eli5: If a 2% inflation is considered good and healthy, will this not at some point cause abnormally high money values or a currency crash?
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Absurdly high monetary values: Yes.
Currency crash: not if it maintains that rate on average.
For a currency to crash people have to lose faith in it. This normally occurs if there is a rapid devaluation. A slow but steady devaluation allows the public time to adjust without causing a panic.
Abnormal is relative. Many currencies have higher sticker prices compared to USD/CAD/GBP/EUR that seem abnormal to countries using USD.
Crashes are inevitable in a system left to markets with little oversight or input, but also as a social phenomena, subject to perception. Tldr; If inflation is slow, people don’t freak out and cause a crash.
No, very likely not. A 2% steady inflation (for explanatory purposes) is a doubling of price every 35 years. This is easily something that most people can accept and have accepted much higher – a lifetime of purchasing something would see it quadruple in prices at 2% inflation.
Money is a created product. So it isn’t something that will “run out”. What is important is relative predictability and stability.
Not necessarily.
Look at the Japanese yen as an example. Their currency means you have to spend like 100 yen fir a soda, for example. This hasn’t had a significant impact on the value of Japan’s currency.
Keep in mind that as it currently stands, a person from 1920 would consider our currency to *already* be abnormally high money values. Milk is like 30x more expensive in terms of dollars than it was 100 years ago.
Currency crashes happen when a currency is over or under valued. Inflation happens over a long enough timescale that demand adjusts accordingly.
Sure it does, think about this. How much did a piece of bubble gum cost a hundred years ago, a penny? Now it’s a quarter? That’s a 25 times increase in price over 100 years.
The value of currency absolutely keeps changing, it’s just at a slow enough pace that people don’t notice it too much.
Well, for one, it all depends on how you define “abnormal”. For instance, the Japanese Yen seems abnormal to the US Dollar (128 Yen = $1) or the Euro (136 Yen = 1 Euro). But there’s nothing really strange in practice, because nothing is denominated in decimal Yen, and the smallest coin they issue is the 1 Yen coin.
Secondly, even if it does become a problem, there are ways to address it. Even the nuclear option of completely replacing a currency has been done successfully elsewhere, such as the Europe with the Euro and Brazil with the Real.
One day, prices might be much higher… there was a time a loaf of bread was 30 cents, not $3.00 we see today. One day it’ll be $30.00. But will that seem odd if the increases occur slowly over time?
But countries can also re-value their currencies to drop 0’s off. I was in Mexico about 20 years ago when they did it… the New Peso took effect Jan 1, and Old Peso bills were accepted at 1/1000 face value for year or so until they could all be swapped out. Peso/Dollar exchange rate went from about 5000/1 to 5/1.
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