Should we lock the Canadian Dollar with the U.S.?

[Machjo]

You're quite right Machjo, any inflation is definitely bad.

The way I see it, inflation encourages excessive spending, and deflation encourages excessive saving. If you aim at 0 inflation, then you're encouraging neither, thus leaving it up to individual citizen to decide how much he wants to save or spend without artificially imposed penalties on that decision.

I'll be honest, I'm kind of attracted to this idea:

Islamic gold dinar - Wikipedia, the free encyclopedia

Since the value of the coin is intrinsic to its composition, the government can neither inflate nor deflate its value as it pleases. the value of the coin is intrinsic to its metal content, and so its value remains no matter what the government does.

 

[Machjo]

And we also know that governments are attracted to short-term benefits, specifically as it relates to a four-year time span.

1-2% inflation is perfect since it promotes growth while ensuring that the negative consequences of that growth are not likely to be felt within a four year period, unless of course it's been going on for awhile.

Looking at it that way, 1-2% inflation is politically beneficial

 

[JLM]

The way I see it, inflation encourages excessive spending, and deflation encourages excessive saving. If you aim at 0 inflation, then you're encouraging neither, thus leaving it up to individual citizen to decide how much he wants to save or spend without artificially imposed penalties on that decision.

I'll be honest, I'm kind of attracted to this idea:

Islamic gold dinar - Wikipedia, the free encyclopedia

Since the value of the coin is intrinsic to its composition, the government can neither inflate nor deflate its value as it pleases. the value of the coin is intrinsic to its metal content, and so its value remains no matter what the government does.

Regardless I think smart people save for a rainy day and future needs.

 

[Machjo]

Regardless I think smart people save for a rainy day and future needs.

It depends on what you mean by 'save'. If there is inflation in the economy, 'saving might mean buying gold or hedging against the inflation in some other manner. In the absence of inflation, it may mean saving the money itself in some way.

Also, there are other options beside saving, such as investing. However, in times of inflation, the growth of the investment might be unsustainable, causing people to lose out on the investment when the market crashes. This thus increases the risks of investment, thus potentially leading some more cautious investors to opt for more saving over investment, in the form of gold if possible.

Inflation increases investment instability, and let's not forget some do confuse investment with saving, which really are two distinct concepts.

 

[Machjo]

After all, there is nothing wise about saving inflating money. You either invest it or hedge it, and save something stable like gold and such.

 

[Machjo]

And again, people who are too poor to save much money find whatever they do save water down over time, which is not fair to them, if the currency is always inflating. They've earned that money and the government has a moral obligation to protect the value of those savings.

 

[SirJosephPorter]

Any inflation is bad. Think about it. If you're dealing with a poor person trying to save whatever he can for his future, even 1% inflation hurts and waters down his hard earned money, forcing him to make harder decisions between saving now and spending before prices rise.

The only real difference between 1% and 10% inflation is the degree of the pressure put on him. The only money one can hedge against inflation is what one earns beyond what is required for his sustenance. As such, the poor, who have no spare money to hedge against inflation, take the full brunt of it, whereas the rich who can hedge against it with their spare money cake a lesser brunt of it. On that front, we could even argue a moral front against inflation.

As for deflation, I agree that it is equally harmful and for similar reasons. A rich person can save some of his money and wait while prices go down, while a poor person has no extra cash to spare. Either way, inflation of deflation, the poor take the majority of the brunt of it, even if it's moderate.

Now please explain why moderate inflation is 'good'?

So what you are saying is that the economy must be balanced on a knife edge, with zero inflation. If it is slightly positive, we are doomed, if it is slightly negative, we are doomed? That is a rather strange point of view.

There is nothing wrong with a small amount of inflation, less than 2%. In a growing economy the demand for goods and services is always increasing. That will temporarily lead to a minor shortage and a slight increase in prices, until new products, services are generated and catch up with demand.

In a dynamic, vibrant economy, there will be slight inflation. It is neither avoidable nor it is desirable to avoid it. As to the poor you are so concerned about (strangely, you were not concerned about them when you advocated abolishing the minimum wage for the poor, when you were all for giving the employers the right to pay starvation wages), that much can be made up by social assistance for those out of work or by pay increase for those in work. In a growing, vibrant economy, pay increases of 1 or 2% are not at all unreasonable.

 

[SirJosephPorter]

Any inflation is bad. Think about it. If you're dealing with a poor person trying to save whatever he can for his future, even 1% inflation hurts and waters down his hard earned money, forcing him to make harder decisions between saving now and spending before prices rise.

The only real difference between 1% and 10% inflation is the degree of the pressure put on him. The only money one can hedge against inflation is what one earns beyond what is required for his sustenance. As such, the poor, who have no spare money to hedge against inflation, take the full brunt of it, whereas the rich who can hedge against it with their spare money cake a lesser brunt of it. On that front, we could even argue a moral front against inflation.

As for deflation, I agree that it is equally harmful and for similar reasons. A rich person can save some of his money and wait while prices go down, while a poor person has no extra cash to spare. Either way, inflation of deflation, the poor take the majority of the brunt of it, even if it's moderate.

Now please explain why moderate inflation is 'good'?

Indeed, when you advocate exactly zero inflation (not slightly positive, not slightly negative); you are saying that supply and demand for any goods, any services must be exactly matched, no excess or no shortage. What world do you live in, when has that ever been possible?

When supply outstrips demand, prices fall. When demand outstrips supply, prices rise. In a growing economy, demand for all kinds of products, for services is always increasing. It takes time to generate new products, new services to fulfill those demands. Of necessity, there has to be some inflation in a growing economy.

When you say inflation must be zero, you are advocating a static economy, one that is neither growing nor shrinking. That is an impossible situation, sustainable perhaps for very short periods of time, but no more. You cannot have a growing economy without a slight amount of inflation. The inflation we currently have in North America is about right.

 

[Machjo]

So what you are saying is that the economy must be balanced on a knife edge, with zero inflation. If it is slightly positive, we are doomed, if it is slightly negative, we are doomed? That is a rather strange point of view.

Exaggeration aside, more or less. Sure the government cannot control inflation completely, but it could aim the currency towards a set value and always try to bring it back to that value after any bout of positive or negative inflation, thus moderating its effects.

There is nothing wrong with a small amount of inflation, less than 2%. In a growing economy the demand for goods and services is always increasing. That will temporarily lead to a minor shortage and a slight increase in prices, until new products, services are generated and catch up with demand.

So what you're saying is that the government ought to blackmail people into spending before prices go up even if they'd rather save and wait.Such growth is unstable in the long term. I'm all for growth, but I'd rather see slow but sustainable growth rather than fast and impressive growth beyond our means only leading to recession, bankruptcies and bailouts later. A man has a right to save his hard-earned money under his pillow ad know that it will still be worth the same years down the road.

In a dynamic, vibrant economy, there will be slight inflation.

Not necessarily, unless we'd already addicted it to inflation as we have done already. I understand that to bring the rate of inflation down below the habitual rate would cause some short-term harm to the economy since those who'd been spending more than desired to beat prices would then start saving for awhile, causing a temporary re-adjustive recession. Once the economy would be used to that though, spending would increase again along with growth, but this time with more savings behind it, thus making it more sustainable growth less likely to fall into recession later, unlike inflationary growth, the very recipe for recession down the road.

It is neither avoidable nor it is desirable to avoid it.

It is avoidable.You raise taxes and reduce spending, taking excess money out of the economy.

As to the poor you are so concerned about (strangely, you were not concerned about them when you advocated abolishing the minimum wage for the poor, when you were all for giving the employers the right to pay starvation wages), that much can be made up by social assistance for those out of work or by pay increase for those in work. In a growing, vibrant economy, pay increases of 1 or 2% are not at all unreasonable.

you obviously have selective reading. I did oppose minimum wages precisely since they can hurt the poor. I'd also proposed however that we introduce German-style co-determination laws so that workers can always negotiate fair wages. I'd also promoted the idea of school vouchers for those below the poverty line so as to educate them further so as to increase their natural market value rather than price them out of the market with minimum wages. Minimum wage is really just fixing a leak with tape.

As for inflation and minimum wages, workers are then forever dependent on the whims of the government to raise their wages now and then, always with the minimum wage hike either having little to no impact, or putting them out of work. Further education and the power to negotiate fair wages for themselves puts more power into their own hands rather than making them so dependent on the government all the time. We have to look beyond the feel-good qualities of supporting a minimum wage ad consider the reality behind them.

Sweden is doing quite well for itself I'd say.

 

[Machjo]

Indeed, when you advocate exactly zero inflation (not slightly positive, not slightly negative); you are saying that supply and demand for any goods, any services must be exactly matched, no excess or no shortage. What world do you live in, when has that ever been possible?

When supply outstrips demand, prices fall. When demand outstrips supply, prices rise. In a growing economy, demand for all kinds of products, for services is always increasing. It takes time to generate new products, new services to fulfill those demands. Of necessity, there has to be some inflation in a growing economy.

When you say inflation must be zero, you are advocating a static economy, one that is neither growing nor shrinking. That is an impossible situation, sustainable perhaps for very short periods of time, but no more. You cannot have a growing economy without a slight amount of inflation. The inflation we currently have in North America is about right.

Prices rise in an unstable economy where growth is too quick or where demand outstrips supply. Sure the government cannot control it completely, nor should it control inflation on specific products. It ought to control overall inflation though so as to not put undue pressure on people to race against prices thus encouraging them to spend more than they can afford. Inflationary growth is unstable. It looks good in the short term, but catches up to us later. So what's the point of such growth if it's only bound to lead to a crash later anyway.

 

[JLM]

Prices rise in an unstable economy where growth is too quick or where demand outstrips supply. Sure the government cannot control it completely, nor should it control inflation on specific products. It ought to control overall inflation though so as to not put undue pressure on people to race against prices thus encouraging them to spend more than they can afford. Inflationary growth is unstable. It looks good in the short term, but catches up to us later. So what's the point of such growth if it's only bound to lead to a crash later anyway.

Any amount of inflation is bad, especially for seniors who (to play it safe investing) invest largely in fixed income funds. Any inflation just eats substantially into any profits.

 

[Machjo]

Any amount of inflation is bad, especially for seniors who (to play it safe investing) invest largely in fixed income funds. Any inflation just eats substantially into any profits.

But hey, some people can hedge their funds. As for the rest, as Marie Antoinette used to say, Let them eat cake.:lol:

 

[JLM]

But hey, some people can hedge their funds. As for the rest, as Marie Antoinette used to say, Let them eat cake.:lol:

And Marie Antoinette lived just long enough to realize making that statement was a huge mistake............:lol::lol::lol:..............Hedging is one trick around it but most seniors and probably the ones that can least afford it are probably not sophisticated in the advanced tricks of investing.

 

[Machjo]

And Marie Antoinette lived just long enough to realize making that statement was a huge mistake............:lol::lol::lol:..............Hedging is one trick around it but most seniors and probably the ones that can least afford it are probably not sophisticated in the advanced tricks of investing.

Then they can spend it on cake... and hurry up about it already before the price increases again.:lol:

I'm feeling a tingling in my neck already.:lol:

 

[Machjo]

On a serious note though, if we consider that the poor are the ones who take the brunt of the inflation, it is bizarre the political left is usually the least concerned about it.

 

[JLM]

On a serious note though, if we consider that the poor are the ones who take the brunt of the inflation, it is bizarre the political left is usually the least concerned about it.

If the Political Left had all the answers they'd be in power all the time. :smile:

 

[SirJosephPorter]

Exaggeration aside, more or less. Sure the government cannot control inflation completely, but it could aim the currency towards a set value and always try to bring it back to that value after any bout of positive or negative inflation, thus moderating its effects.

Government cannot control the inflation completely? I would say they can never control it on the knife edge, as you want them to do. The only vehicle government has to control inflation is interest rates. There is no way they can adjust interest rages to give exactly zero percent inflation.

Invariably they will overdo it or underdo it. If they raise interest rates too much, they will cause deflation. Once deflation starts, it is very difficult to control; deflation can lead to a depression, since it reduces demand for most goods and services.

Indeed, I haven’t seen any economist of the left or the right, suggest that government manipulate interest rates to keep the inflation exactly at zero. It cannot be done.

So what you're saying is that the government ought to blackmail people into spending before prices go up even if they'd rather save and wait.Such growth is unstable in the long term. I'm all for growth, but I'd rather see slow but sustainable growth rather than fast and impressive growth beyond our means only leading to recession, bankruptcies and bailouts later. A man has a right to save his hard-earned money under his pillow ad know that it will still be worth the same years down the road.

Government doesn’t have to blackmail anybody, people will spend as they see fit. But the point is, there cannot be any growth without a small amount of inflation. If supply and demand are in balance all the time, that means that there is no increase in demand, the economy is stagnant.

And whee is this right that you mention of a man to keep his money under the pillow enumerated? In the Charter?

Not necessarily, unless we'd already addicted it to inflation as we have done already. I understand that to bring the rate of inflation down below the habitual rate would cause some short-term harm to the economy since those who'd been spending more than desired to beat prices would then start saving for awhile, causing a temporary re-adjustive recession. Once the economy would be used to that though, spending would increase again along with growth, but this time with more savings behind it, thus making it more sustainable growth less likely to fall into recession later, unlike inflationary growth, the very recipe for recession down the road.

If you mean bring inflation down to zero percent, government will almost certainly get it wrong and cause deflation. If we have deflation for any length of time, that will lead to decreased demand. As a result, companies will downsize, putting people out of work, further decreasing demand, leading to more downsizing. It is a vicious cycle, which will lead to depression.

Not surprisingly, I don’t know of any economist which embraces such crazy economic theory (that government must maintain zero inflation at all times).

It is avoidable.You raise taxes and reduce spending, taking excess money out of the economy.

and how is that going to guarantee exactly zero inflation?

you obviously have selective reading. I did oppose minimum wages precisely since they can hurt the poor. I'd also proposed however that we introduce German-style co-determination laws so that workers can always negotiate fair wages. I'd also promoted the idea of school vouchers for those below the poverty line so as to educate them further so as to increase their natural market value rather than price them out of the market with minimum wages. Minimum wage is really just fixing a leak with tape.

There is no guarantee that what you are saying will work in Canada. Workers may not always be in a position to negotiate. Especially when there is high unemployment, the employer may demand say, 20% pay cut, or he will threatne to lay off 20% of work force, whether he needs to or not. Workers may easily be cowed into agreeing to the pay cut.

Another problem is that in some industries, there are many foreign born workers, they may not be very educated, they may not even know much English. Such workers can easily be exploited by unscrupulous employers. We know that minimum wage works for everybody.

 

[SirJosephPorter]

Prices rise in an unstable economy where growth is too quick or where demand outstrips supply.

No, prices rise in any economy where demand outstrips the supply. In a growing economy, the companies fill up the increased demand quickly, leading only to low inflation. In a stagnant economy, the demand may be filled up slowly or not at all, leading to high inflation.

Sure the government cannot control it completely, nor should it control inflation on specific products. It ought to control overall inflation though so as to not put undue pressure on people to race against prices thus encouraging them to spend more than they can afford. Inflationary growth is unstable.

That is what governments do, they keep inflation in check by adjusting interest rates up or down. But what you are saying (that government try for zero inflation and in the process, risk deflation) is totally unreasonable, and I don't see any government taking that path towards deflation and possible depression.

 

[Machjo]

Government cannot control the inflation completely? I would say they can never control it on the knife edge, as you want them to do. The only vehicle government has to control inflation is interest rates. There is no way they can adjust interest rages to give exactly zero percent inflation.

That's why I'd mentioned 'exaggeration aside'. Of course the government cannot control it 100%. What it can do though is adopt policies to either inflate or deflate the currency back to its original targeted value. This way people know they can trust the government to maintain their hard earned cash in the long run.

Invariably they will overdo it or underdo it. If they raise interest rates too much, they will cause deflation. Once deflation starts, it is very difficult to control; deflation can lead to a depression, since it reduces demand for most goods and services.

Read above.

Indeed, I haven’t seen any economist of the left or the right, suggest that government manipulate interest rates to keep the inflation exactly at zero. It cannot be done.

I'm not aware of any either, but I'm sure some do, as politically suicidal a stance as it may be. Economics textbooks do talk about the pros and cons of inflation too, and the one I'd read (a school textbook) discussed, interestingly enough, mostly the psychological and political as opposed to the economic benefits of inflation, and also acknowledged the benefits of 0 inflation. Sure the author never took sides in the book, but the fact that the various stances were presented suggests that they are discussed by economists.

Government doesn’t have to blackmail anybody, people will spend as they see fit.

Accepting of course that if they decide to sit on their money it will water down, and so they are penalized for that action.

But the point is, there cannot be any growth without a small amount of inflation.

Wrong. Inflation encourages growth, but growth can still occur in the absence of inflation.

If supply and demand are in balance all the time, that means that there is no increase in demand, the economy is stagnant.

Not necessarily. If a person wants a house, he'll pay to get it built. If the government taxes him and takes some of his money and then does not spend it, then he has less money to spend, yet since the government is not spending either, the construction company has no choice but to accept less money for the work it does. Then again, with prices dropping, it would learn to live with that. So growth could still occur within the context of down-ward adjusted prices. Though I agree that long-term deflation is harmful, it is neither more nor less harmful than long-term inflation. Inflation encourages excessive consumption, a race against prices. Deflation encourages excessive savings in the hopes of dropping prices. Zero inflation over the long term ensures neither, with a more stable and balanced flow of spending and savings.

And whee is this right that you mention of a man to keep his money under the pillow enumerated? In the Charter?

Not all rights are legal. Some are simply moral.

If you mean bring inflation down to zero percent, government will almost certainly get it wrong and cause deflation. If we have deflation for any length of time, that will lead to decreased demand. As a result, companies will downsize, putting people out of work, further decreasing demand, leading to more downsizing. It is a vicious cycle, which will lead to depression.

Get rid of minimum wages, and workers could accept temporary pay cuts instead of layoffs. And since costs would be dropping, they wouldn't mind it anyway. And since deflation can always be countered by inflation, any deflation below the target rate would be a sure sign that inflation is coming round the corner as per government policy to maintain the target value of the currency.

Not surprisingly, I don’t know of any economist which embraces such crazy economic theory (that government must maintain zero inflation at all times).

and how is that going to guarantee exactly zero inflation?

As mentioned above and in previous posts, targeting the value of the currency would ensure 0 inflation in the long term. This does not mean that there may be temporary inflation or deflation in the short term.

There is no guarantee that what you are saying will work in Canada. Workers may not always be in a position to negotiate. Especially when there is high unemployment, the employer may demand say, 20% pay cut, or he will threatne to lay off 20% of work force, whether he needs to or not. Workers may easily be cowed into agreeing to the pay cut.

If workers have a legal say in the company, then they'll willingly accept pay cuts if the employer takes them too. And remember, in times of 0 inflation, salary increases won't be a major issue anyway. And if you improve education for all, then they are more valuable and so have more to offer their employer too, and thus more to negotiate with.

Another problem is that in some industries, there are many foreign born workers, they may not be very educated, they may not even know much English. Such workers can easily be exploited by unscrupulous employers. We know that minimum wage works for everybody.

To enter Canada, one ought to be required to know the local language. And no, we do't know that minimum wage works for everybody.

 

[Machjo]

http://www.minneapolisfed.org/research/sr/sr331.pdf

This is an interesting article showing how the relationship between deflation and recession is not so clearly proven. There have even been cases of growth during periods of deflation. I think the reason deflation leads to recession today is owing to anti-deflationary bias. If we increase the minimum wage and various other kinds of price floors and then have deflation,obviously we have a problem since that would push the real minimum wage up even further as an example. We can say that legislative bias is partly to blame for deflation causing recession.