Inflation/Deflation and the Federal Reserve

Five years ago the Fed published their long term goal for inflation (modified a year ago) to be 2%/per year. According to the rule of 72, that would reult in 100% inflation over 36 years. That would mean a dollar that I saved as young man would only be worth a quarter today. and a dollar that I had when I retired would today be worth 5o cents.

We all know that cumulative inflation has been much more than that. My young man dollar is actually worth less than a dime, and my retirement dollar? Certainly not more than 50 cents.

Why not a goal of zero? I believe that would terrify the marketers who dominate our economy today. Why would the consumer fall for the “buy now” pitch if there was a chance of his/her money be worth more down the road.

Another reason that businesses like inflation is that it means they make money on the inventory. Imagine if there were the expectation of deflation. Just in time manufacturing would become absolutely necessary.

There would also be a chance for wages to keep up with prices. Imagine that!

The federal reserve theoretically prints Federal Reserve Notes and lends them to the government and commercial banks (and, I think, charges interest on the loans, even to the taxpayers). Thus the Fed controls the money supply and thereby theoretically controls the inflation rate. Of course we know that nowadays there is not much money actually printed but is created in cyberspace. It’s just bits in servers.

So how would deflation affect ordinary people? Would prices fall? Would prices chase wages instead of the other way around? I don’t know but it would be fun to watch, I think.

The seven Fed governors serve 14 year terms, staggered so that a president gets to nominate one every even year and they are then confirmed by the Senate. In practice, however, it is extremely rare for anyone to serve more than a few years. Most resign but occasionally one will die in office. Right now, according to wikipedia, there are two vacancies so only five members. I don’t know why, but I guess the Senate’s relationship with President Obama was, as we know, the epitome of non-cooperation. The only one that I could find who served a full term was Greenspan who served for 19 years (the chairman’s term is 5 years)

Thus, it is really the U.S. senate who is to blame for inflation. If you don’t like what’s been going on, call your senators. Demand that the inflation rate target be zero or below!

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