The majority of central banks focus on a 2% inflation target. In the developed world, we are experiencing inflation well below this level. I argue this is creating a debt spiral which is completely unnecessary if the true objective should be to increase GDP per capita and equality of income and wealth.
Over the past decades, technology enhancements in extractive industries has increased supply of commodities for any fixed cost. The transfer of knowledge and processes to the developing from the developed world has increased supply and reduced the price of a wide range of industrial and consumer products. The benefit of this should have been a reduction in the general level of prices and a corresponding increase in real wages.
This technology shift, as a result of the digital age, increases potential supply. If real wages were allowed to increase (through falling prices), that supply could have been met by increased demand.
The desire to raise inflation back to 2% has increased outstanding debt across economic business cycles as interest rates are cut to a lower terminal rate as the debt level rises with each cycle. The fear of deflation causes central banks to ease monetary policy too soon, too far in the hope of meeting the 2% inflation target. Debt does not get the chance to either be repaid of written off. Central banks are forced to cut even deeper in the next downturn to cut the interest burden. This creates a spiralling cycle of easy money and increasing debt.
Far better I say, to maintain the money supply as fixed across the business cycle, allow it to increase only to reflect productivity gains. This puts a cap on over-zealous expansion as confidence rises from a recession and forces inefficient operators to default in a slump.
Increasing the money supply, through QE or lower rates, in an attempt to increase prices adds to GDP in the less productive industries if it is not accompanied by rising real wages. Money needs to find a home. Currently it is fed into financial markets increasing asset prices. To some extent this generates activity and GDP; e.g. property sales, but far better to increase output of goods and services which give utility. How does a house or bond sale increase utility yet they add to GDP just as house construction or car production?
But if we allow prices to fall and real wages to rise, the demand will be across all levels of income but have most impact upon those on lower incomes. The demand will not be focussed on financial assets but since it is in the hands of the lower earners, it will create demand for goods and utility based service not financial services.