Can you lend me $100 please? I promise that I’ll pay you back in 10 year’s time. How does that sound so far?
Did you ask what the rate of interest would be? Oh, that would be zero. It’s an interest-free loan. I’m a triple-A kind of guy. I’m good for the money. Just ask anyone.
By the way, the annual inflation rate could be 2% or perhaps more, which means that by the time I repay the loan, the $100 you receive might only buy you $81.70 worth of stuff.
So, do we have a deal?
It stinks, doesn’t it? But that it precisely what the US Federal Reserve is planning to do.
It is called AIT or average inflation targeting. Essentially, the Fed aims to boost average inflation above a 2% target, whilst keeping interest rates ultra-low for years to boost employment.
The two key words are “average” and “target”....