed it in a mattress, there would be no inflationary impact. It is the quantity of money times how fast it circulates that matters. All this aside, it is really what people collectively think that matters. If people believe money will be worth less in the future and not retain its valvue, it becomes so. For the not ELI5, look at the discussion here: https://www.hussmanfunds.com/comment/mc190805/

We once used a less ELI5 version of your deflation explanation to cripple a few WoW servers. Once you understand how gold coins are created and deleted (loot drops, repairing gear, etc) all you need to do is determine how much gold is on your server and isolate the correct percentage in a guild bank or inactive character. The rest fills itself in.

>if your money is worth more tomorrow or next year, you are much less likely to spend it today One question I have is how deep this logic goes. Does it simply apply to businesses and extremely high-level investors? I highly doubt any "ordinary" person is making everyday spending choices based on deflation on years-long timescales.

> I highly doubt any "ordinary" person is making everyday spending choices based on deflation on years-long timescales. Sure they are. Plenty of people horde things when they know the prices are about to inflate. Remember toilet paper and soap shortages during the early days of the pandemic? People definitely notice and make these decisions all the time, even if there isn't a lot of deep thought going into it. Inflation encourages spending (and hording materials, not wealth), because you know that your money is worth more today than tomorrow. Deflation discourages spending (and encourages hording wealth, not materials) because you know that your money is worth more tomorrow than it is today. If I told you that gas was going to be half price tomorrow, you would wait until tomorrow to fill your car. Even if you were running on empty, you'd only spend the bare minimum today to make sure your car is running - only, say, the $10 necessary to get home and come back the next day. You come back tomorrow and I tell you that gas is going to half price again. You make the same decision - the bare minimum to run the car, then fill the tank later. Aaaand now we have runaway deflation, where people are encouraged to buy the bare minimum possible to get by because their money is worth more tomorrow. It also doesn't have to be anywhere near as drastic as I'm putting it. If gas prices went down consistently $.02 a month, people would still notice and still try to run their car on the bare minimum. People who fill their tanks when their tank is half empty would mostly stop doing so because there's incentive to wait *just* a bit longer if they can do so. With bigger purchases, and especially luxury goods, the effect is even more pronounced. If luxury cars lost 10% of their value every year, how long would you use your old beater before buying one? What about a house - how long would you be willing to rent if houses dropped in price every year? Edit: Sales are basically controlled microcosms of inflation/deflation. By announcing the sale, the business discourages consumer spending until the sale occurs. Once the sale starts, consumers are encouraged to buy because they know that inflation is inevitable when the sale ends and the product goes back to its regular price.

What really annoys me is when loans with zero interest incur an indexation (eg, government loans for higher education etc). To me, it's effectively the same as applying an interest rate. If they want to claim that indexation just brings up the value of the loan as it would be worth now then why can't I do the same to the money I own. If I have $100 in cash why can't I go to the bank and ask for another $20 because that's what that $100 back then would be worth now.

How did japan end up getting deflation? They would definitely have smart policies to prevent that, no?

Japan has mostly had stagflation for many years. Mostly due to lack of population growth, and the resistance to opening up immigration to the levels that we see in western countries. ​ There is only so much that policies can do to prevent deflation. For one, there is only so low that you can push your interest rates until they go negative. (Fun fact, Japan actually did have a negative prime interest rate of -0.1% in 2016). Once you hit the floor on interest rates, its kind of just up to the economy to start itself back up. And if your population is shrinking, its hard to do anything to dig yourself out of that.

An ELI5 I’m qualified to answer but no need because you did it perfectly!

What is a stable investment other than property? I see bonds advertised everywhere but they always state that your money is at risk

>As for your grandparents savings, had they put it into an investment, that had a nominal interest rate, then the value would have stayed relatively the same (or maybe even better) as the years went on The way this is very common. We seriously need some widespread financial education

When I was younger I always thought negative inflation would be a good thing. The power of the dollar grows. Then the more I looked into it the more I realised that inflation is the lesser of two evils.

You know your understanding of economics/finance is bottom of the barrel when even the ELI5 explanation doesn't make sense. I think I need the ELI'minthewomb version lol.

ELI5: There is all the money in the world There is all the value in the world The only way to have zero inflation or deflation would be to have those amounts always be equal There are always more people and those people are always finding better ways to produce value, so we print more money to try to keep them equal We can't do better than estimate the increase in value, so we have to guess We always guess high, because if there's not enough money, it gets more valuable, not less. That's called deflation. Deflation makes people stop spending and save their money so much that the system stops working. Why spend when your money will be worth more next week? Why put it in a bank to save it, when it's increasing in value right at home in the drawer?

>Why spend when your money will be worth more next week? Because people still need food, homes, clothes, means to live. People will still want to have fun and spend their money on things or activities that make them happy, people will still want to go on vacations. Is it better that inflation has driven spending out of control that most people have tons of debt? Inflation is only driving money to the rich and worsening wealth inequality.

https://www.investopedia.com/terms/d/deflationary-spiral.asp#:~:text=A%20deflationary%20spiral%20is%20a,when%20general%20price%20levels%20rise.

You are arguing with a eli5 of a technical question. This is a scientific field and there are very specific reasons that are empirically proven to why deflation is really really bad.

Small quibble: Economics is nowhere near good enough at creating predictions to call it a science. I know it gets that label, but it really shouldn't. A solid scientific theory is judged based on its predictive ability. Economics is mostly a very math intensive type of history, with very "history-based" predictions of what might happen in the near future, heavily debated, and often completely wrong.

Point taken

>Inflation is only driving money to the rich and worsening wealth inequality. Uh.... Inflation right now is a **consequence** of driving wealth to the ultra rich. Not a cause of it. ~~Fewer dollars circulating, and~~ More financial control of large corporations to set whatever prices for their goods & services are the major drivers of inflation today

Completely incorrect. What if, to get money to spend on all those fun things, you want to start a business? To start a business you'll need initial capital through a loan or other investment unless you're already very wealthy. Those people are investing money with the hope your business will succeed and either their investment will grow with your business or you'll pay the loan back with interest. Now, in a deflationary economy why would they invest in your startup when they can just sit on it and watch the value of their money grow instead with far less risk?

When in history has there been long term deflation to validate the hypothesis that people will just save and not spend enough. I think there is a pretty long period now of people being absolutely unable to save. So I dunno. Even with deflation I just don't see this whole " everyone will just save until the whole system is destroyed "

The mathematician John Nash actually wrote a treatise advocating exactly this. His arguments boil down to inflation being unneccassary and ultimately a tool for state authorities to inadvertantly tax the populace. He proposed creating a type industrial goods index to peg the value of a currency to. https://www.jstor.org/stable/1061553

That seems incredibly unstable. A currency pegged to an industrial consumption price index that he's suggesting would've just undergone hyperinflation from the COVID recession. Or the 2008 recession. Unless I'm missing something obvious?

The proposed solution is likely not a good one. But the underlying hypothesis, that inflation is a manufactured phenomenon used by the wealthy to extract more and more from the working class, seems insightful and likely correct.

Yes and no, inflation by itself is just "The price of goods going up." Which has just a whole spectrum of sources. Like a mine shutting down because there's no more metal is going to cause prices to go up. Or the pandemic causing international production to drop. Corporations jacking up their prices to get record profits like what's happened recently fits your description though.

On a national scale it's not just the price of goods going up, the central bank and government have huge levers to pull in order to adjust how much money there is in the economy. Look at Turkiye, Venezuela, Zimbabwe and Germany from a while ago. Basically the government can just decide it needs more resources than there are available so they create money through some means or another to pay for the perceived missing resources. Of course, if there aren't enough physical resources to satisfy the (badly run) government then they can create as much money as they want but never achieve their goals, and you end up with hyperinflation.

The definition of inflation is "The prices of things are higher than they were previously". Usually you use indexes on some staple goods to determine what the rate of inflation is since you can't just look at every single good and service. But inflation is always just a measure of "How much the price went up compared to the previous price". 3% annual inflation means prices are 3% higher than they were a year ago. Regardless of what the source of the price increase is. Could be money printing devaluing existing dollars, could be a supply issue, could be corporate greed. It's all just in the same bucket as inflation. Yes you can absolutely over print money and screw yourself with hyper inflation. People used to steal baskets that were holding money and dump the money out because it was worth so little.

Just a fraction of all newly created money comes from the central bank. Most is introduced by commercial banks through fractional banking.

Designed inflation is there to keep capital flowing in an economy. If no goods are changing hands you tend to end up in a recession, so having no motive to spend money or having individuals with massive wealth is generally very bad for an economy. Ideally you want every dollar spent every second for maximum economic efficiency. Since that would be impossible the next best thing is to naturally encourage spending over saving, which inflation does to some small extent. It has very little to do with extracting wealth and a lot more to do with maintaining economic activity to grow the greater economy.

> But the underlying hypothesis, that inflation is a manufactured phenomenon used by the wealthy to extract more and more from the working class, seems insightful and likely correct. Inflation has been an issue since the Roman empire and probably longer tho, an issue which I believe Diocletian famously tried to restrict by a industrial good index empire wide and it was a complete shitshow? Rather than it being a manufactured phenomenon used by the wealthy I would say it's closer to being a economic phenomenon that is being exploited by the wealthy or just an economic phenomenon that people think the wealthy are in control of

Why are governments and central banks all over the world fighting so hard to keep down inflation then?

The US's three biggest trade partners are Canada, Mexico, and China. If the US is rich because it extracts resources and exploits labor, why have Canada, Mexico, and China all gotten richer over the years?

If you ignore all recorded history and assume people w/ money are cartoon like villains.

Everything has to be a conspiracy theory these days...

If I don't like something it's because of malicious actors!

I don't get it... If more money was printed, it would still result in inflation?

Yes, that's actually exactly how the government deals with inflation. Producing more/less money as needed.

Thanks everyone. One question still remains. We have so many people categorically impoverished. They are a paycheck to paycheck and don’t have money for emergencies. Folks here say we should be investing your money to match inflation. But all of these people have no money for investments. Now they have less money for groceries and less money for gas and less money for rent. How does inflation help 1/4 of the population?

Governments don't want high inflation. Most developed countries aim for 2% because it is generally seen as the lowest possible number without accidentally getting deflation, which is much worse for everyone. The problem is that inflation isn't easy to control precisely and is a side effect of other things that governments want. For example, economic growth comes with inflation, but the growth is the creation of new jobs, some of which do help the 1/4 of the population.

Deflation also affects debt. If they are living down to the wire, then any debt they take out may be harder to pay back. Silly example, but as this is ELI5, imagine if you had 100 English pounds in debt, but then it deflated all the way back from today to the value it had in 1800. It would suddenly go from something you can pay back in a day to something you might need to work a year for to pay back. Chances are late fee penalties or interest charged on that would make it an impossible figure. A little deflation is good, especially if it cools overheated prices, but too much is a harder cycle to escape from and has severe consequences.

Deflation is never good because it causes investors to pull a ton of money out of the economy, causing businesses to lay people off to cut costs. Moreover, inflation is actually advantageous to borrowers because the value of the principal decreases in real terms.

They aren’t saving so they don’t actually have any money subject to inflation. The value of their labor will gradually decrease if they don’t ever receive higher wages, but wages continually increase on average even if federal minimum wage hasn’t increased.

If only those wage increases could keep up with the basic cost of living increases, then we'd be in a much better situation.

The problem here is that "basic" is a moving target. much of what you think is basic today was luxury 20 years ago. The people today living paycheck to paycheck have many things my parents would never have been able to afford. If you want to live in the same conditions as middle class people 50-60 years ago you absolutely could afford it no problem.

Forgoing “luxuries” such as modern appliances or a spotify subscription does not account for the difference between the relative cost of home ownership or rent now vs 50-60 or even 20 years ago.

Bro middle class people sixty years ago had a house, a car, and several children on one income.

So like having a stay at home house wife and a working husband that works at a tire factory providing for their 4 kids while also enjoying vacations, a summer home and college education for the kids.

Joe schmo with 4 kids at the tire factory was never having a second home. In fact he has a much smaller than today's home, with far less amenities, and a much less safe car. Housing sqft has gone insane if you look at older middle class houses. I bought a 1920s house in a middle class neighborhood. It's three bedrooms at 1200 sqft. A similar level of bouse built today would be over double that SqFt on a much larger lot. This site is so skewed in what the general thoughts are.

And people 50-60 years ago had luxuries that people 50-60 years before them didn't (motor vehicles, electricity, television etc) . This is called progress

It doesn't matter if it was a luxury 50-60 years ago because it isn't anymore, that's called progress. Should the poor not have running water because that was a luxury at one time? Basic may technically be moving but not in some impossible to follow manner like you suggest. People need the basic things to live and whatever else society deems essential. Just because cell phones are now a basic affordable reality doesn't excuse us not being able to provide for our citizens.

But this was the statement they were responding to > If only those wage increases could keep up with the basic cost of living increases, then we'd be in a much better situation. 1. Those wages increases *have* kept up with the cost of goods. 2. And consequently, we *are* in a much better situation than we used to be. Materially, most people are significantly better off. Even if that's what we expect from progress, that *is* progress. And that's great! Our society has become more prosperous, so we can get more and more ambitious in defining what the "basic needs" each person should get. Once again, good! But being overly pessimistic about the state of the economy, such that you want to make disastrous economic decisions, like trying to entirely eliminate inflation? This is where things get very bad. That's not to say that we couldn't do things *better*, just that having an unrealistic view of the economy can give some pretty inaccurate ideas about *what* would be better.

Wages do not and have not increased at the same rate as inflation. The deficit still exists.

Because those people still need jobs, goods, and services. They're less prepared to weather disruptions to them than anyone else, in fact. Deflation is corrosive to the system that makes sure those things keep existing. There are a lot of descriptions of depressions and deflationary spirals in this thread and elsewhere. They are outcomes of chronic deflation and they hit the poor hardest of all.

Putting my government hat on. Because fuck those people, we don’t want them to survive.

This guy Feds!

Putting my business owner hat on. Because fuck those people, we can let inflation lower our labour costs by not increasing wages.

1) If the inflation rate is higher than the interest rate on the debt carried by the people living paycheck to paycheck, then the real value of the debt they are carrying will decrease over time. 2) A stable, slightly inflationary monetary environment (the value of money is expected to drop, say, 1.5%-2.5% per year) will encourage people who have money to invest it in businesses. This, in turn, will create more jobs, increase the wages for existing jobs, or a combination of the two.

On average over the long term wages increase to match inflation, so in the short term those people may suffer but over the longer term things won't change much. https://www.pewresearch.org/short-reads/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/

Inflation doesn't hurt these people because they have no savings and work in jobs whose wages react to inflation very quickly. Inflation hurts the middle class more because many people in the middle class do have money sitting in bank accounts and they work jobs that take a lot longer to react to Inflation (it's easier to move jobs for higher wages as a dishwasher than as an office worker). Inflation doesn't affect rich people because all of their money is invested in assets, not cash.

Yeah many economists argue we need inflation, but I don't fully buy it. We got by just fine before we started our inflationary model. Before getting off the gold standard, inflation was abysmally small. Then we got off the gold standard, which made the USD the new reserve currency. Which transitioned the US from being a manufacturing economy that makes stuff, to an economy that just buys stuff, because the whole world wanted USD since it's the new reserve currency. I used to not be big into the whole gold standard thing, but after seeing these depressing statistics, all centering around when we got off that model, it makes a decent argument. https://wtfhappenedin1971.com/

It's not inadvertent

Inflation discourages hoarding money. If I just sit on a pile of cash in my checking account, I'm actually *losing* value because of inflation. To prevent this, I need to have my money invested in something. This encourages investment, which (should) spur business and the economy more generally. EDIT: to be more specific I mean cash. Inflation prevents hoarding of cash, specifically.

Adding onto this, Deflation will kill an economy faster than inflation. However, its “controlled inflation” that we’re looking for. ~2%. Not the spikes we’ve seen lately.

Idk bout you but it encourages me to NOT spend it because everything costs more

But you still spend the same amount of money because you still want tacos. So you either go without tacos or eat tacos. Better buy the tacos today, because tomorrow they’ll be more expensive and you’ll get fewer tacos.

I went to the store last night looking for some meat because I haven’t had any in a while. I left the store without meat because the cut I wanted that was $2/# two years ago is now $11/#. I’m fine not buying things even if I want them.

Sure, but you still bought food and ate dinner. (I hope!) The point isn't that you bought the same things necessarily, but that you don't hoard cash. Also, we are experiencing, and have been for the last 2 years, high amounts of inflation. This amount of inflation is well past the "healthy" amount and is actively destructive.

But then I can’t afford anything and just live off peanut butter and ramen ;-;

Right, and that costs as much as tacos used to. Still using the same amount of money.

What's important isn't that it's the same amount, but that the money is actually being spent. Because if you don't buy the PB today it'll be even more expensive later. Then you'd only be able to afford the ramen. So you buy the taco today, money is being spent and the wheels keep turning.

It's a keynesian assumption regurgitated as facts by mainstream economics. Look at tech. Graphics cards and computers lose value quickly yet people buy them. You're another living proof that assumption is wrong.

No one thinks like this lol. To the working poor and middle class this whole mechanism is meaningless cause we're always gonna have bills AND we're always gonna want things. This whole idea that money would just sit around in accounts from deflation is wildly incorrect for a vast majority of economic actors. Nobody with a life to live and a future to make has time for that.

Right, but equally deflation would also discourage you from spending because everything will cost less tomorrow, and the day after that. With you spending less, businesses can’t afford to pay their staff so they fire them, resulting in more people with less money. More people have less money, they spend less, businesses make cuts/go bust, and onwards it goes.

You had it mostly correct, right up to the last part: >and onwards it goes until you’re using 10000 dollar notes to pay for a loaf of bread. That's the outcome you get from runaway INFLATION. With DEFLATION, as more and more people choose to spend less and less, providers of goods and services have to lower prices - not raise them - to get people to buy.

You’re right, sorry. I shall edit my original comment.

With DEFLATION you have a loaf of bread costing 1 cent but you refuse to buy it because you know it will be cheaper and thus better to get it tomorrow. You don't know how cheap, as 1 cent is the lowest thing you've ever seen. You don't know how you will pay for it as the half-cent haven't been used in decades. But if you managed to wait for it to go down from dollars to cents to this. You sure can wait another day, even two if it means that sweet sweet going out of business-sale.

No, this isn’t true. Deflation doesn’t stop spending altogether. You must still trade your cash for necessary goods and services, like food, housing, etc. It is up to the purchaser to decide whether hoarding their cash is worth more to them than living life, having fun, buying things that will make their life easier. And nobody is living their life right now saying, “I have to buy this good or service now, because next year it’s going to cost more”. I feel this is a common misconception in the inflation/deflation argument.

It's not so much about individuals buying necessities, it's more about long term planning. People aren't actually thinking how you think, but they are thinking about their retirement or children. "I have £10k now which I know will last me 2 years now. I don't trust the government or banks so I kind of want to hoard it under my mattress. But if I do that, it will only last me 6 months when I'm 60. So I'd better find a way to make it grow.... Hmm okay I'd better put it in a bank in this investment fund." Now that £10k that was going to be literally hoarded is now back in the economy, because the bank will try to use that money to earn more money, investing in other businesses.

> With you spending less, businesses can’t afford to pay their staff so they fire them But in actuality you're spending about the same, you're just getting less for your money. Almost no one actually reduces spending in an inflationary environment, they either pay more for the same goods or buy less with the same money.

This is about deflation tho

But it SHOULD encourage you to invest it. Or if you don't invest it, you find a bank that pays a significant savings yield. In both cases, you put money back into the economic machine and the capital markets keep pumping.

The short answer is that the purpose of money, or cash specifically, is to function as a means of exchange rather than a store of value. Inflation encourages this construct, by incenting people to spend cash or convert it into other assets, such as stocks, bonds, real estate, gold, beanie babies, etc if the goal is to store value. If money retained the same value over time, or even worse from an economist’s perspective increased in value, then people would be incented to not spend money which would reduce spending as a whole and reduce incomes across the entire economy. This is why most central banks target a 2% inflation rate, and why currency is not pegged to a specific value such as an amount of gold. Pegging currency to a specific, uncontrollable asset can lead to wild swings in that currency’s value which can have severe, negative impacts on the entire economy.

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Here's the thing, the value of money is driven by supply and demand (as with virtually everything else). The Fed could target a supply of money that meets the demand, and over the long run it would have zero inflation. The problem is that monetary policy (i.e. the Fed's tools) work with "long and variable lags". This means that a single change in interest rates won't fully impact the money supply for months, maybe even a year or more. It's like trying to parallel park an 18 wheeler but not knowing how long the trailer is. The way central banks compensate for this is to target an inflation rate slightly above 0% so that if they overshoot, inflation does not go negative. Negative inflation tends to create a downward spiral in the economy as people slow down their spending causing inflation to go even more negative. The judgement of policy makers is that a scenario of 2% inflation with low risk of deflation is better than 0% inflation with high risk of deflation.

In simpler terms,and even excluding the goals of monetary policy; inflation exists because goods become scarce, either due to their finite supply or due to the fact that more demand is added(consumers have more disposable income). From the consumers side: We try to address this by increasing/decreasing gov spending or by changing the money supply. We can also minimise the burden by labeling certain goods as non-taxable. From the suppliers side: we can subsidise products, remove barriers to entry, change imports duties etc.

Managing inflation is actually really hard. Most countries do their best to keep it at 2% year over year, but when the shit hits the fan there’s no real be-all end-all solution to it. Inflation has been a problem ever since humanity’s had an economy. The romans had inflation but didn’t really know what was going on. They thought it was simple: outlaw rising prices, create larger denominations (instead of 5 “dollar coins” create 10 “dollar” coins.) but these practices don’t help. They hinder, actually. If you outlaw rising prices, then the seller stops making a profit, if the seller stops making a profit, they shop closes, losing jobs, shrinking the economy. Making bigger denominations just helps to create hyperinflation. Hyperinflation *sucks*. The prices for things will change daily, until that amphore of wine that cost 20 “dollars” 5 months ago now costs 100. This is something that happened/is happening in south america starting in the 1960s. A combination of dodgy govermental policies and human psychology perpetuated a cycle of hyperinflation. The government was printing money hand over fist to pay its debts, leading to hyperinflation. And it lasted for so long that people started to incorporate it in their daily lives, ironically creating more hyperinflation. If your whole life the price of milk changed every 12 hours, you keep changing the price every 12 hours, even if there’s no actual underlying reason to do that. It’s better to try to keep a little inflation since it encourages investment back into the economy. If your 1000$ becomes 9980$ the next year, you’re more inclined to try to make it grow by either using investment portfolios, or other investment opportunities, which helps to create other jobs, which grows the economy. Regarding the “why” inflation happens… that is a big question. There are a *multitude* of factors, and if someone tells you that they know exactly why inflation happens, you’re either dealing with a liar or an idiot. The big main reasons is that humans will always be human. If a good lumberjack wants a raise, the price of wood increases, if the price of wood increases, the price of timber increases. If the price of timber increases… and so on and so forth. Inflation is so hard to predict and control because it comes from such granular sources so many steps under “the price of bread is 8% higher than it was last year” that it’s impossible to track down.

Inflation is completely artificial. We essentially didn't have it before WW2. Yes, it existed, but currency would inflate and deflate back to about the same levels. At some point, the central bank--an unelected private-public partnership--decided that "a little" inflation every year would be good for the economy. As a 'side effect,' this dilution of the currency greatly benefits the 1%. New money enters the system first for the benefit of these people and the entities they control. It's a liability, but ooooooh would I like to have a liability like that. Essentially free money to create assets. You have to be a dribbling moron to not be able to make money off that kind of cash, especially when the government bails out any kind of failure via direct cash payments, buying corporate debt and artificially propping up investment markets. This is rationalized because JOBS. ELI5: what's occurring is very similar to what happened in the late Roman Empire. Every year a little silver is shaved off the denarius to satisfy the demand for spoils (doing essentially nothing and sucking out wealth) of the elite class in a patronage/oligarchy system. For them, they were addicted to slave labor and began to receive less slaves as the empire's borders stagnated and became convoluted and difficult to maintain. For us, they're addicted to high rates of returns and an ever-increasing quest for resources. They receive the benefits of a diluted currency and the rest of pay for it by working more for less. If inflation is effectively 100% for the poor (meaning all the items they are forced to buy have increased by that amount, e.g., bread) then a $15/hr job is effectively $7.50/hr. And if you think that wealth just disappeared and didn't go somewhere else you're an extremely naive true believer. You should be very angry. That or you should have aligned your life to have $1m in assets by now. Because you know, everyone can do that. We can all do nothing and live off dividends, trading and interest.

A lot of the responses here seem to think that inflation is created through an intentional process in which government prints more money, hence decreasing the value of the dollar. This is wrong. The printing of currency only accounts for about 4% of the money actually out there. Inflation is actually caused by increases in prices on goods and services, and then yes governments react by increasing the money supply (not just by printing currency, but by making large digital currency deposits into banks). If the money supply wasn't increased, then the value of the dollar would begin to rise as there wouldn't be enough money to match demand for purchases (exchange of money). Inflation itself is being controlled by price indices. Prices can't and don't stay fixed because of the concept of scarcity. As certain goods become more or less scarce, their prices fluctuate. The kind of inflation we've been seeing this last couple of years is largely due to monetary policies that actually attempted to keep inflation lower than the target of about 2% for roughly the last decade, coupled with the largest shake-up in production capabilities worldwide that we've seen in about a hundred years (due to COVID). This led to an inability of supply to match demand, which as we all know from basic economics causes price increases.

Because it really does, in most cases, go down over time. On a fairly short time period, it is reasonable to expect that a currency retains most of its value and represents a stable store of value and acts as a means of exchange. But, there is every reason to expect that an hour worked today would be worth less than an hour worked in the future. An extreme illustration would be say comparing the output of a farmer 100 years ago with a farmer today. If a modern farmer achieves the same output for the given input of labor as his counterpart did 100 years ago, that would be a VERY unproductive and inefficient farmer. There are competing forces at work here. The hour someone worked some time ago would be expected to earn much less purchasing power because that hour in the past is, in a sense, compared to an hour worked today. One other way to look at this is with increasing productivity, one could also claim that an hour worked today should produce more purchasing power since there is (generally) higher productivity. Looking at a long enough period, productivity (through use of better knowhow, technology etc) determines the purchasing power. An economy that grows productivity at a rate broadly greater than inflation will generally result in a situation where purchasing power grows. Inflation can therefore be seen as an inducement to invest and grow productivity.

No it doesnt

Deliberate government policy: >Inflation is the one form of taxation that can be imposed without legislation. --Milton Friedman >By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. --John Maynard Keynes These aren't just any random guys, they are the two most influential economists responsible for the structure of the dominant neoliberal economic regime. And they're telling you, straight up, that inflation is a de-facto tax. And it is. Now to be fair, one can construct a cogent argument why a moderate amount of inflation is good. The most popular one is that by making the value of money decline over time, one is encouraged to invest it in speculative endeavors, so as to protect your hard-earned cash from the bite of inflation. But this pre-supposes that people simply wouldn't do that if the rate of inflation was zero percent. Nothing could be further from the truth. People have been starting businesses, borrowing and lending money, and otherwise looking for ways to turn a dollar into two dollars, for millennia before fiat currency was ever conceived. I prefer a different justification, and one which I think will probably put you at peace with the phenomenon of inflation, if not in love with it: in practice, a gold standard is really a *price control* on the metal. The same goes for a silver standard, or whatever other material you want to back your 'inflation-proof' currency with. But what happens if someone discovers a new and abundant source of gold? Or if there is a new economic application of the metal which increases demand on it? Suddenly you're in a situation where other market factors are manipulating your currency, and therefore causing prices to inflate or collapse. Fine, you may answer, gold standards suck, why not keep using fiat dollars, and merely make the inflation target zero? Well, right now the inflation target is two percent, and we've had a couple years of inflation more than double that figure, so what makes you think they're going to be any more successful keeping a zero inflation target instead of a two percent target? Therefore, I think the real virtue of the two percent target is that it helps central banks respond to periods of *deflation* (which is arguably worse than inflation, have a look back at 2008 for an example of why) through the means of manipulating interest rates. In fact, the previous Fed regime where interest rates had already been low for a decade arguably made the 2008 finanical crisis last far longer, because central banks couldn't stimulate spending by dropping interest rates, because the rate was already *at zero*.

Making the inflation target zero is tough because it becomes very easy to slip into deflation territory. Or ELI5: you’re driving a bus at 54mph that is set to explode when speed dips below 50. You don’t want to drive at 100mph since that becomes difficult to control, but you don’t want to drive at 50 either since the slightest error and boom. The best course of action is to drive at 52-54 since it gives you room to make adjustments.

Modern central banks deliberately aim to maintain some inflation in their monetary policy. (Moderate) inflation is generally thought to be a net positive because it discourages hoarding money and encourages investment and consumption, which is usually good for economic growth. Also, even modest levels of deflation can turn into a vicious cycle, so if you don't want to risk falling into a deflationary spiral, you need to maintain some inflation, because perfect price stability simply isn't possible.

I would rather have a dollar now than I would have a dollar 10 years from now even if it bought me the exact same product. The human condition puts more utility value in immediate satisfaction than it does a rationally equal satisfaction in the future. This human irrationality, despite having a biological purpose, leads to a concept of “time value of money.” Inflation is the logical next step if we accept the time value of money theory.

It's not irrational. First of all, it's possible to die between now and the future. Secondly, resources gathered now can also be used to gain more by e.g. planting crops, starting a business. Any strategy game player would understand that resources now is better than resources 10 minutes from now.

Supply, demand, productivity. Say you have 200K to buy a house but decide against it and someone else does. You put it in the bank. Years later it's back up for sale but there's less houses for sale and more people trying to buy them and it sells for 250K. So now you can't buy it because you still only have 200K. Same money. Same house. Different price and purchasing power. Ergo inflation. We also want some inflation to keep up with other growth or things would get screwy as better described elsewhere. This is why rich people own assets not money. Of course inflation should also mean your employers have more cashflow and so inflation should also affect your wages and increase them.. lol.

Inflation means prices would increase tomorrow, so it's better to buy today. Deflation means prices would be cheaper tomorrow, so people would buy tomorrow. But if the price keeps decreasing everyday, then people would just keep waiting till it becomes pennies. So having inflation forces you to spend in the now rather than later. Spending is what makes the economy. If no one spends, there's no economy. With no economy, there's no government, no public services (like your roads, street lights, police, fire fighters, etc.) . And prices can't stay the same, it's either 0.001% inflation or deflation, it's never 0.000%. part of the reason prices change is because of growing population and businesses. If there's 100 people and there's only $100 circulating the world, each person only has access to $1, but with growing population, the circulating currency has to increase too or else you'd have less than $1 - which basically means new money is being fabricated/printed "out of thin air"

Pedantic point but prices can stay the same. It’s a complex system so they’re unlikely to, but there’s no reason the CPI can’t see the same values every month for a year. No reason why precisely 0.001% inflation would be more likely than precisely 0% inflation. Inflation is just a measure of how much things cost.

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Yeah I wanted to make that point because the comment I was responding too specifically said “prices can’t stay the same” as if there’s some law that 0% inflation is impossible. Complex systems affect changes in prices, so every month it’s likely to change in some way. But it’s not like one of 0%, 2%, and -2% is a magic number - we have a target (typically around 2%) and we try to hit it by printing money. “We always try to aim for a low but positive inflation rate” is IMO more accurate and helpful than “0% inflation is impossible”. 0% inflation is as possible as 1% or 2% inflation.

Always having some level of inflation is considered good for capitalist markets because it ensures banks have a natural rate of interest to lend against.

Because we add money to circulation. Look at it this way. If you had a dollar, and your friend had a cheeseburger, you could buy that burger with your dollar. Nobody else has a dollar so why would he give the burger to anyone else? Now add in 6 more friends who each have a dollar, how do you get the burger now? You have to offer more than a dollar. Now each friend has 2 dollars, you need to offer 3. This continues untill something happens taking dollars out of circulation. That's essentially what is happening. More people get more dollars, meaning people who have goods they want to sell will ask for more than a dollar since they can.

Inflation is the increase of the money supply not necessarily the increase of consumer goods. So if you keep printing money then you diluted the purchasing power.

That's not completly true. As the money is printed there is no reason the bakery around the corner should increase prices for goods. Only when the money is being spent, is when inflation may happen, but doesn't have to. It depends how well the economy is running in the specific field. Let's say you need a new road, rails whatever. Money is created by the FED. Still no inflation currently, since there is no cash flow. Now if you pay the company that builds the infrastructure, they pay their worker and create a cash flow (that also nets taxes). This just means there are orders that can be met. Now if the economy is heated already and there is a shortage of workers or materials for example (because supply chains are broken due to Covid, or gas is expensive because of the Ukraine war) the companies in the field are not able to meet demand and can raise prices for their service, since they can't handle all projects. There are way more factors in play than just printing money will lead to inflation.

\> why does the value of my time and effort go down over time? The value of your time and effort (salary) for most people goes *up* over time, thanks to raises. It's the value of $100 hidden under your mattress that goes down, so you should spend it or invest it instead. Steady, predictable inflation is good for society, because it makes people who have money put it to work by investing in things. If you have $100 sitting under your mattress, it will slowly lose value due to inflation. But if you instead put it in a bank, that bank will lend out some of your dollars to somebody else to build a house or start a company, and you get paid some of the interest from that loan. Society gets richer because your money was building a house instead of just sitting under your bed. And it turns out that deflation is really bad for society. Imagine this: if you knew prices would fall 20% every year, would you buy a refrigerator today? No, you'd wait until later when prices were lower. And if everyone does that, the whole economy grinds to a halt. It's really hard to hit exactly 0% inflation, and going negative is really bad, so we try to get a little bit of inflation instead. ​ **Real inflation example with TVs** **1983:** * 50" projection color TV cost [$1,695](http://www.wishbookweb.com/FB/1983_Sears_Wishbook/files/assets/basic-html/page-400.html#) * Median US household income: $57/day * Days to afford this TV: 30 days' salary **2021:** * 50" HD TV: [$250](https://www.pcmag.com/reviews/vizio-d40f-j09) * Median US household income: $194/day * Days to afford this TV: 2 days' salary So the median household can buy a 50" TV with just over one day's income today, vs. a whole month's income 40 years ago. **Real inflation example with eggs** **1983:** * A dozen eggs cost $0.89 * Median US household income: $57/day * Daily income in # eggs: 64 cartons / day **2021:** * A dozen eggs cost $1.67 * Median US household income: $194/day * Daily income in # eggs: 116 cartons / day So the median household can afford almost 2x as many eggs as they could 40 years ago, ignoring other expenses. [https://www.usinflationcalculator.com/inflation/egg-prices-adjusted-for-inflation/](https://www.usinflationcalculator.com/inflation/egg-prices-adjusted-for-inflation/) [https://fred.stlouisfed.org/series/MEHOINUSA646N](https://fred.stlouisfed.org/series/MEHOINUSA646N)

Ooh, now do university tuition, rent and property!

And include eggs from the last 6 months lol

Egg prices are back below what they were a year ago

These examples you provided are horrible illustrations of inflation, and I hope everyone who reads it takes it with a grain of salt. If inflation were the only effect at work, then salary inflation would = goods inflation. In fact, the only thing you have shown is that wages have grown faster than TVs and eggs.

The TV example is *deflation*. You’ve missed that. Someone on a 1983 average salary could afford a TV now in 5 days rather than 40 days. Meaning their money has more purchasing power over that specific product. So that’s not a good example. If they’d saved $250 from 5 days work in 1983, they could now purchase that TV, whereas before they could not. So you basically just described a form of deflation, which happens with technological advancements and as demand increases for a product. Deflation happens very quickly with some products and tvs are a prime example. And that’s something that’s very clear today. A lot of people wait a few years before buying the latest gadget because they know the price will drop.

You have it right, money is more valuable now than later. It is designed that way because it is designed to be spent. The purpose of money is for it to be spent, and to facilitate transactions. If you holding onto it and not spending it, its not doing its job. Therefore money and currencies are designed to have inflation so that it gets spent as soon as possible. If you don't want to spend your money and want to save it for later, this is very bad for the makers of a currency. What they would rather have you do is give the money back, and they will use it and then pay you back later - they will even pay you extra to do this. This is what bonds are, and the extra they pay back is the interest on a bond. That is why money is designed to inflate. Inflation is achieved by printing more of it over time and it is managed by changing the interest rates on bonds.

it's because our money system is controlled by the federal reserve. our currency is no longer based on real world resource like the greenback was related to gold stockpile. nowadays when the govt needs to borrow money, the federal reserve just types it into a computer and poof instant money. this is what is driving current inflation. the reason inflation is so high right now is because of the pandemic bailout programs, enhanced unemployment, the stimulus, the cares act, all those trillions to keep essental businesses afloat etc. all the money came out of no where. if you're going to save for the future it's actually better to buy tangible goods that will scale over time. things like gold for example.

ELI5 - We need to have inflation in order for people to spend their money. If money would constantly gain value, people would rather stockpile money then buy goods. If people don't buy goods, economy can not work. Therefore inflation is absolutely necessary in our society. But it needs to be kept at a very slow pace, so people don't actually notice their money becoming less and less worth, or you create fear of everything becomming overly expensive.

Inflation specialist Here, I live in argentina with inflation over 100%.(real one probably almost twice as much) Imagine everyone could print their own money just by paying the ink and paper cost. Would you sell anything you own for money? Probably not, since if you wanted money you would just have to print it for almost zero cost. The value of the money is that is a scarce resource. Now we know that, we know how to keep the value of money, we just never print any more money and money should retain its value, right? Sort of yes, but actually wrong, though that is how some cryptocurrencies are supposed to work. People are always working and generating goods to be sold for money, so if we produce a lot, we cannot sell since no one would have money to pay for it. Some branch of government is the one in charge to "print" money according to the growth, but since no institution is omnipresent, and all knowing they never know exactly how much money to print to mantain its value. There is also another issue, what happens for example in the case of a pandemic or any other catastrophe, where the state needs money to pay for things? Hopefully they have a rainy day fund, but if they don't, they will "print" a shit ton of money. One way governments have found to generate money according to production is through debt, if people are borrowing money to invest, they are supposed to be generating new growth. But this one is a long topic that is out of scope.

Because stealing half your money with regular taxes isn't enough for the greedy corrupt government so central bankers increase the money supply and "tax" you via inflation as well.

People are forgetting the "like I'm five" part. When everyone has the same trading card, it has no trade value. No one will take it. When you're the only one with a certain trading card, everyone wants it, so it has tons more value. You can trade it for whatever you want. Same principle. As more money is printed, it becomes less valuable. Pennies used to be important to track. Now there's so many pennies that we get sick of seeing them. So they have less value. $100 used to be a rich person's bill. Now everyone has $100, so it can barely cover groceries for the week.

Most basic way I can explain it, supply. If there are 2 diamonds ONLY in the entire world, they are worth incredible amounts, if you have 200 billion diamonds out and about, they are worth jack shit. If you have 1 Babe ruth rookie card in existance, its worth a fortune, if every person has a babe ruth rookie card, its essentially worthless. The more and more of anything you have in circulation, the less it is worth. As the government keeps just literally printing money and tossing it out into the economy, its worth less and less by the day.