Targeting 2% theft
When I was in high school I was fascinated by economics. Every day my best friend and I — we took voluntary accounting classes and were justifiably labeled the nerds of the class — would read the Financial Times and debate its headlines and their effect on markets.
As someone who tries to think from first principles, I was always perplexed by the target of 2% inflation central bankers were aiming for. To me it always seemed like the target was postulated like an axiom and never second-guessed.
If you asked someone or consulted textbooks, they would give you obscure answers about a safe buffer from deflation, which needed to be avoided at all costs.
Today, Jerome Powell and other central bankers still talk about inflation in the same way.
In order to understand the true source of the 2% inflation target, one needs to observe that 1) inflation is usually caused by an expansion of the money supply, 2) the ability to expand the money supply is necessary for governments to fund their tremendous and growing deficits and 3) inflation typically does not affect a country’s elites nearly as much as its average household.
In other words, 2% is the inflation rate that allows the government to expand its balance sheet by enough to fund its deficit while not infuriating citizens enough to cause political resistance or uproar.
Inflation is a concealed non-consensual tax (i.e. theft).
2% is just low enough for us to not complain.
