If inflation is bad, and deflation is worse, then what is the best possible scenario for a country(that suffers from inflation)’s economy?
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The best case would be the top 1 percent investing in Healthcare and other economic failures withing the world.
Reining inflation in, back to a healthy low level. High inflation is bad, but low inflation is strongly preferable to deflation, and overall very tolerable. The long-term goal is often around 2% annual inflation.
Curing bad cycles of inflation in the 1970s in the US required cranking up interest rates to the point of causing a sharp recession.
Inflation isn’t bad.
Rapid inflation is bad.
The us had roughly 8% inflation in just one year.
That is huge. Most economist say 1-3% is healthy.
The idea is to not encourage people to horde money.
If you have deflation you are encouraged to not spend money. Rapid inflation you are encouraged to spend every dime you get immediately and things like buying inventory for shop keepers becomes incredibly risky.
Deflation would be catastrophic economically.
Why is deflation worse?
Because under deflation everyone stops spending. Lets look at Hyper deflation to see why. You can by a House for $200,000 but if you wait 3 months the same house will cost $180,000 6 months $162,000, one year $131,000. Why would you buy now if waiting makes everything cost less? When everyone stops spending the economy basically just shuts down.
>what is the best possible scenario for a country(that suffers from inflation)’s economy?
Become the words leading economy and a supper power that dominates all aspects of the world. The US has “suffered” from inflation for 59 out the last 60 years.
inflation is perfectly fine in fact you want about 2% inflation to help facilitate spending. Even 5-6% inflation is not a big deal, We had that we had that for most of the 80s and 90s. We even got through 10% + inflation for most of the 70s. It seems like such a big deal now because we have had crazy low inflation for over 10 years, and like 2% for the 10 years before that. As a result people, and corporations, have sort of forgotten how to deal. Inflation only really becomes a big issue if it stays at about current levels for years on end or if you have hyper inflation, More that 50%.
Generally speaking, the minimum inflation possible that has the most people working.
When our economy had the longest run growth, including wages, from 1933-1965, it was often around 4%. Right now we have a constraint so it’s about 9% and possibly rising still.
Our wealth comes from, roughly speaking, *stuff*. People make, farm, fix, ship, serve, etc stuff. That stuff is real. That stuff is what is used to make better stuff. The whole purpose of money is to deal with stuff, and people dealing with stuff, etc.
Right now theres less stuff in the system than before, but more money. We’re stuck with inflation for a while until we make new stuff (like factories) that allows us to make new stuff (things people want). The alternative to inflation in the current stuff-shortage is have lots and lots of people not work and be too poor to buy stuff. But then they aren’t making stuff, and we’re never getting that lost time back when people who could have made stuff did not, and the real actual real economy is poorer.
Inflation in and of itself is not bad. 2% is generally considered to be the ideal level, and that’s what most central banks target.
Mild and gradual inflation is what we want.
Rapid inflation is bad because it makes everyone get very poor quickly because they have to slend more than they make just to live.
Deflation is bad because is brings the economy to a halt, credit dries up, and everyone is unable to service their debt. Bankruptcies pile up, and everything goes to shit.
Gradual inflation that keeps in line with GDP and wage growth is the sweet spot to keep credit creation and economic activity running smoothly.
The reason inflation and deflation are bad is that they tend to cause runaway effects, though due to slightly different patterns.
With inflation, the runaway effect occurs when inflation is noticeable between when money is earned and when it can be spent or invested, which is typically 2-4 weeks. This occurs as people will start to factor that inflation into pricing by increasing prices, thus causing inflation. This effect only really starts at around 13% annualized inflation (1% per month), and really kicks into gear around 24% annualized inflation (2% per month). Such high levels of inflation is likely to start to affect the government’s ability to pay its charges, encouraging it to print even more money, thus causing more inflation. At low levels, such as the normal target of 2% annualized inflation, inflation does not cause these problems, though it can still have problems if some prices are not adjusted for inflation – which is common with those set by law, such as minimum wage, welfare, and tax brackets.
Deflation gets its runaway effect as people will slow down purchases if they know they can buy the same item for cheaper later. Stuffing money under a mattress, thus removing it from the economy, also becomes a viable, and fairly low risk, investment strategy. Both of these will start to shrink the economy, thus causing more deflation. As the economy shrinks, people producing luxury goods are laid off, causing even less money to be circulating and causing more deflation. The process will eventually stop when the economy has shrunk to necessities and basic luxuries – people cannot stop buying food, and very few people would be willing to live without some luxuries, if they can afford them.
With all of that in mind, the normal target is about 2% inflation. This is enough to avoid dipping into deflation, which can runaway very quickly, while not being high enough to have inflation start to cause problems.
Why is mild inflation good? Wouldn’t no inflation be better? 0% With a base currency that did not change, would it not be more reliable?
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