Halls of Shrewd'm / US Policy
No. of Recommendations: 2
Would this even work with modern economies that seem to need a bit of inflation to keep aggregate demand from falling off?
OTOH - life in Japan over the past "Lost Decade" was pretty good from the standpoint of low prices, but on the wage side there was very little wage growth over that same period.
One of the more "remarkable" quotes from Buffett's CNBC interview that seems to have flown under the radar.
No. of Recommendations: 2
Buffett’s point is that the goal is stable prices. A buck preserves buying power.
2% inflation is a reasonable OUTCOME. It should not be a goal.
With a 2% goal…3-4% actual inflation is a not entirely unreasonable outcome.
4% inflation is entirely unacceptable.
No. of Recommendations: 18
2% inflation is a reasonable OUTCOME. It should not be a goal.
There are *extremely* good reasons to have a 2% goal, not a 0% goal. That is why they have it as a goal, not because an average of 0% was too difficult.
The first and biggest reason is that deflationary risk to an economy is FAR greater than inflationary risk, because you can get stuck in deflation for long periods, like spinning your wheels in mud. So a slight undershoot of a 2% target by 1-2% is OK, but an undershoot of a 0% target can become disastrous.
The second is that many prices are too sticky. For example, consider the wages in a slowly dying industry. Maybe the work of those workers is really only worth a few percent less than it was previously, and the best allocation of people and resources within the economy is to have those folks gradually move to another activity. The most rational outcome for both that company and the country is for them to have a slight cut in real wages. But people (and employment contracts) pretty much completely eliminate small pay cuts as a possibility, meaning they get overpaid for the value of their work, and both that company and the economy suffer. Thus a little bit of inflation acts as a lubricant: at for example 2% inflation, the growing firms will offer 2% (or more) increases in the pay they offer, and the stagnating firms will keep nominal wages the same (small and relatively painless real pay cuts), slowly tempting workers to move to other industries.
Is there a better idea? Not that anyone has tried yet.
Some recent research, which I find somewhat compelling, is to target a given *nominal* economic growth rate rather than targeting inflation at all. When the economy is cyclically weak and therefore real growth is weak, you'd allow more inflation so that the nominal growth rate stays up near where you want it: a loose and expansionary fiscal/monetary stance. When the economy is booming and overheating, with unsustainably and dangerously high real rates of growth, you'd target much lower or zero inflation (restrictive policies) so that the nominal growth rate doesn't exceed the real one. One advantage of this is that it's easier to measure and react to the nominal economic growth rate than it is to see the current inflation level, so if nothing else you mostly eliminate misreadings of the data.
Jim
No. of Recommendations: 8
It’s absolutely true that deflation can be more theoretically dangerous than inflation — the classic spiral where prices fall, consumers delay purchases, businesses cut prices further, layoffs follow, and the cycle feeds on itself.
But that’s largely a pre-modern problem.
In the real, post-Depression world — with central banks, fiat currency, and instant digital money movement — we now have roughly 80 years of evidence showing that struggling economies don’t stay stuck in deflation. They reflate, and they do it fast.
Why? Because the playbook is simple and politically irresistible:
Put money directly into consumers’ hands.
Voters reward it. Policymakers know it. And when push comes to shove, it happens — every time.
The pandemic was the ultimate stress test:
We literally shut down large parts of the economy, told people not to work, and created what should have been a DEEPLY deflationary environment.
Instead?
Massive STIMULUS + central bank action → rapid reflation → inflation surged to ~9%.
That’s the modern REALITY. Look at the past 80 years.
So yes, deflation is VERY dangerous — but it’s also highly containable in today’s system.
Inflation, on the other hand, is what we repeatedly struggle to control once it takes hold — and it disproportionately harms the working and middle class.
That’s the core of Warren Buffett’s point:
The goal should be stable purchasing power — not targeting a built-in erosion like 2% inflation.
Aim for 0%.
Accept that you will land slightly above it.
But don’t institutionalize inflation and then act surprised when it drifts to 3–4%.
Because in the modern world, the bigger long-term risk isn’t deflation.
It’s the quiet erosion of buying power.
And before someone brings up Japan—
Yes, Japan experienced prolonged low inflation/deflation. But it’s an outlier driven by unique structural factors: demographics (aging/shrinking population), cultural savings behavior, and policy choices that no major Western economy has chosen to replicate.
More importantly, Japan’s experience actually reinforces the modern point:
Even there, policymakers spent decades trying to create inflation through aggressive monetary and fiscal policy.
No one looked at Japan and said, “This is the model.”
They looked at it and said, “Avoid this—and if it happens, reflate.”
That’s exactly the playbook we’ve seen globally for decades.
No. of Recommendations: 13
And before someone brings up Japan—
Well, colour me unconvinced. It sounds like you've said that persistent deflation isn't a problem because it never happens any more, and the one big recent instance that disproves that generalization can be ignored because...it disproves the generalization? (just kidding)
Persistent deflation can be very pernicious, and it can and does happen in the modern world.
Yes, in theory (though clearly not in practice) helicopter money can always solve deflation. I believe the reason it doesn't is that by the time you have persistent deflation because of some set of root causes, those root causes can be very difficult to fix, and the difficulty can rise over time.
My point was merely that there is a very good reason that inflation targets tend to be around 2%. Central banks are always learning more about what not to do, but the evidence to date is that a lot of countries have tried other numbers as targets, including zero and "no target", and the largest number of successes, for extremely good reasons, have been in countries targeting around that number. They can get into Jesuit-like distinctions between "around" and "around but not above", but it's still that area that thinks seem, so far, to work out best.
Jim
No. of Recommendations: 5
“Persistent deflation can be very pernicious, and it can and does happen in the modern world.”
I’d push back on that—not because deflation CAN'T happen, but because in the modern system it doesn’t persist the way it once did.
That’s the key shift.
Pre-Depression, policymakers didn’t have the tools—or the framework—to respond effectively. Today they do. And they use them, consistently.
We’ve now seen repeated episodes where economies weaken sharply and the response is immediate and overwhelming: Monetary expansion, fiscal stimulus, direct transfers.
The pandemic was the clearest example. If there were ever conditions for sustained deflation, that was it.
Instead, the system reflated rapidly.
So the question isn’t “Can deflation exist? ”Of course it can.
The question is: Does it persist in a way that defines the modern risk environment?
The evidence of the last several decades suggests it doesn’t—because the policy response function has fundamentally changed. Fundamental is the operative word. This is not mere coincidence
That’s why I don’t think the 2% target should be treated as some kind of optimal truth.
It may be a practical convention. It may even be a useful buffer.
But it’s also rooted in a risk framework shaped by a different era—one where deflation was far harder to escape than it is today. The memories of the Great Depression will stock with us for life. But we no longer need to worry about not having money--that's an easy simple immediate fix, we need to worry about WHAT OUR MONEY CAN BUY.
In the current system, we’ve shown we can generate inflation when we need to.
Containing it once it’s unleashed has proven to be the harder part.
Disclaimer: 4 years of Jesuit education. So I have a solid excuse for being wrong :)
No. of Recommendations: 1
A far greater concern I have over the Fed's inflation-targeting framework than the exact target itself is how it will function in a AI-driven economy.
If AI and robotics significantly reduce the cost of labor at scale, we will enter a period of sustained, productivity-driven deflation as costs of most goods and services plummet.
In a world without Fed inflation targets, that deflation would greatly increase real consumer purchasing power as each dollar would buy far more than it used to, effectively distributing the gains of technological progress into the hands of consumers through lower prices.
But if the Fed maintains its commitment to broad inflationary targets (even a 0% target), it could respond to those productivity-driven falling prices with large scale monetary expansion to offset it.
Historically, the lion's share of the Fed's money printing has flowed into financial assets such as stocks and real estate, not into the pockets of consumers.
The implication is important: instead of allowing AI-driven productivity to translate into materially lower costs and higher real purchasing power for all, current Fed policy could inadvertently redirect a large share of those gains into asset prices while keeping prices elevated.
Asset holders (e.g., the wealthiest) would benefit disproportionately, while non-asset holders (e.g., the average Joe) would not, robbing the general public of one of the key benefits of an AI-driven future and increasing inequality in the process.
And in such a scenario, where AI may already be causing meaningful short-term labor displacement, this would further compound the burden on those already affected.
This is a conversation the Fed needs to be having now, before these dynamics begin to fully play out.
No. of Recommendations: 7
More importantly, Japan’s experience actually reinforces the modern point:
Even there, policymakers spent decades trying to create inflation through aggressive monetary and fiscal policy.
And yet nearly all of the tools prescribed by our current wonderful knowledge were tried there, unsuccessfully:
Japan combated decades of deflation (approx. 1990s–2020s) primarily through massive monetary easing, including zero/negative interest rates and quantitative easing (QE), alongside fiscal stimulus and structural reforms known as "Abenomics" (launched 2013). These measures aimed to boost domestic demand, encourage borrowing, and raise inflation to a
2% target.
Yes, Japan has some structural differences. How are we to know that there won’t be an equal, but different set of differences that impact our ability to deal with a deflation, given that we haven’t had one in 100 years?
This is a bit too facile, and I think Jim had it right. You aim for 2% because if you’re low, you’re still not in “danger Will Robinson” territory. If you aim for zero% and miss, you are.
No. of Recommendations: 0
Is there a better idea? Not that anyone has tried yet.
Some recent research, which I find somewhat compelling, is to target a given *nominal* economic growth rate Interesting. Another interesting idea is Gundlach's: to just automatically set fed funds equal to the 2-year yield, i.e. let the market set it. He gave a chart showing this is what's actually been the policy for a while anyway, more or less. WAY outside my circle of competence, but I like any decent solution that reduces politics (good luck with that).
https://www.youtube.com/shorts/58rMHJyh4Qc
No. of Recommendations: 12
you’re still not in “danger Will Robinson” territory.
This is a deeply elderly crowd : )
Jim
No. of Recommendations: 2
How the 2% inflation target came about. No great economic research or deep thinking behind it.
The story of the 2% inflation target starts oddly in New Zealand. In 1989, New Zealand wanted to codify the independence of its central bank, and in this bill, it directed the New Zealand finance minister and head of its central bank to come up with an inflation target (Irwin 2014).
Once the bill became law, then an inflation target had to be chosen. In an off-hand remark in an interview, the former head central banker said the inflation target should be zero to 1 percent. However, Don Brash, the head of the central bank, claimed “It was almost a chance remark,” and “The figure was plucked out of the air to influence the public’s expectations ”(Irwin, 2014). They used this number as a starting point and pushed it up to 2% to give themselves a bit more room.
https://sites.lsa.umich.edu/mje/2023/09/04/why-the...
No. of Recommendations: 13
How the 2% inflation target came about. No great economic research or deep thinking behind it.
In a word, no.
This is probably the single most widely analysed and debated number in global macroeconomics in the last 40 years.
The relevant and competent people think a lot more about stuff than you seem to give them credit for. Rail against elites if it makes you feel good, but one definition of "elite" is someone with the training and intelligence and experience to know what they're talking about.
I don't. I can't follow the intricacies of the papers that conclude that 2% is better than 4%. (not all of them, it should be noted). But I appreciate that some do know what they're talking about, and it's painfully obvious that the number isn't used around the world these days simply because some guy plucked from thin air long ago. They might be off, but they are certainly delving as deeply as they can. It's the current consensus (or mode, at least) of a gigantic ongoing debate and analysis process.
Jim
No. of Recommendations: 1
In the current system, we’ve shown we can generate inflation when we need to.
We can sometimes generate inflation. After the GFC, the US and Europe had a hard time following the playbook you outlined. In Europe, deflation set in but central banks couldn't drop rates below zero (at least not every effectively). Europe stimulated but not very much and fairly quickly pivoted to austerity measures, particularly for Southern Europe. Those countries did not fare well and took about a decade to recover to pre-crisis GDP. This lead to secondary problems like rise of populism. The lesson is that you don't want to start off with rates too near zero when a downturn comes, because then you can't lower them.
The US fared better, but the initial stimulus packed was clearly too small, and we also had an austerity contingent in Congress who wanted the opposite of stimulus. So our downturn was longer than it needed to be. I agree with you that we can generate inflation (within limits) but that doesn't mean government officials will act when they need to.
Mungofitch mentioned that inflation allows companies to reduce payroll without cutting wages, which is hard to do. There is another way to cut payroll, and that is to reduce headcount. So if a little bit of inflation prevents some layoffs, that's a good thing. So that 2% target rate is doing some heavy lifting.
