4% Inflation Best


Summary: The psychological effects of inflation are misunderstood, and misemployed, causing underemployment. Gentle inflation is best, ultra low inflation is bad and dangerous. There are philosophical, and technical, reasons for that.

Gentle, but significant, inflation stirs the economy as needed, and advantages advancing technology relative to the forces of sedimentation of the obsolescing past.

The inflation target of the European Central Bank, 1%, is way too low. The US Fed is just as bad, with its zero interest rate policy, which mostly serves its friends in the plutocracy. As it is, the zero interest rate policy does not provide money to the real economy, and other things need to be done.

One of the things to do: target inflation around 4%.



The European constitution enshrined the erroneous notion that the European Central Bank could enforce the value of the euro without worrying about the European economy in general, as if one could have a currency without an economy (the mandate of the Fed of the USA is to watch over the currency, and the economy).

This conceptual imbalance, a currency with an economic disconnect, led to an overvalued euro, while putting the Chinese economy on steroids, and allowing American plutocrats to splurge through the elaborated web of corruption they sneakily set up for themselves worldwide, leveraging themselves on the strong euro.

The Sino-American circus at the Copenhagen climate conference pretty much torpedoed decades of European evolution towards greater efficiency. It was pretty obvious that Europe’s entire strategy to switch, at immense cost, to sustainable energy and low CO2 production, was a casualty of plutocratically driven Sino-American expediency.

Europe was condemned to keep on sacrificing itself while China rips its intellectual property (example: duplicating Siemens Very High Speed trains!), demolishing moreover its industry by unfair competition, due to the undervalued Chinese currency, and the USA could keep on enjoying quasi free energy, while polluting the entire planet with its addiction to deadly fossil fuels, while rampaging militarily throughout Central Asia, looking for more, as it enjoyed the protection of the overvalued euro.

Something needed to be done. The Sino-American arrogance was enabled by the overvaluation of the euro. European products could not compete. The European economy was stagnating, and its substantial essence was invigorating Chinese and Americans, whose economy progressed by leaps and bounds.

The euro had to go down, European advisers concluded. Miraculously, suddenly, Europe observed the presence of Greece in its midst. It was always known that Greece was a desperate case, as it converted its drachma into euro at too high a rate (making the Greeks instantaneously rich and unemployed). But it had not been observed yet, as it deserved. It’s good to have a desperate case in one’s closet, to frighten the vampires with.

So now the euro is going down. Patriotic Europeans ought not to be satisfied until it reaches parity. Come to think of it, a few years as undervalued as the euro was overvalued, should do wonders for the European economy. (Let see what happens to the plutocratic USA, as it faces competition from correctly priced European products!)

This being said, the ECB inflation target of 1% is deeply erroneous. Inflation actually spurs demand: it is no coincidence that so many German products were sold to the parts of Europe with the most inflation (the PIIGS). Without that inflation, Germany would be doing much less well.

Just an example: Spain has bought Very High Speed trains from Siemens (which reach 250 mph, 400 km/h on the Madrid Barcelona line). Spain could have bought equivalent VHS trains from Alstom, the French company which is the competitor of Siemens. So now Spain has a deficit, and some Germans whine. Would they prefer Spain to have bought French trains? (By the way, the Chinese deconstructed and mass produced Siemens VHS trains, in an apparent violation of intellectual property… and now they propose to sell said stolen property to the USA).



After 1,000 years of intra European wars between people who wanted too much, the meta principle of construction of Europe is to proceed minimally, as needed. No more, no less. The euro was established because one cannot have dozens of countries each with its own currency, in a small place: that was the necessity.

Another more drastic reason is that the French and the Germans (and the Benelux, Austrians and Northern Italians) do not see why they should not have a common currency, although they see plenty of reasons to have one. As far as the French and Germans are concerned, to have different currencies is as smart as having West Texas with a different currency from East Texas. But then France, Germany and the Benelux, that’s 180 million people.

So now 16 countries are in the Eurozone. More are in it informally (such as Romania). Estonia should formally join in 2011.

The euro was established as a currency, without governance, except an honorable promise, that everybody would be saintly, and keep yearly budget deficits below 3% of GDP (and 60% GDP for total state debt). That promise was broken, as soon as France and Germany found it was in their best interest to break it. At that point a crisis was certain: the magic spell had been broken. If France was going to allow a 8% deficit, Germany 6%, why should not Greece have 9.4%? After all the paragons of financial supremacy, the USA, has 11% deficit, and Britain, 12.8%…

So the crisis exploded, after the Copenhagen disaster. Greece was called a disaster, and the money manipulators scurried for their little lives, unknowingly doing the work of French intellectuals. The euro finally went down. A bit too fast, though: scary interest rates of the order of 21% on some Greek government debt were seen. It was time to slow things down.

The French have long promoted ECONOMIC GOVERNANCE. The way many see it in France, French taxes act as a subsidy for many other European powers. And not just because of the completely independent French nuclear umbrella; Britain has long behaved as a less regulated extension of Wall Street, with plenty of fiscal paradises attached to itself (Anglo-Normand islands, Isle of Man; arguably all of Britain was a tax heavens for non UK plutocrats), something that exploded in 2008: the AIG unit that cost US taxpayers around 180 billion dollars was based in London, to fully enjoy deregulation, New Labor style.

The trick to lower the euro degenerated in a sovereign debt crisis, and Europe finally reacted to it. Merkel went to Moscow to celebrate victory on the Nazis with the Russian leaders, as NATO forces paraded on Red Square in front of the Kremlin, as they should. Sarkozy cancelled, stayed home in Brussels to handle the debt and fiscal crisis, leaving French troops to parade without their president.

That was the Franco-German duo at its best: France, seconded by a trusting Germany, in command, making the Lisbon Treaty instantaneously obsolete, as required by the crisis at hand. The European Central bank was suddenly given powers it never had, and that the Lisbon constitution excluded (but which all real central banks have), such as buying bonds from member states (the US Fed has long been selling and buying its own bonds, in a gymnastics incomprehensible for those not abreast of these mysteries… but it is crucial; the Fed also bought for no less than 2,400 billion dollars of mortgages.)

France and Germany together are a superpower. Others have to join. This is how the EU works, how the Schengen Treaty and the Eurozone work.



Inflation is collapsing:

clip_image002BLS, Cleveland Fed.

This is bad: should this go on a bit more, there is no way out.


American economists ought to worry about deflation, instead of penning anti-European rants with no deep philosophical underpinnings. The European Union had deep philosophical roots, 2,000 years before there was Hitler, and he got crushed, he and his fascist racist ideological company. As soon as Germany and France became again politically identical, there was no reason left for the Verdun Treaty’s partition (August 843 CE). So now we have a united Europe, and American economists should worry about depression in the USA, not worry about fostering disunion on a continent far away, in the apparent hope that the USA will triumph once again.

Uncontrolled deflation is flight into terrain, and low inflation targets invite it. It is clear to me that the 1% (!!!!) inflation target of the ECB is a philosophical, and technical mistake. Recently the ECB was congratulating Estonia for having achieved that target: bad.

First technically: inflation can be controlled, by rising interest rates. Once Carter had nominated Volcker to crush inflation, Volcker was able to do so by rising interest rates to 23% (causing 2 recessions and making Carter lose the election).

Deflation cannot be controlled, though. A simple analogy: in a plane, if one is high enough, one can go higher. But if one has gone down too much, one crashes into the ground. A plane can fly higher, but a plane cannot fly underground. Economists need to be brought back to earth safely.

To pursue the aeronautical analogy, an economic bubble is like a stall for a plane: one goes up too high, too fast, forward motion in the medium becomes insufficient, lift disappears and one falls.

Forward motion, in economics, is real progress made into the physical world (some of it Sisyphus style, as in repairing potholes, curing the sick; some of it grandiose, as when switching to new, more advanced technologies, some of it necessary as in teaching the young, and the deciders). The economy, as the plane, needs to provide lift, lest it crashes (the world economy is the largest machine, and, as all machines, it can fail). When the Soviet economy failed, lifespan, health, income and creature comforts collapsed. Economy is not just about profits, contrarily to what plutocrats think (supposing they think)

There is another more subtle effect illustrated by the aeronautical analogy. Applying the full power of zero interest rates when already crashing from a bubble gone wrong, can make the situation worse.

There was a strange crash of an Airbus A 330-200 in Tripoli, with a fatigued, sleep deprived crew, facing the rising sun, with a foggy mist on the ground. The pilots apparently mistook all too long the desert for the runway. After removing the last safeguards of the plane’s computerized brain, they came next to the ground, realized their error, and applied, too late, the full power of the Airbus, which is enormous. The plane reared steeply, more than 20 degrees, said the captain of an Alitalia jet behind, and roared up. But its tail hit the ground hard, tearing from the rest of the airframe. Still dragged fiercely by the engines at maximum power, the jet pitched down, and drove into the ground, pushed by its engines, disintegrating into remarkably tiny pieces.


Controlled Flight Into Terrain. What happens when you apply maximum thrust while crashing into the ground (A 330-200, Tripoli, May 2010).


Morality: if one has already started to crash into the ground, applying more power will only cause further damage.

Translating this analogy to economics: in a free market, fractional reserve banking system, the maximum thrust is given by the zero interest rates policy. The more one lowers interest rates, the more banks can lend (since they get money at zero interest, free money, from the state). Fine, that’s the theory. But to who do they lend, and for what? Absent government control, they will do what they have done best lately.

Unfortunately in the present morally corrupt system, the banks look for the strongest profit, for themselves, and that is not obtained by investing to optimize the real economy. Instead publicly financed private banks invented a casino in the sky where they attribute each other imaginary profits.

Thus, the stronger the banks, the more they do what they do best: giving to their friends, to their politicians, past, present and future, indulging their addiction to derivatives, shadow banking, and various other conspiracies between each other, to create fake profits, while the central banks shower them secretly with free money.

In other words, the lower the interest rates at which the central bank gives money to the banks, the more the banks do exactly what caused the crash. Or rather, the crashes: the financial crash of 2008, and the slower and more formidable crash of the entire social and economic system of the West (which has been going on for more than a decade).

This is true in Europe, where the enormous "private" financial institutions fed the economic imbalances of the PIIGS (Greek GDP per head is way higher than Greek earnings, through borrowing and subsidies). Thus the real economic and fiscal problems of Europe have nothing to do with not providing low interest rates (they are nearly as low as they can get), rather the opposite. The same holds in the USA.

Instead, the economic and social problems arise from the moral values of the main economic actors, what they do, and the activities which have been encouraged, creating imbalances, but mostly a lack of forward lift (hence the Tea Party, the return to no government, the early Neolithic).

Forward lift in economy is provided by better (more powerful, efficient, ecological) technology (necessary, as the old resources and methods get exhausted). So, to sustain the economy and the way of life, one needs to provide continually better, more complex, technology (this flies into the conception of Tainter that higher complexity kills; instead, it saves lives, and provides economic lift).

How does one provide more advanced, more complex technology? Well an ever more advanced thinking system is one necessary factor, dire need and regulation are others. One can even get a little help from the free, for profit market free enterprise as in Silicon valley, where greedsters mix with inventors to produce gadgets.




Inflation advantages the implementation of more advanced technology, because inflation forces people to continual reevaluate their old habits.

Conventional economic theory has it that people look for the cheapest product, or for better products, or a mix of these characteristics. Right. But, before looking, people have to WANT TO LOOK. Or have to be FORCED TO LOOK.

Conventional economic theory has forgotten that detail: if consumers don’t need to bother, they may well not bother. Inflation is a spur that forces economic participants to look, and makes actually the entire public into savvy , even philosophical, economic participants, lest they drown in rising prices.

Indeed, old habits depend upon old values, and old consumption patterns. When inflation permeates the economy, all prices rise, and create a dynamic ecology, by changing continually the environment, forcing speciation of new technology, that serve new habits. It is exactly what happens when speciation in biology is forced by environmental changes.

Increasing prices force people to continually look afresh at whether their old habits are WORTH IT. People see the costs and prices of what they used to like go up, and they ask themselves: why not to try something else?

Often they find the old less worthy than the new. How? New products depending on higher technology benefit from automation and simplification of production. The latest TVs have very few parts, several orders of magnitude less than the old ones, and this is true over all of engineering. Hence the prices of the most modern products rise less. Some will say that the price of these products and services would go down in a zero inflation world, and it makes no difference. Sure, they would go down, but there is a difference.

Te point is that consumers do not have to look at the costs of the new products and services, so they may, and will, ignore them, MUCH MORE than in a world where the products they are used to rise in price.

Also, as inflation works its magic, people will question MORE paying through the nose for traditional, hence less efficiently provided products and services. Basically a good measure of inflation forces the hand (manual labor) to compete with the mind (intellectual labor), and the hand is found wanting.

Gentle inflation continually swirls the economy, for higher performance.

1% inflation target is a clear problem: it risks to forever extend the Great Depression we are in. For all the preceding reasons, 4% ought to be the inflation target. This is not enough, but it will help.



P/S: A well known interest of gentle inflation is that it makes sovereign (government) debt manageable, through nice and easy default, compensated by increased economic activity. This is all the more necessary since the present austerity packages will only make the deflation worse, and are untenable, if not compensated by significant inflation (which will have to be engineered by government programs, as during the New Deal, or with the help of national banks as in India or China; clearly these examples show what needs to be done, in the West, again).

Inflation can be compensated with subsidies for the poor, as France did in the pre-Trichet era (Trichet was head of the Banque de France for 10 years or so before becoming ECB head, and is an anti-inflation hawk of the excessive type).


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6 Responses to “4% Inflation Best”

  1. Inflation Now! (IN!) « Some of Patrice Ayme’s Thoughts Says:

    […] have dealt with that subject many times in the past, such as in “4% INFLATION BEST“. Adding dimensions to what Paul Krugman says, I sketch why inflation is good. One can […]


  2. Waltz, $treet! Perish, People! « Some of Patrice Ayme’s Thoughts Says:

    […] from civilization, while plutocrats feast and the poor starve. I have long explained, as in 4% Inflation Best, that deep, planet saving reasons, exist to get inflation restarted. There are encouraging signs […]


  3. Housing & the Money Trap | Some of Patrice Ayme's Thoughts Says:

    […] Now our errant boy, Krugman, is embracing it idly (caveat: although, before anyone, I pointed out 4% inflation was good, I do not embrace bubbles.) In ‘Bubblephobia and Monetary Policy’ Krugman opines […]


  4. INFLATION GOOD, STAGNATION BAD | Some of Patrice Ayme's Thoughts Says:

    […] will say: oh no, you don’t understand, with 4% inflation, the rich will get richer. Question: how come did the rich not become richer during the post war […]


  5. Bring Euro Down, Save Germany’s Soul | Patrice Ayme's Thoughts Says:

    […] Why? Because “price stability” is unsustainable, just as a plane cannot fly at ground level. In economics, the ground is zero percent inflation. Right now it’s only .3% in the Eurozone. For why inflation too close to zero is a disaster, see “Inflation Good, Stagnation Bad” or the older: “4% inflation best”. […]


  6. Patrice Ayme Says:

    Economy is whatever the government wants it to be. I am not sure the value of the pound did not change for centuries. Closer by, the “30 glorious years” had persistent inflation. I have reasons to love inflation.
    In any case, there few weapons against deflation, short of a massive command economy.
    And I have a technico-ecoomical reason for inflation…


    4% inflation best:



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