If the ideal inflation rate is around 2%, won’t money eventually become worthless?
In: Economics
It’s common for inflated currencies to remove a few 0 from their notes. For example turkey at some point removed 3 0s so 1000 became 1, because everyone was making millions every month.
Suddenly everyone making 2.000.000 a month went back to 2.000 a month, and everyone lived happily after.
It is worthless already. Best to think about it as an additional tax on financial prudence.
It’s not the type of economy that’s at fault. It’s possible to have our current economic systems and set incentives to bias growth in areas such as renewable energy, plant-based food, lab-grown meat, reforestation, carbon capture etc and not kill the planet. It’s basically life itself that is hurting the planet, since life is about thriving and being fitter than your ancestors. Humans have been so successful that we’ve created problems for ourselves and every other lifeform by consuming so much and negativity hurting our surrounding environment. It remains to be seen whether democracies are strong enough / effective enough to solve this, or if populations’ demand “for more” will be too much (or if we’re already beyond the tipping point). It’s a very real problem but I don’t think it’s economic systems at fault.
Mild inflation is to encourage people to not hoard their cash under a mattress and to go out and spend it or invest it.
> ELI5: If the ideal inflation rate is around 2%, won’t money eventually become worthless?
There is no ideal inflation rate. Inflation can be at 10% but if there are 10% more goods and services, and the wages increase accordingly, it evens out. More money supply with more goods and services. In the case of the current administration, the inflation was too high.
https://www.usinflationcalculator.com/inflation/current-inflation-rates/
2 pct inflation is.not ideal, it’s just a number that some monetarists thought sounded reasonable. Zero pct is more ideal.
Inflation at around 2% means that prices increase by 2% per year on average. Over time, this does make money worth a bit less each year, but not to the point where it becomes worthless.
Here’s a simple way to think about it:
– **Year 1:** A candy bar costs $1.
– **Year 2:** With 2% inflation, the same candy bar costs $1.02.
– **Year 3:** The candy bar costs $1.04, and so on.
The value of money decreases slowly, not rapidly. The idea behind a 2% inflation rate is to keep the economy growing steadily, encouraging people to spend and invest rather than hoard money, which helps businesses thrive and keeps employment stable.
Money wouldn’t become worthless because the inflation rate is managed to be low and steady. It only becomes a problem if inflation gets out of control and prices start increasing very quickly, which can lead to money losing value rapidly. But with a stable, low inflation rate like 2%, money retains most of its value over time.
So many bad and wrong answers here.
No, Money won’t become worthless, because money is relative.
With a low to interest rate, the prices of everything will rise by a similar amount. For example lets say you make 1000 dollars a month and your rent is 200 dollars a month. Now lets say over the next 20 years inflection is 100%. After those twenty years, you make $2000 a month and your rent is $400 a month. Its still a 1/5 ration. So your money didn’t lose value, because your labor is still worth the same amount when compared to rent.
Low to moderate inflation is not a problem if its balanced and fairly predictable.
A lot of the things that people blame on inflation are really the result of pay inequity. Where the incomes of the wealthy are going significantly, but the income growth at the bottom of the scale is growing slowly and possibly below the inflation rate.
This leads some people to think that if we could keep inflation at zero then everything would be fine, but it actually causes more problems. Trying to keep inflation at zero you run the risk of getting into Deflation which is much worse than inflation and really tough to get out of.
With deflation your money is worth more tomorrow than it is today, so people are encouraged not to spend because things will be cheaper tomorrow. If people don’t spend then they are not buying goods and services, which means people will make less money and slow the economy. It creates a cycle that’s very hard to break. Japan was in a recession for over a decade because they got into a deflation cycle.
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Yes and now that you got started go check the various ways used to “beat inflation”: investments; how “new money” is created: bank loans; and how these two tie together: getting a new loan approved by using investment as collateral.
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