What If There Were No More Inflation?

If you ever want to know how much a person actually knows about economics, ask them if inflation is good or bad.  If they say that it’s good, you should immediately laugh in their face and never listen to them about economic matters again.  If they say that it’s bad, you should also immediately laugh in their face and never listen to them about economic matters again.  The only correct answer is to say that it depends on what you’re trying to accomplish.  Another somewhat related question you can use is to ask if we want a strong dollar or a weak dollar.  Again, the only answer is it depends upon your goals.

All that to say inflation can be a very useful tool to manipulate economic conditions.  But it is generally accepted by economists that it is only useful because of a persnikity number.  That number is zero.  Or, to be more precise, the zero lower bound of short term interest rates, a situation we find ourselves in now.  If you are at the lower bound and you want to increase demand, your main weapon is inflation.  You set an inflation target high enough so that businesses and individuals would rather spend their money now than lose purchasing power due to inflation.

But what if you got rid of the zero lower bound?  What if you could go negative on interest rates?  In other words, what if we could make it so that you would have to pay banks to hold your money?  Economist Miles Kimball is proposing just that.

The details of it elude my rudimentary economic knowledge, but it has to do with a switch to electronic money.  If I understand it correctly, paper money doesn’t work because if you go with negative interest rates people/businesses will simply not put their money in the bank.  Electronic money forces you to have a holding company for your money which also makes you suceptible to negative interest rates.  The Federal Reserve can then use their power to manipulate short term interest rates to effectively eliminate inflation and, theoretically, recessions.

It’s a fascinating idea.  It reminds me of Bitcoin, the underground all electronic world currency.  If Kimball’s proposal achieves acceptance, it sounds to me like we’ll soon have a governmentally controlled version of Bitcoin.

One thought on “What If There Were No More Inflation?

  1. Steven Scott

    Huh. My initial fear would be that the people and businesses who are sitting on capital now would just move their money to banks out of the country like they do to avoid taxes. It is interesting though.

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