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Asked a question 13 days ago

I am confused as to why the Federal reserves has an inflation (PCE) target of 2%. I get the broadly speaking price stability mandate why the arbitrary 2% target? why is inflation a good thing ? or is the Keynesian theory of paradox of thrift still applicable today. 2. With MMT what are the cause and effect relationships from top to bottom of QE and near zero interest rate on the real economy in terms of growth and price? 3.With all this 'money printing brrrrrrrrrrrrrrrrrrrrr' are we going to see inflation in the next 5 years (your opinion), or is the Fed trying to creating an inflation expectation, knowing themselves inflation isn't coming? 4.Why would primary dealers (ect) allow the Fed to swap out their risk assets (inflation protectors) for a liquid reserve asset, this only makes sense if primary dealers don't expect inflation?

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Lyn AldenExchange Expert
Founder of Lyn Alden Investment Strategy

Because it's a very debt-based system, policymakers don't want deflation, and want a slight buffer against deflation, and hence 2% is an agreement for them. 

MMT is very different than top to bottom QE. The environment we had from 2008 to 2019 was very top-down QE. MMT instead would be direct spending into the economy, including into middle and working class most likely. 

I do think inflation trends upwards in next 5 years; subject to huge fiscal stimulus. 

Primary dealers get liquidity by selling Treasuries. Reserves are very liquid, although the fashionable narrative is that they are not. They allow banks to buy more Treasuries, for instance. Bank holdings of Treasuries are at all-time highs; they're not selling existing Treasuries; they are serving as pass-through entities to buy Treasuries from the Treasury and sell to the Fed. 

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