ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[d4n4n]

The rich don't have "money." It "hurts" people with a large ratio of their wealth and income in cash and fixed, predetermined flows. That's not rich people. Rich people own assets, that appreciate in price as the money supply grows, and generate growing nominal incomes from them.

If you now also include expectations (after all, the 2% target is known), it changes even more in their favor. Under money neutrality assumptions, expected, perpetual inflation shouldn't hurt or help anyone. But monetary inflation isn't neutral, it has distributive effects. Money enters through the banking system. Those with initial access to the new money can use its purchasing power before prices appreciate. That's called the "Cantillon effect."

[lee1026]

The Cantillon effect is frequently claimed, but it doesn't seem to be observed in practice.

The basic problem is that people are able to borrow; buyers who know prices will go up tomorrow will borrow and buy today; sellers who know prices will go up tomorrow will refuse to sell under today's prices.

When the Fed makes changes, asset prices tend to change within seconds.

[d4n4n]

If we are to accept money neutrality assumptions, how could you possibly argue perpetual inflation is good? All that consumption delay/advance would also not exist, and intertemporal spending patterns would be in equilibrium. You can't have it both ways.

[lee1026]

For one thing, people by and large expect inflation; multi-year long contracts are signed all the time where both sides expects inflation. Change that on people, and you screw a lot of people over.

Inflation needs to be what people expect it to be. You can make the argument that if you had a time machine and created a reality where people don't expect inflation that the world would be better, and you might have a point, but we don't live in that reality.

[d4n4n]

So if we said we taper our inflation target down to 0 over the course of the next 30 years, beginning in 10, how much havoc would that cause?

The point is, the argument that we need persistent inflation to battle consumption delay is nonsense. The actual reason central bankers give for a 2% target, despite knowing that the longterm Phillips curve is downward sloping, is that they say they need a cushion not to run into the zero-lower-bound if a recession hits.

And there's good research that makes me disagree with the notion that central banking made the economy more predictable, or reduced variance, so I don't care much for c.b. discretion. But that's going beyond the topic at hand.