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Low inflation is usually desirable, just think that achieving 2% inflation annually is the main mandate for the European Central Bank. That's because even at 1

by simo7 9y ago

Low inflation is usually desirable, just think that achieving 2% inflation annually is the main mandate for the European Central Bank. That's because even at 1%-2% inflation a year is difficult to spark the so-called thesaurisation phenomenon you're implying. In general I agree with you, I'd just change "low inflation" with "deflation". On the "money" being neutral with constant inflation. Yes, sure. It's the business dynamics that are not neutral. Quick example: - Say you have 10$ costs and 10$ revenue every year. - One year you expand production and you have to pay an additional 10$: so 20$ costs and 10$ revenue for that year. - With 0% inflation you have a 10$ loss (20-10), while with 10% inflation you have (20 * 1,1 - 10) = 12$ (about 11$ on constant prices terms) in loss (revenue won't grow till next year).

BenoitEssiambre 9y ago
First, the ECB has nearly destroyed western civilization with their overly tight stance during the past decade. They destroyed the economy of their weaker members like Greece, eliminated the means of subsistence for their vulnerable workers which emboldened fascists and geopolitical foes like Russia. It was not difficult to spark the "thesaurisation". Excess reserves at the ECB and the Fed shot up by trillions. Natural market rates for investment were estimated by some around -4% and the central banks kept their rates very high at close to 0%. Yes deflation is worst but low inflation can be terrible in some situations. "With 0% inflation you have a 10$ loss (20-10), while with 10% inflation you have (20 * 1,1 - 10) = 12$ (about 11$ on constant prices terms) in loss (revenue won't grow till next year)." Not true, inflation means that revenues are constantly rising faster and financing costs are lower in real terms.
- simo7 9y ago
  > Yes deflation is worst but low inflation can be terrible in some situations. Agreed. But not because of what you are implying: "...people transfer their savings to cash, the world switches from producing real stuff...". That is rather a risk resulting from deflation. I agree because higher inflation can help an economy plagued with insolvent debt to "assimilate" it gradually and create new room for healthy debt. > Not true, inflation means that revenues are constantly rising faster. That's precisely what I'm denying: there's often a significant delay between the outflows of money and the inflows they generate (typically in high fixed-costs businesses). If you're expanding production every year and you see the added revenue only the year after it's not difficult to see how inflation would have a negative impact (even if constant!).
  - BenoitEssiambre 9y ago
    >That is rather a risk resulting from deflation. There doesn't need to be deflation. As long as the real return on cash (around -2% when interest rates are zero) is higher than market safe return on investment (which can be lower than -2%) it can cause a gridlock in the investment market. >If you're expanding production every year and you see the added revenue only the year after it's not difficult to see how inflation would have a negative impact (even if constant!). I don't follow at all. Inflation means prices are rising with time. So the investment early in time is made when prices are lower and the revenues are made later when prices are higher and thus you make higher revenues relative to what you paid for your investment. Inflation helps you here! Insufficient inflation would be the problem. You make your investment when prices are high so you pay a lot, then when it comes to sell your product you get a insufficiently high price and low profit. It's all part of the cost of capital calculation: https://en.wikipedia.org/wiki/Cost_of_capital https://en.wikipedia.org/wiki/Cost_of_capital
    - simo7 9y ago
      > As long as the real return on cash (around -2% when interest rates are zero) is higher than market safe return on investment (which can be lower than -2%) it can cause a gridlock in the investment market. That way holding cash is better than buying a government bond but you're still loosing purchasing power holding cash, so why not spending it? The real problem is when holding cash increases your purchasing power over time. > So the investment early in time is made when prices are lower and the revenues are made later when prices are higher and thus you make higher revenues relative to what you paid for your investment. Inflation helps you here! You reason as if you make the first investment and then that's it. It's not what really happens in most businesses. Imagine you make an investment every year which produces the revenue for the year after.
      - BenoitEssiambre 9y ago
        >That way holding cash is better than buying a government bond but you're still loosing purchasing power holding cash, so why not spending it? You want all retirees to spend all their money at once? What if they planned to live for another while? Safely carrying value into the future is a service that can sometimes cost you. There is nothing unnatural about negative returns. If cash has zero returns when when market rates on private safe investment is negative, savers start accumulating pieces of paper or electrons in accounts instead of things that have real world value and create economic activity. This puts the real investment market into a gridlock and production drops. >Imagine you make an investment every year which produces the revenue for the year after. Yes and it always helps you when the prices are higher when you sell than when you buy.

by simo7 9y ago

BenoitEssiambre 9y ago

First, the ECB has nearly destroyed western civilization with their overly tight stance during the past decade. They destroyed the economy of their weaker members like Greece, eliminated the means of subsistence for their vulnerable workers which emboldened fascists and geopolitical foes like Russia. It was not difficult to spark the "thesaurisation". Excess reserves at the ECB and the Fed shot up by trillions. Natural market rates for investment were estimated by some around -4% and the central banks kept their rates very high at close to 0%. Yes deflation is worst but low inflation can be terrible in some situations. "With 0% inflation you have a 10$ loss (20-10), while with 10% inflation you have (20 * 1,1 - 10) = 12$ (about 11$ on constant prices terms) in loss (revenue won't grow till next year)." Not true, inflation means that revenues are constantly rising faster and financing costs are lower in real terms.

simo7 9y ago
> Yes deflation is worst but low inflation can be terrible in some situations. Agreed. But not because of what you are implying: "...people transfer their savings to cash, the world switches from producing real stuff...". That is rather a risk resulting from deflation. I agree because higher inflation can help an economy plagued with insolvent debt to "assimilate" it gradually and create new room for healthy debt. > Not true, inflation means that revenues are constantly rising faster. That's precisely what I'm denying: there's often a significant delay between the outflows of money and the inflows they generate (typically in high fixed-costs businesses). If you're expanding production every year and you see the added revenue only the year after it's not difficult to see how inflation would have a negative impact (even if constant!).
- BenoitEssiambre 9y ago
  >That is rather a risk resulting from deflation. There doesn't need to be deflation. As long as the real return on cash (around -2% when interest rates are zero) is higher than market safe return on investment (which can be lower than -2%) it can cause a gridlock in the investment market. >If you're expanding production every year and you see the added revenue only the year after it's not difficult to see how inflation would have a negative impact (even if constant!). I don't follow at all. Inflation means prices are rising with time. So the investment early in time is made when prices are lower and the revenues are made later when prices are higher and thus you make higher revenues relative to what you paid for your investment. Inflation helps you here! Insufficient inflation would be the problem. You make your investment when prices are high so you pay a lot, then when it comes to sell your product you get a insufficiently high price and low profit. It's all part of the cost of capital calculation: https://en.wikipedia.org/wiki/Cost_of_capital https://en.wikipedia.org/wiki/Cost_of_capital
  - simo7 9y ago
    > As long as the real return on cash (around -2% when interest rates are zero) is higher than market safe return on investment (which can be lower than -2%) it can cause a gridlock in the investment market. That way holding cash is better than buying a government bond but you're still loosing purchasing power holding cash, so why not spending it? The real problem is when holding cash increases your purchasing power over time. > So the investment early in time is made when prices are lower and the revenues are made later when prices are higher and thus you make higher revenues relative to what you paid for your investment. Inflation helps you here! You reason as if you make the first investment and then that's it. It's not what really happens in most businesses. Imagine you make an investment every year which produces the revenue for the year after.
    - BenoitEssiambre 9y ago
      >That way holding cash is better than buying a government bond but you're still loosing purchasing power holding cash, so why not spending it? You want all retirees to spend all their money at once? What if they planned to live for another while? Safely carrying value into the future is a service that can sometimes cost you. There is nothing unnatural about negative returns. If cash has zero returns when when market rates on private safe investment is negative, savers start accumulating pieces of paper or electrons in accounts instead of things that have real world value and create economic activity. This puts the real investment market into a gridlock and production drops. >Imagine you make an investment every year which produces the revenue for the year after. Yes and it always helps you when the prices are higher when you sell than when you buy.