If people's money starts losing value, the last thing they would do is to be concerned with interest rates. With less valuable money, people would simply be able to afford a smaller consumption basket and, thus, spending will stay flat & consumption will decrease.
> ... people make 10x the salary ...
Where did this come from? Just because the productivity would increase 10x / cost would decrease 10x, it does not mean that workers would receive 100% of the relevant benefits. Most likely, 90%, if not more, of those would be routed to business owners (and robots' owners, if the machines are leased instead of bought).
If your money starts losing value, do you A) put it under the mattress or B) trade it for things that you can either use now or that retain/grow their value in the future?
Now, if you're talking about erosion of wages over, that's less of an issue of inflation, and more an issue of the power dynamic between owners of capital and owners of labour.
> Where did this come from? Just because the productivity would increase 10x / cost would decrease 10x, it does not mean that workers would receive 100% of the relevant benefits. Most likely, 90%, if not more, of those would be routed to business owners (and robots' owners, if the machines are leased instead of bought).
Sorry, I understand the confusion given I used the term 'salary'. I should have said something along the lines of 'value' or 'goods'. The split between workers and owners depends on the surrounding conditions.
The point is that dollars are tokens that represent goods produced, at the time they were produced. Not how much energy or effort went into those goods.
It depends on the situation. For example, if one lives paycheck to paycheck or close to that, then I don't see how they would not put a bit "under the mattress" (emergency fund) and spend the rest on basic needs. There is only so much food one can buy to store at home for future consumption. On the other hand, if income >> costs, that's a totally different story ...
> Sorry, I understand the confusion given I used the term 'salary'. I should have said something along the lines of 'value' or 'goods'. The split between workers and owners depends on the surrounding conditions.
No problem. Re: "depends on the surrounding conditions" - it is a very diplomatic way of avoiding touching the core of the income inequality issue.
> The point is that dollars are tokens that represent goods produced, at the time they were produced. Not how much energy or effort went into those goods.
Not sure I understand this point. It seems to be against one of the basic economic principles that I remember (price of goods = cost of production + margin / added value) - where cost of production implies exactly "how much energy or effort went into those goods". Perhaps, I'm dumb as rock or completely forgot Economics 101. :-) For example, if a TV model A costs $200 and model B costs $2000, it is not just because they "represent [different] goods produced", but because model B is much more expensive to produce and/or it has much more added value [real and/or perceived] than model A.
I'm looking at excess capital used for funding loans, business, etc. So I'm more focused on this case. I take you point that inflation eats up ~2% of cash savings yearly, and that it's a bigger deal the less wealthy you are.
> it is a very diplomatic way of avoiding touching the core of the income inequality issue.
I'd say that deflation is much worse for income inequality, since sitting on cash becomes profitable, so the people who can afford to do it the longest win out.
I don't think either inflation or deflation will solve income inequality. I think that's controlled by taxation of capital gains vs. income. Specifically, the lower capital gains tax, and the ability to sit on unrealized capital gains without paying taxes on them in the mean time.
> For example, if a TV model A costs $200 and model B costs $2000, it is not just because they "represent [different] goods produced", but because model B is much more expensive to produce and/or it has much more added value [real and/or perceived] than model A.
I think where we're diverging is:
- You're comparing two different goods produced at the same time. - I'm comparing two identical goods produced at different times.
So if you make a baguette in 1921 and sell it for 5$, and then try and buy a baguette in 2021, it should cost 5$, despite the fact that the amount of energy/work it takes to produce a baguette in 2021 is much lower than in 1921. The money represents the value of the end good, not the work that went into producing it. And so if the good becomes cheaper to produce over time, you'd want to inflate the cost of it to keep it level.
> And so if the good becomes cheaper to produce over time, you'd want to inflate the cost of it to keep it level.
I'm a bit confused about this part - why would you want to "keep it [the cost] level" between 1921 and 2021?
That part is specifically meant to contrast deflation with either stagflation or inflation. If you drop the nominal price over time, you're setting a Ponzi scheme. By virtue of selling something in the past and holding on to the token, you're entitled to more of it in the future, without any risk. And you're preventing the token from being spent by someone now who could use it.
And likewise, I appreciate the line of questioning, it helps me reflect and think about this. The details are a bit fuzzy, and I'll need to think more about some goods that seem deflationary (computers for example)
I disagree. Money is a store of value that is separate from society - gold is an international currency accepted organically because of its useful and intrinsic properties, with thousands of years of history in a wide variety of cultures that had no link before trade began.
There is no "debt" here. Society doesn't "owe" the holder of money anything, necessarily.
By the way, you're wrong in that money a) is only a store of value (it also functions as a medium of exchange and a unit of account) and b) is separate from society (in the modern world, in most countries, it is only government who has legal right to issue [primary] money).
And how is ‘investing’ a productive use of capital? In deflationary regime, business is about cash flow. Inflationary regime investments are all speculation, and everybody has to play the game.
This Keynesian argument comes from a nihilistic disregard for social structures, the environment, and future generations. Look him up. “In the long run, we’ll all be dead” - Keynes
>This Keynesian argument comes from a nihilistic disregard for social structures, the environment, and future generations. Look him up. “In the long run, we’ll all be dead” - Keynes
Is this supposed to be a joke? How are old people becoming rich through no work, no productive investment whatsoever supposed to help future generations? Future generations receive greater incomes than their previous generations thanks to inflation. With deflation they receive lower incomes than their previous generations.
When you own deflationary money and you do nothing with it you basically create a claim to future work in the past. By working at a simple 1800s job you have created a claim to the labor of someone working a software job even though you took no part in enabling that job to exist in the first place. Same with the bread baker robot. By holding onto the currency you never created an economic environment that enabled such an investment to be made. You just held onto the currency and once someone was foolish enough to build the robot you obtained a claim to its productivity.
There is actually no difference between inflation and deflation. For every inflationary asset basis, there is a deflationary asset basis. Flip bread/money in your own text and you see the problem.
The only difference is taxes. Tax basis could be anything. Let’s say, SHA-256 hashes. Every year, the hash value of your dollar investment account quadruples. You need to pay for half of those gains, or else you go to jail, and if you resist, you can be legally killed. The price of food and shelter is irrelevant to me. Pay me. Can’t? Okay, we’ll collect tax in Bitcoin, but we’ll have to raise the tax rate to 90%. We can go back and forth on this as much as you want. In the end, I guarantee the guy with the legal right to kill you ends up owning everything.
In conclusion: inflation and deflation are both the same thing, and they both suck.
If we want to have something like UBI to take care of income instead of work, that still comes from tax dollars, which relies on economic activity (capital gains from investment, income tax, sales tax, etc).
In other words, less economic activity has specific impact on real world people and how much money they can get. It’s not just about investing, not just about billionaires.
If you hold onto cash, it does nothing. If you invest it, either directly, or by giving it to another entity to invest on your behalf (IE, a chequeing account at a bank or mutual fund), it allows someone else to make use of it, and in exchange, you will be repaid with more cash in the future.
In order for the investment to make sense, the growth on the asset needs to be larger than the growth of the value of the money, plus risk. So in a deflationary currency, loan interest rates must be higher to be worth it. If loan interest rates are higher, then the cost of doing business increases. If the cost of doing business grows, the price of goods to increases. And when the price of goods increases, this causes the amount of goods sold to drop. This causes the income of the business to drop. Which increases the risk of investment, causing interest rates to go up.
This cycle continues until everyone is holding on to their cash, and no one is spending. The way to break the cycle is to have cash start to lose value, or inflate. Then the interest rates drop, and people start to spend their money.
Another way to think about it is:
Say it costs 1.00$ to make a loaf of bread in 2020. By 2030, there's a robot that can make a loaf of bread for 0.10$ in 2020 dollars. So because society has become more productive in those 10 years, the work you did in 2020 is now worth 0.10$ 2020 dollars. So we can think of a dollar as representing the cost of goods, at the time that you did it. So if you make 1$ worth of bread in 2020, it should be able to buy the same amount of bread in the future. So we inflate the currency 10x, so bread still costs for 1$ in 2030, but now there's 10x the amount of bread to go around, and people make 10x the salary, so for people who are currently making money, bread is 10x cheaper.
Now, you still want some inflation on top of this, since you want to push people away from sitting on money and towards putting that money to productive use. But that's the core rationale.