Regular people invest when investing makes sense, when the creation of a thing like a restaurant or a farm or what have you has significant value in and of itself. NOT because they value money, and the value of their money will decrease if they don't invest

Having the power to control inflation to force people to invest is tantamount to setting their mattresses on fire to get them out of bed in the morning so they'll go to work. People will get out of bed--and invest--when it's right for them, and they don't need people like you to goad them into it.

Anyone who thinks defaltion is a good idea is essentially thinking that their small cash pile will magically grow to be worth more without them doing anything, which seems enormously attractive because it's a) easy and b) there isn't any of that unpleasant risk that comes with investment, and which makes it so hard to decide what to invest in. So everyone who has money stuffs it under the metaphorical mattress, and people who don't have any can't get any because the supply of credit has vanished. Economic growth slows way down.

Under deflation the same computer would cost half as much 2 years later, and you would only have half as much income to spend on it.

Under deflation, though, everyone has less money so I have to keep cutting my rate to stay competitive. Now even though I'm more productive I'm getting a lower return on my productivity. Arguably,this is a problem currently facing much of the labor force in the US.

Any economic situation can be good for individuals who are positioned to take advantage of it, but in macro you need to consider the economy as a whole, through to food and extractive industries etc.

The Great Depression was pretty bad for people trying to get by in life, no?

Deflation isn't bad either, it encourages saving, which rather than living paycheck to paycheck as most do today.

Your solution to the problem of inflation is the abolition of credit.

If inflation encourages those with surplus income to make riskier investments, and riskier investments benefit those living paycheck-to-paycheck (say by increasing demand for their labor) then inflation is to the benefit of those living paycheck to paycheck.

On the other hand, the upper-middle-class to wealthy do benefit from deflation, since they have excess income. If inflation doesn't benefit the less well off, then perhaps there is little reason to punish the wealthy with inflation. Those that would save more in a deflationary economy are already saving though.

Oh wait, centralized banking didn't exist back then? Fractional Reserve Systems didn't happen back then? And yet you have a decade of the greatest bank-runs of US History?

And ever since the fractional reserve system was invented, there hasn't been a national-scale bank run in the US for nearly 100 years?

"The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907."

[1] http://en.wikipedia.org/wiki/Federal_Reserve_System

If you're going to act all exasperated about something, at least get your facts right.

When I save money, I invest it in productive enterprise. Thus, I have less in my checking account. You could even consider (gasp) that I'm living pay check to pay check!

So? Why should they put it to "productive use"? Who deems what use is better than another?

Didn't you notice what happened during the recent financial crisis? Capital markets dried up, credit was unavailable to many small and mid-size businesses, and many of them shut down for lack of cash flow during a period of limited demand, rather than any fundamental flaw in their business organization.

Ultimately I don't really like living in a society that has so little slack in it. I'd prefer (not that anyone gives a shit what I prefer) one where most businesses have large equities built into them rather than debts. A business which owns outright the building it occupies is more likely to weather a storm than one which rents or is still paying a mortgage on. That's because it can afford to accept lower yields (not paying an extra $X per month in rent-equivalent to the owners/investors/etc) in the short term for the benefit of still being around.

Slack isn't efficient on any time scale that economists or MBAs care about but over 50 years I think it's quite a good idea. I'd rather own a business which lasts 50 years even if 10 of those 50 years don't pay the kinds of returns I'd like than one which makes better returns for 12 years and then folds.

If most businesses had large equities rather than debts, you'd have a significant opportunity cost. It's not a matter of what MBAs care about (often not what economists care about), but one of what could have been achieved with money that was otherwise sitting idle. The approach you describe often leads to zombie companies that are not actually productive but are able to cannibalize their own assets while making it difficult for more efficient producers to enter the market.

Equity means having control over your destiny, debt means the bankers decide your fate. Choose accordingly.

With this neutral terminology, we're now ready for some actual thought. We can recast the claim as follows: currency dilution is good because it encourages spending and discourages saving. There's no doubt about the factual claim—dilution does indeed encourage spending and discourage saving). But why is saving bad and spending good? This is an ethical judgment that depends on your particular set of values, but it is undeniable that currency dilution transfers purchasing power from savers to spenders. In particular, it's mathematically equivalent to combining a perfectly hard currency with forced confiscation (from savers) and transfer (to spenders), i.e., organized theft. Thus, from an ethical point of view, there is a strong reason not to give dilution the benefit of the doubt.

Regarding the so-called "gold standard", the historical evidence is not nearly as clear-cut as you've been led to believe. Though flawed in many ways, What Has Government Done to Our Money? by Murray Rothbard is a good place to start: http://mises.org/money.asp

As for saving and hoarding, those are not the same either. If someone saves they typically do so via a savings account or a CD at an institution engaged in fractional lending but (within the US and within limits) a government backstop to prevent loss of savings. Hoarding is putting your money under the mattress where it's absolutely not doing anything.

The fact that your argument requires redefining basic economic terms should be a clue that there is something terribly wrong with your priors.

In this light, let's consider four activities: spending, investing, saving, and hoarding. Currency dilution encourages the first two and discourages the second two. It also systematically transfers purchasing power from savers/hoarders to spenders/investors. Can you build a case that the benefit from dilution outweighs the costs? Dilution certainly encourages "economic activity" (for certain values of "activity"), which you seem to regard as axiomatically good. What is your justification for this?

Not taking sides here, but I think it could be argued that devaluation is good because it encourages economic activity (i.e. spending) instead of mindless hoarding.

I mean, money is supposed to be a medium of transfer, not an investment/saving mechanism. We don't want people hoarding cash in a bank account. We want them to invest that cash in actual assets that can then be developed.

So would threatening to execute anyone who spends less than n% of their take-home pay, but people don't advocate that, do they?

Before you object to the comparison, I know: "That's different: the costs would vastly exceed the benefits!"

Right, but there would be costs! There are costs any time you force people to spend (commit to purchases) earlier than they would like to -- whether you do it by inflation or the sword.

One cannot simply say, "well, economic activity [that we measure] went up, so that must have been a good idea!" But anytime someone brings up the "encourages economic activity" argument for inflation, they rarely offer any way to model the cost of moving up purchases like this, nor do they even realize it's necessary to do so!

(Edited to avoid excessive attribution of the argument.)

The government already taxes other things (both to generate income and to alter behavior), so looking at inflation that way makes it easier IMO to make sound policy decisions rather than comparing it to executions.

For those "taxes of other things", you still need to model its social cost to know whether it outweighs the benefit. You can't just dismiss the point as "this isn't execution".

Edit: Important thing to note: in most discussion of taxation, the theme is "how to avoid the deadweight loss", i.e. how to write the tax in a way where it just transfers money without inducing changes in behavior. Advocating inflation as a behavior-changing tax is a sharp deviation from this, requiring a very different justification and model than traditional taxation.

This is certainly not true for e.g excise taxes. Inflation as a tax on dollars-held is similary intended to alter behavior by encouraging those with wealth to take riskier investments (alternatively stated, to discourage long-term holding dollars, similarly to how excise taxes are intended to discourage consumption of particular goods).

When someone proposes n% inflation as a way of "taxing" hoarding, what's the corresponding model? What's the "rising sea level" there?

In cases of a ~100% "inflation tax" (aka hyperinflation), we see the harms clearly: people have to spend money almost the second they get it. They have to move up purchases and otherwise arrange their lives in ways that are extremely welfare harming, and which probably outweigh the benefits of the greater economic activity it induces.

(Contrary to a lot of talk on hyperinflation, I don't see the chief problem as being volatility; even with stable, predictable hyperinflation you have the problem of losing the main benefit of money, which is that you don't have to know what you'll ultimately be buying in order to produce something for sale.)

So likewise, to justify a Pigovian argument for inflation, you would likewise need a model, or otherwise gauge the magnitude, of the "costs of making people move up purchases [when they'd rather save and decide later]" -- the costs that become extreme in the case of hyperinflation. And yet virtually everyone enamored of the "we need to encourage economic activity" argument for activity has nothing in the way of this. Hence my frustration with it.

(The analog of hyperinflation in carbon taxes would be a ban, or absurdly high tax, on burning of fossil fuels, and has the corresponding welfare harm that the avoided fuel usage -- or costs in evading the ban -- far exceed the welfare harm of the emissions themselves.)

I haven't seen any evidence that convinces me that modest inflation causes people to spend money sooner (If you have any I would be very interested to see it).

I think that easy access to credit definitely affects people's spending behavior, but I don't have a lot of data to back that up.

You can't have it both ways: either inflation (of a certain rate) is good because it makes people spend sooner, or it doesn't change behavior.

Edit: or there's some other way in which you operationalize the goal of "increased economic activity" that's orthogonal to "spending earnings sooner than you otherwise would".

By spending I intended "purchasing depreciating (or disposable) assets"

Purchasing equities as an inflation hedge is not what I meant. Inflation does encourage riskier investments, as merely holding currency is insufficient to maintain capital.

I agree that it's an open question whether or not that's a good thing: some would argue that encouraging riskier investments encourages malinvestments which becomes a net negative; others argue that the increased activity caused by risky investments outweighs the damage done by malinvestments; I've even run into many who claim that even malinvestments are good, since moving money around is good no matter the reason.

If that last point of view is true, I'm giving up on economics, but the first two both seem reasonable to me.

And yes, there are trade offs, one of which is the malinvestments from spurring people to hold non cash. My point was that this, plus the individual welfare loss of the hoarder from having to commit to purchase sooner, must be weighed against the purported benefits of (what you got people to do via) inflation -- and (as I said at the beginning) that most people who make that argument for inflation (even economists) don't offer a way of modeling those relative benefits.

It's like arguing for an apple subsidy on the basis that apples are good, without even thinking about the costs of such a subsidy (ie diversion from non-apple production).

With this neutral terminology, we're now ready for some actual thought. We can recast the claim as follows: devaluation is good because it encourages spending and discourages saving. There's no doubt about the factual claim—devaluation does indeed encourage spending and discourage saving. But why is saving bad and spending good? This is an ethical judgment that depends on your particular set of values, but it is undeniable that devaluation (currency dilution) transfers purchasing power from savers to spenders. In particular, it's mathematically equivalent to combining a perfectly hard currency with forced confiscation (from savers) and transfer (to spenders), i.e., organized theft. Thus, from an ethical point of view, there is a strong reason not to give devaluation the benefit of the doubt.

And yet, so far as I can tell, devaluation is always given the benefit of the doubt by the mainstream. Doesn't that seem odd?

No, you can't. In fact, it is interesting that you blamed me for attempting to short-circuit critical thinking, and then turned around and suggested something so asinine as this.

The reason it is asinine is because not all forms of saving are equal. A grandma stashing cash under the mattress does not help anyone else but the grandma, which is why it makes sense to discourage it using devaluation mechanics built into the economy. But if she invested that cash into a value-generating asset (e.g. a company, a piece of real estate, a public project, etc.), both her and the asset developer/owner would benefit: it would be possible to develop and maintain the asset, and she would reap greater returns. And just so we're clear, it's not like we're forcing grandma to take insane risks. Government bonds have historically been incredibly safe. So devaluation exists as a mechanic to say to grandma, "instead of mindlessly hoarding your money under the mattress, buy bonds with it. As a result, we (the government) will be able to fund public projects and you will be shielded from devaluation."

It is difficult to argue that this configuration is less optimal than one in which money never loses value.

http://steshaw.org/economics-in-one-lesson/chap24p3.html

See also Murray Rothbard's discussion:

http://mises.org/money/2s9.asp

You may not agree with their analyses, but at least they can serve as a counter-narrative to the mainstream views you evidently support.

By the way, your comment can be improved by removing everything before "not all forms..." In that case, it would simply make a cogent point (though one with which I still take exception). As it stands, your comment comes across as petty and unrefined. Stay classy—it's nicer, and it's also more likely to persuade.

I'm not sure what that means. Jokes about relativity aside, time doing what? If you mean individual's labor (which has been tried a few times, see http://en.wikipedia.org/wiki/Ithaca_Hours), then that seems unlikely to even be fungible, much less stable.

I'd say there is good grounds for saying this is a great human invention - although probably not on a par with sanitation.

No the system isn't perfect - it is structurally flawed like all other systems - but it has worked well and the negative side-effects can be managed

  > This is despite the greatest financial crash since the great depression.

Although its not the same as economic output - having stable prices is important to support growth or a recovery. Deflation prolongs a depression - this was the major motivator for quantitative easing in the last financial crash.

I should correct myself - I should have said "low + positive + stable" inflation and not just "low inflation"

Inflation most definitely favors the upper classes relative to, if not at the expense of the lower classes.

If you have a mortgage, it is likely that your net worth is negative. In such a case, inflation greatly helps your networth.

Credit card debt, mortgages, student loans, payday loans... this is the reality of the lower and middle class. If you're making less than $45,000 / year, you're likely in debt in the US.

At which point, inflation helps greatly, by reducing the value of your debt. A (former) student who has $100,000 in debt isn't "losing money" to inflation... the student is instead "losing debt" to inflation.

This system in which the middle class is by default considered the debtor class is a result of decades of manipulation.

Its hard to call it "manipulation"... although I'd argue it is widespread ignorance that has caused this problem. It is clear to me that swaths of people do not understand the concept of debt until it is too late. There is clearly a problem in the education system.

Too many people are getting too much into debt. Not on someone else's choice, but on their own choice.

There is also the option of not getting a degree at all, one which is rarely discussed. It turns out that the US Job can't subsume all of the college-level jobs anyway. A degree in Library Science is surely hard stuff, but its relevance in the modern workforce is questionable.

I dare say, its better to just get a job out of High School and start climbing the corporate ladder at Target or Costco, than to waste 4 years of your life on a dead-end degree. (And no offense to "dead-end degrees" either. Lawyers for instance, are contracting. They're currently a dead-end degree, despite the extreme difficulty and prestige associated with the field. But it is surprisingly difficult to get a job now as a fresh Law Grad IIRC).

Nevertheless, those who are $100,000+ in debt benefit from inflation. There are plenty of people in this unfortunate situation and the country should do more to support them. (the counrty should have done more to prevent them from getting into that situation... but that is another story)

I can understand why unexpected inflation would help debtors, but that's not what people argue for.

Consider that 20 years ago in 1994, the Mortgage rate was 9.17%, while today Mortgage rates are roughly 3.9%... it is clear that the market for interest rates is rather more complicated than you mention.

http://www.freddiemac.com/pmms/pmms30.htm

-------------------------

Second, you're right. It really doesn't matter how high or low inflation is, if it is consistent... then it is something the market will easily take into account.

So a steady rate of inflation is perfectly fair to both sides. Which is why the Federal Reserve wants to peg inflation at 3%.

So a steady rate of inflation is perfectly fair to both sides.

But it wasn't claimed that it was fair, it was claimed that it was good for debtors, which is what I find hard to believe.

But with the number of "underwater" homes, subprime mortgages, and so forth that were handed out through the early 2000s, it is clear to me that mortgage holders probably have negative net worth, especially if they were lower or middle class families.

People were buying homes they couldn't afford. In these cases, inflating their debt away is only a benefit.

Combining that with the fact that many mortgage holders would have bought before 2003, suggests to me that the overwhelming majority of mortgage holders are not underwater, which takes nothing away from the pain of those who are, but numerically, they are a minority. Perhaps half of all mortgages relate to purchases (original purchase date, not most recent finance date) prior to 2003, and I'd wager that well more than half (probably 75+%) of purchases since then have mortgages that are not underwater.

Sure, mortgage holders from lower class families are more likely to have a negative net worth. But that's almost the definition of lower class, not because they're a mortgage holder. Lower class families with last names starting with "S" are also more likely to have negative net worth than average families; has nothing to do with their name...

Totally agree that inflation is the friend of a fixed coupon debtor. I'd be hard pressed to decide to pay off my house even if I had the free cash to do so. It will be much cheaper to pay it off with massively devalued 2024 and 2034 dollars.

[1] http://www.forbes.com/sites/erincarlyle/2013/12/17/6-4-milli...

I worked in a bank for a few years - doing credit risk in both consumer (cards, personal loans, etc) and investment banking (bonds). When it comes to consumer loans, like cards, mortgages, personal, etc, the basic formula is the cost of funds plus a margin that reflects the risk (i.e. card loans more risky than mortgages).

Cost of funds relates to how much it costs for the bank to obtain those funds - its an aggregate of various wholesale market rates, the composition of its deposit base, and a bunch of other things.

Inflation risk is something I never had to factor - but it could have just been because I wasn't working in a time with a major inflationary shock

Side note:

In a deflationary economy, then "zero-risk" would be just holding on to the cash. Of course, that's still not risk-free since you might have been wrong about the economy being deflationary.

I'm well aware that there's a risk-spread over the base rate for mortgages. My point was that the GP said he worked in a bank pricing credit and never had to figure anything to do with inflation; he only had to deal with a cost of funds figure and therefore banks don't price inflation into credit products.

My point was that cost of funds figure WAS the inflation figure.

Now, if you're arguing that there isn't 100.000% correlation between the various cost of funds rates and the various measures of inflation, I'll agree, but posit that the correlation is high, just not perfect.

greed, illusion and disinformatuon has sucked their common sense. one can't win against zombies.

edit: 4 downvotes on this. point proven.