Definitely not an area I’ve done too much research into, but it’s always seemed obvious to me that interest rates should simply be allowed to float through market forces. Sometimes money should be cheap to get more of to encourage investment, and in those cases, people are already not taking out enough new loans. In some cases money should be expensive to keep the economy from being effectively manic, and in those cases people are already taking out far too many loans. If you have a system that simply lets that happen, you don’t need any interest rate targeting at all.
That isn’t to say that the government would be uninvolved in monetary policy at all, of course. There would still be things like, what fraction of loans need to backstopped by real money, deposit insurance to prevent runs, etc. Of course, the government would simply go through the same process as everyone else to get loans at whatever the rate is. These things could all be changed in response to actual conditions that matter, while letting interest rates do what they’re for.
You seem to favor the idea of targeting inflation which I don’t really. Some things that increase inflation are good. Some things that cause deflation are good. Getting both is far more important than the resultant rate. For instance, efficiency of manufacture decreasing costs is an unalloyed good, but so is the amount that people can afford on their salary. I’ll do a deflationary (not rare in some industries, very rare in others) example because so many people already defend having some inflation.
Suppose, for instance, that a worker is currently making half of what it costs to employ them including all costs. The company makes a nice 10 percent of the revenue as profit.
An outside advance causes a dramatic increase in efficiency, and that company can make twice as much with the same worker. Suppose that the worker’s salary doubles because everyone in the industry is hiring, but other costs stay the same. Total cost has gone up 50% to double production. Further suppose the price is lowered to 80% of what it was due to the glut.
(I apparently completely forgot how to solve math word problems. I hope the following math is right, but the point doesn’t rely on exact numbers at all.)
newProfit= newRevenue—newExpenditures= 1.6OldRevenue − 1.5oldExpenditures= (16/9)oldExpenditures - (3/2)oldExpenditures= ((32-27)/18)oldExpenditures=5/18OldExpenditures=(2/3)(5/18)newExpenditures=10/54 of new revenue=5/27newRevenue
The worker is better off, making twice the money. The customers are better off, with people who would have formerly bought it paying only 80%, and those who wouldn’t have presumably having improved on their next best option. If the worker’s income were denoted in units of what they made, their income is up 250%. The company brings in 60% more revenue for 50% more cost, and their profit has improved from 10% of revenue to 5⁄18 of their former revenue or 27.777777(etc) percent of their old revenue in profit, which is 5⁄27 of their new revenue or 18.518% of new revenue.
Literally everyone is doing better, and there is no reason for the companies to stop advancing, despite a truly massive deflation.
I have unfortunately run out of time to keep working on the comment and make it shorter or better.
Definitely not an area I’ve done too much research into, but it’s always seemed obvious to me that interest rates should simply be allowed to float through market forces. Sometimes money should be cheap to get more of to encourage investment, and in those cases, people are already not taking out enough new loans. In some cases money should be expensive to keep the economy from being effectively manic, and in those cases people are already taking out far too many loans. If you have a system that simply lets that happen, you don’t need any interest rate targeting at all.
That isn’t to say that the government would be uninvolved in monetary policy at all, of course. There would still be things like, what fraction of loans need to backstopped by real money, deposit insurance to prevent runs, etc. Of course, the government would simply go through the same process as everyone else to get loans at whatever the rate is. These things could all be changed in response to actual conditions that matter, while letting interest rates do what they’re for.
You seem to favor the idea of targeting inflation which I don’t really. Some things that increase inflation are good. Some things that cause deflation are good. Getting both is far more important than the resultant rate. For instance, efficiency of manufacture decreasing costs is an unalloyed good, but so is the amount that people can afford on their salary. I’ll do a deflationary (not rare in some industries, very rare in others) example because so many people already defend having some inflation.
Suppose, for instance, that a worker is currently making half of what it costs to employ them including all costs. The company makes a nice 10 percent of the revenue as profit.
An outside advance causes a dramatic increase in efficiency, and that company can make twice as much with the same worker. Suppose that the worker’s salary doubles because everyone in the industry is hiring, but other costs stay the same. Total cost has gone up 50% to double production. Further suppose the price is lowered to 80% of what it was due to the glut.
(I apparently completely forgot how to solve math word problems. I hope the following math is right, but the point doesn’t rely on exact numbers at all.)
newRevenue=1.6oldRevenue newExpenditures=1.5oldExpenditures oldProfit=oldRevenue—oldExpenditures oldRevenue= (10/9)oldExpenditures
newProfit= newRevenue—newExpenditures= 1.6OldRevenue − 1.5oldExpenditures= (16/9)oldExpenditures - (3/2)oldExpenditures= ((32-27)/18)oldExpenditures=5/18OldExpenditures=(2/3)(5/18)newExpenditures=10/54 of new revenue=5/27newRevenue
The worker is better off, making twice the money. The customers are better off, with people who would have formerly bought it paying only 80%, and those who wouldn’t have presumably having improved on their next best option. If the worker’s income were denoted in units of what they made, their income is up 250%. The company brings in 60% more revenue for 50% more cost, and their profit has improved from 10% of revenue to 5⁄18 of their former revenue or 27.777777(etc) percent of their old revenue in profit, which is 5⁄27 of their new revenue or 18.518% of new revenue.
Literally everyone is doing better, and there is no reason for the companies to stop advancing, despite a truly massive deflation.
I have unfortunately run out of time to keep working on the comment and make it shorter or better.