In a recent interview, Ben Bernanke said:
Price stability supports healthy economic growth by making it easier for households and businesses to plan for the future. In practice, price stability does not require that inflation be literally zero; indeed, although inflation can certainly be too high, it can also be too low. Cases in point include the United States in the 1930s and the more recent experience of Japan. Most members of the FOMC would like to see an annual inflation rate of about 2% in the longer term.
Does a 2 percent inflation rate make any sense? How does the FOMC come up with this 2 percent number? Is there some low amount of price inflation, like 2 percent, that avoids the boom/bust cycle? When trying to hit this 2 percent price inflation target, is the money supply a free variable?
No, a 2% inflation rate does not make sense. It is not the inflation rate that causes business cycles but the artifically cheap credit used to create the inflation rate. The Fed comes up with the inflation rate by a method worse than a guess. They are borrowing the number thrown out by Milton Freidman who proposed a small inflation rate as the goal for the central bank. No, the only way to avoid business cycles is to eliminate the sources of inflation: Central Banks mostly but also fractional reserve banking(Banks lending out more than their depositors can claim on demand.). The money supply is the only variable, it is the only thing the central bank can do to keep any inflation rate greater than zero.
Its laughable how many times academics, and officials have proposed limiting their inflationary policies.
Funny, I just sent a message to someone on youtube who made a similar arguement. Here is the relevant portion:
"More importantly, you appear to assume that a small amount of inflation is necessary in a growing economy. This betrays an uncritical acceptance of conventional wisdom regarding monetary theory. Are you familiar with the Austrian or French Liberal schools of economic thought? I believe your confusion stems from the idea that stable prices are economically desirable, whereas in reality a stable money supply is optimal. Falling prices are not deflation, and as the technology industry should illustrate, are not necessarily detrimental to an economy. Falling prices brought about through a contracting money supply does of course stifle economic growth, but the answer is a stable money supply, not consistent inflation that relies on some theory of rational expectations.
To put it another way, do you agree that any given supply of money in an economy (within obvious limits) is sufficient to fulfill its purposes, assuming goods are allowed to rise and fall relative to the monetary unit freely? As an example, see how Paul Krugman’s Babysitter analogy falls apart after allowing prices to fluctuate unhindered. http://www.amconmag.com/article/2009/jan/12/00031/
Is there a reason an increase in the money supply is beneficial to an economy in the long term? It seems to me that any industries stimulated through credit expansion not backed by deferred consumption (IE savings) do so at the expense of other sectors who are competing for those resources. I defer to F. A. Hayek for an excellent illustration of this fact. It seems that the difference between hyperinflation and an “optimal” amount of inflation is different only in degree."
Where does this idea of a “stable price level” come from? Why do these people make the unctritical assumption that prices should be stable, when the determining factors aren’t? It is extremely lazy.