If the ideal inflation rate is around 2%, won’t money eventually become worthless?
In: Economics
Yes, and no.
The British currency, the Pound Sterling, was, originally, a *literal one pound mass of metallic sliver*, mined from the Sliver mines of Sterling.
It’s obviously worth vastly less than that now, but the economy works fine, weather a pound mass of sliver is £1, £5,000, or £5 million. If the number on the banknotes gets too big we can just knock a few zeros off it.
A small amount of inflation that people can plan around and adjust to is basically the “least bad” option over the long term. It’s sudden rapid inflation that causes problems, or deflation
Mathematically, sure if you consider a limit to infinity.
Realistically, no. A consistent 2% inflation over a lifetime (80 years) is about 5x appreciation in price. Which is not a lot. Humans don’t live forever.
In the US, for example, a loaf of bread probably costs around a quarter ($0.25) in 1960 and today, the average loaf is perhaps around $4.00. This is a 16x increase (far more than 2% annually) – the world didn’t fall into chaos. The data suggests that wages tend to follow inflation for the most part.
Yes and no. There’s a few ways to deal with currency inflation, the ones that generally happen are:
1. Drop smaller denominations. Many places have been eliminating smaller coins as their value drops below usefulness (or the scrap value of the metal they’re made from). NZ dropped their 1 and 2 cent coins decades ago and now doesn’t issue anything below a 10c coin
2. Currency revaluation. Basically, you make a new currency called “New Dollars” that replaces old Dollars and set it to being worth a suitable amount of old Dollars to bring the numbers back to something convenient to use again. e.g $1 New = $1000 old and stop issuing the old currency
3. Make bigger notes. Places with more rapid inflation have gone as high as 100 Trillion units notes in their local currency before giving up and ditching the currency all together. (see Zimbabwe or Germany between WW1 and WW2)
Money itself is already worthless to a degree, especially in the digital age where a vast majority of transactions are literally just numbers. You pay for something, numbers in a machine go up or down, but nothing happens. You’re basically paying with the gesture of tapping your card.
Our system of currency outside of literally trading goods and materials, is worthless, we just have agreed upon structure that assigns worth.
There are different kinds of money. The kind most people think of (paper bills, coins, checking accounts) is made to be a medium of exchange, not a store of value, and so it’s healthy for it to lose some value over time because it promotes circulation. The idea is to keep “money velocity” stable or increasing; without this you get deflation, which is catastrophic.
That’s not the only kind of money though. Treasury bonds and TIPS are also money, a different kind designed to be saved, so they don’t lose value the same way.
If you have a box of cash (or coin) and you lock it up in a safe, then with 2% inflation that box of cash will indeed lose half its value every 35 years.
I don’t know anybody that does that. Most people spend most of their money to live and pay their bills and invest the rest. People do consider “beating inflation” when they make investment decisions. Money itself is for transferring goods and services, it is not meant to be hoarded.
Yes, it will.
Inflation erodes the value of money over time. We measure inflation as prices going up, but the better way to think of it, is *the value of money going down.*
This is bad for the individual, but good for the economy.
Because money loses its value over time, it incentivises people to spend or invest their money, rather than hoard it. That increases consumption of goods and services, which increases employment etc.
Hoarding money the bank will pay you some interest, although interest is *usually* lower than inflation.
Yes.
But that’s the point.
Since you know money will be worth less tomorrow than today you’ll do something with your money other than just hold onto it.
You’ll buy a thing or you’ll lend it to someone at an interest rate better than inflation. Maybe you buy a sliver of ownership in a company who is expanding faster than money is becoming worth less.
It encourages people to spend and keeps money changing hands. That exchange of money for goods and services is the economy.
The theoretical inconvenience of eventually needing to issue currency with fewer zeros is far, far, lesser than the economic damage of deflation, which a “cushion” of mild inflation helps to protect against.
The idea is to spur people to spend money. If money loses its value, you’re more likely to turn your money into something else that doesn’t. You’re more likely to buy a house or build a factory or put it into the stock market rather than let it sit in the bank doing nothing
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