There is a concept of a natural interest rate (also called a neutral interest rate, or r-star). It is the theoretical interest rate where the economy is at full employment, policy is stable (neither contractionary or expansionary), and inflation is low and stable. Basically, it is the rate needed for a good strong economy at its full potential without inflation problems.
Models also reflect the interests and ideas of those who create them, not just the data.The natural interest rate is a moving target over time based on many factors like monetary supply, business disruptions, etc. But, there is a given natural interest rate at any given time. The problem is that we don't understand economics well enough yet to directly calculate this natural interest rate. We can only model it and different models have slightly different results. And we all know models are based on data that is either out of date or hard to measure exactly.
In the US the historical inflation average is noticeably higher, 3.2% to 3.5% depending on the time period you look at. So, the fed's goal of 2% is much lower than historical results (and thus might not be realistic). Note: it does read like you are confusing the fed's goal inflation rate with the natural interest rate. Two different things.The 2% inflation target is a decade old, it's not this historical value rooted in science. It's based on hand waving. Why does a ~20% inflation rate over a decade, and ~50% over two decades seem right? Why don't we want a lower inflationary period after a time of peak of inflation? Otherwise, as inflation is a compound effect you're still dragging the higher values with you.
True, the model maker had to have ideas on which to base the model. But a good model should both adequately model the past (validated) and future (time tested). A model that only reflects the interests and ideas of who creates them likely will fail both of those tests.Models also reflect the interests and ideas of those who create them, not just the data.
I never said that 2% was natural, just that it had been decided, which kind of says that it is not natural unless you believe in intelligent design.Rates don't have a natural level but inflation of 2% is natural? Who decided that it's the natural number? Who decides how to calculate inflation and the so-called core inflation? Maybe we need a transitioning period of even lower inflation to offset the insane amount of inflation that we've already seen? Inflation, in the US, is also still at around 3.3% last I checked.
Low rates have caused a huge housing price hike around the world, and the 0% rates have only stayed so long because of pressure from Trump (at the time) and others - including those nice claims of "transitory" inflation. Now that the damage is done, I'm not sure what the solution will be - but pumping more free money doesn't seem like the correct solution to me.
Generally i totally agree with this, but the rate is just a tool to adjust macroeconomic trends in the direction you want, so it will never have a fixed number it needs to be at.There is a concept of a natural interest rate (also called a neutral interest rate, or r-star). It is the theoretical interest rate where the economy is at full employment, policy is stable (neither contractionary or expansionary), and inflation is low and stable. Basically, it is the rate needed for a good strong economy at its full potential without inflation problems.
The natural interest rate is a moving target over time based on many factors like monetary supply, business disruptions, etc. But, there is a given natural interest rate at any given time. The problem is that we don't understand economics well enough yet to directly calculate this natural interest rate. We can only model it and different models have slightly different results. And we all know models are based on data that is either out of date or hard to measure exactly.
For the Euro area, click on the "HOLSTON-LAUBACH-WILLIAMS ESTIMATES" tab in the link below.
Measuring the Natural Rate of Interest
Model-based estimates of the natural rate of interest, or r-star, and related variableswww.newyorkfed.org
I basically agree with your whole post. But, I do want to at least attempt to defend the delay in raising interest rates (even though the delay was bad and in hindsight was wrong).What is worrying is why the central banks in US, EU and UK didn't immediately start to raise interest rates when the inflation went above 3%. That still doesn't make any sense. When has inflation come and gone by itself?
We need more AII basically agree with your whole post. But, I do want to at least attempt to defend the delay in raising interest rates (even though the delay was bad and in hindsight was wrong).
1) Actual data takes time to collect. Then it gets revised multiple times as new data trickles in. Lots of survey respondents, especially from businesses, are quite late in reporting info because they have bigger issues to deal with. In this particular situation, all data got revised much later. So, when the central banks originally held rates low, the economies looked iffy and inflation looked to be in control. The information that inflation was skyrocketing past 3% wasn't known until ~6 months too late.
All revisions kept going in the wrong direction. Employment which was thought to be in trouble kept getting revised better and better (more consumers will spend). Supply chain and shipping issues which were thought to be short-term kept getting longer and longer. Inflation which was thought to be in check kept getting revised worse and worse. By the time the data revisions came in, inflation was already getting out of control.
2) We had ~13 years of inflation considerably UNDER the 2% goal. There were tons of news articles and posts here about how to increase inflation. Central banks actually had the reverse problem in mind. After years of trying to get some inflation, nothing they tried actually worked. At least at the start of inflation going up, it was likely a relief that they finally met their 2% goal. But then, they realized too late that they went far past it (see #1).
Nope, since it wasn't salaries pushing inflation, people simply needs to have their saleries adjusted in regards to the inflation so they can get the same buying power again.Ideally we should be aiming for deflation, at least to undo the high inflation of the past 5 years and get back to 2019 levels. Just because the rate is back to normal now does not mean the damage is not already done. Everything is still way too expensive. Need to undo the damage.
Are you going to accept a lower salary too?Ideally we should be aiming for deflation, at least to undo the high inflation of the past 5 years and get back to 2019 levels. Just because the rate is back to normal now does not mean the damage is not already done. Everything is still way too expensive. Need to undo the damage.
Inflation wasn't even particularly high or particularly long this time. Look at the peak inflation, it was far worse in 1942, 1947, 1974, and 1980. Look at the width of the inflationary periods: it was far longer in 1980 and a bit longer in 1974. The damage actually was pretty minimal this time around.Ideally we should be aiming for deflation, at least to undo the high inflation of the past 5 years and get back to 2019 levels. Just because the rate is back to normal now does not mean the damage is not already done. Everything is still way too expensive. Need to undo the damage.
Huh? If everything costs more it means you have less money left over once the bills come out, which means it takes LONGER to pay off the debt. Also it means everything cost more, so you go into bigger debt. Houses, cars etc cost way more than they did in the 40's. So even if the inflation RATE was higher, the dollar hit on that was much less than it is now. My parents got their house build in the 80's and they were basically poor back then. Now days that same house would cost nearly 10x to build. So that means going into more debt.Inflation FEELS bad if you have debt, but actually helps a ton since your debt is now relatively much easier to pay off.
Are you going to accept a lower salary too?
If you think mild inflation is bad, you're going to love deflation.
That is how it works with deflation: salaries and wages have to go down too. Don't ask for lower prices if you don't know what it entails.No need for pay cuts, why not just lower prices of things, and leave it at that? I mean it worked before, just bring it back to what it was. Companies are just being greedy if they lower salaries.
Most people don't get the luxery of having their salaries increased to meet inflation unless they work for the public sector, which is us tax payers covering.
Real median wage: as in after including inflation their wages still went up 12%.In November 2023, nearly 6 in 10 workers (57 percent) earned higher annual inflation-adjusted wages than the year before, a share higher than its 2017–2019 pre-pandemic average...Young adult workers who were between ages 25 and 34 in 2019—and are now between ages 29 and 38—have seen their real median wage rise 12 percent since the onset of the pandemic.
So you want 2024 wages with 2019 prices? Because that's the only way that could happen.No need for pay cuts, why not just lower prices of things, and leave it at that? I mean it worked before, just bring it back to what it was. Companies are just being greedy if they lower salaries.
Most people don't get the luxery of having their salaries increased to meet inflation unless they work for the public sector, which is us tax payers covering.
So you want 2024 wages with 2019 prices? Because that's the only way that could happen.
The data from the US shows most people's wages have gone up, and, especially at the low end, they are exceeding inflation.2019 wages with 2019 prices would be fine. Wages didn't really go up much since then really but COL have by a large margin.
Speak for yourself. I’ll take my 2024 wages with 2024 prices* any day of the week. As would the majority of people if they saw the numbers side by side and used them, rather than their feels and unreliable memories.2019 wages with 2019 prices would be fine. Wages didn't really go up much since then really but COL have by a large margin.
Housing is generally the biggest single expense for people...Speak for yourself. I’ll take my 2024 wages with 2024 prices* any day of the week. As would the majority of people if they saw the numbers side by side and used them, rather than their feels and unreliable memories.
*Housing excluded. It’s a shit show out there if you want a new mortgage. My 2019 mortgage feels basically free.
I hung out a few times with brothers that own over 200 commercial buildings in the city I live in (including most of the big ones). I asked that very question. Their answer? It costs too much to cut rent.The commercial real estate market has never made sense to me. Buildings will sit empty for years at a time. One would think that the owners would cut rents until they get a tenant but it doesn’t seem to happen.