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These points seem rational but seem more and more superficial as I think about them. - A 5% return on an investment coupled with 5% deflation is equivalent to

These points seem rational but seem more and more superficial as I think about them. - A 5% return on an investment coupled with 5% deflation is equivalent to about a 10.5% return. Economically ideal rational actors will continue to invest. - The majority of purchases people make are not delayable: utility fees need to be paid if you wish to continue receiving them, food must be purchased, renting is money thrown in the garbage as is. Everything else that people have to save for, they will normally purchase the minute they are able because they feel the vacuum. - Necessity of pay cuts doesn't follow from deflation but rather from depression. Unlike the other points you don't attempt to defend this premise. - Repeat of prior point. - The debt won't grow. The normal argument should be that your salary will decrease by 2% each year so effectively the original principle grows, but this is an effect of depression, not deflation. The idea that deflation leads to depression is because people argue that it will lead to non-spending. However, my experience with real people, as opposed to theoretically idealized "rational" actors tells me that the minute they can afford to spend more, they will. The evidence on people winning the lottery is similar: most people do not invest, but rather spend quickly and emphatically.

evanpw 11y ago
I think you're mixing up real (inflation/deflation-adjusted) and nominal (not inflation-adjusted). - nerfhammer probably meant a nominal return of 5%, which when combined with 5% deflation is 0. But it seems more likely to me that the real return of any particular investment opportunity would remain relatively constant rather than the nominal return. I'm not too sure about this one - I think that a majority of investment decisions (in dollar terms) are made by people not living paycheck-to-paycheck. I think you still might be right in practice, though - If there's deflation of 2%, then to pay your employees the same amount in real terms, you have to cut their nominal pay by 2%, which people really dislike - This point of nerfhammer I think is wrong. If the value of your stock holdings goes down by 2% every year, but keeps the same purchasing power, the only difference to you is that you don't pay any capital gains taxes - Debts are usually measured in nominal terms, so if you have a loan that says $100 but that $100 is now worth 2% more than it was before, your debt has increased in real terms
- PantaloonFlames 11y ago
  > nerfhammer probably meant a nominal return of 5%, which when combined with 5% deflation is 0. What nerfhammer meant was that a 5% deflation is EQUIVALENT to a 5% nominal rate of return in a 0% inflation market. In other words, during deflation, sitting on cash makes the cash more valuable. Deflation is a dis-incentive to invest, share money, start projects, or seek profits.
  - evanpw 11y ago
    Excellent point. In other words, if you can earn a 5% (real) risk-free return by stuffing $100 bills under your mattress, you're much less likely to make a risky investment expected to make a 6% (real) return, and definitely won't make any investments earning 4%.
- nerfhammer 11y ago
  > This point of nerfhammer I think is wrong. If the value of your stock holdings goes down by 2% every year, but keeps the same purchasing power, the only difference to you is that you don't pay any capital gains taxes The difference is you would be better off holding cash. The stock's value is constant in real terms, the value of cash increases.
nerfhammer 11y ago
> A 5% return on an investment coupled with 5% deflation is equivalent to about a 10.5% return. Economically ideal rational actors will continue to invest. You need a 10% real return in order to make the equivalent of a 5% non-deflation real return. It might seem like it's just adding the the amount of deflation, but it's not: income must drop over time. Your investment vehicle will pay out less in nominal terms. You start a muffin shop - they need to charge lower prices than when the investment was made, and will need to repay their investors less. You invest in a startup - it takes five years for the buyout to happen, but now money is worth more so the nominal price they get sold for is lower. Because there is always a time component to investing, investments need to compete with deflation, they don't automatically just add returns on top of it. > The majority of purchases people make are not delayable... There is plenty of empirical evidence that people do delay purchases during deflation, e.g. https://ideas.repec.org/p/hst/hstdps/d05-98.html https://ideas.repec.org/p/hst/hstdps/d05-98.html Even assuming it's not a majority of purchases, if people cut spending by only 15-25% that's still enough to be quite deleterious for the economy. > Necessity of pay cuts doesn't follow from deflation but rather from depression. Yes it does. Under deflation in order to pay people the same in real terms you have to pay them less in nominal terms. The whole point of deflation is that everyone cuts prices. This means that companies will end up with less income, and have to pass that on to their employees. People absolutely hate pay cuts, and often layoffs end up being used instead. > The debt won't grow. Yes it will. The real value of $1 increases. If you debt is denominated in dollars, the value of your debt increases. The equivalent amount of work you will have to do to pay off the debt increases.

evanpw 11y ago

I think you're mixing up real (inflation/deflation-adjusted) and nominal (not inflation-adjusted). - nerfhammer probably meant a nominal return of 5%, which when combined with 5% deflation is 0. But it seems more likely to me that the real return of any particular investment opportunity would remain relatively constant rather than the nominal return. I'm not too sure about this one - I think that a majority of investment decisions (in dollar terms) are made by people not living paycheck-to-paycheck. I think you still might be right in practice, though - If there's deflation of 2%, then to pay your employees the same amount in real terms, you have to cut their nominal pay by 2%, which people really dislike - This point of nerfhammer I think is wrong. If the value of your stock holdings goes down by 2% every year, but keeps the same purchasing power, the only difference to you is that you don't pay any capital gains taxes - Debts are usually measured in nominal terms, so if you have a loan that says $100 but that $100 is now worth 2% more than it was before, your debt has increased in real terms

PantaloonFlames 11y ago
> nerfhammer probably meant a nominal return of 5%, which when combined with 5% deflation is 0. What nerfhammer meant was that a 5% deflation is EQUIVALENT to a 5% nominal rate of return in a 0% inflation market. In other words, during deflation, sitting on cash makes the cash more valuable. Deflation is a dis-incentive to invest, share money, start projects, or seek profits.
- evanpw 11y ago
  Excellent point. In other words, if you can earn a 5% (real) risk-free return by stuffing $100 bills under your mattress, you're much less likely to make a risky investment expected to make a 6% (real) return, and definitely won't make any investments earning 4%.
nerfhammer 11y ago
> This point of nerfhammer I think is wrong. If the value of your stock holdings goes down by 2% every year, but keeps the same purchasing power, the only difference to you is that you don't pay any capital gains taxes The difference is you would be better off holding cash. The stock's value is constant in real terms, the value of cash increases.

nerfhammer 11y ago

> A 5% return on an investment coupled with 5% deflation is equivalent to about a 10.5% return. Economically ideal rational actors will continue to invest. You need a 10% real return in order to make the equivalent of a 5% non-deflation real return. It might seem like it's just adding the the amount of deflation, but it's not: income must drop over time. Your investment vehicle will pay out less in nominal terms. You start a muffin shop - they need to charge lower prices than when the investment was made, and will need to repay their investors less. You invest in a startup - it takes five years for the buyout to happen, but now money is worth more so the nominal price they get sold for is lower. Because there is always a time component to investing, investments need to compete with deflation, they don't automatically just add returns on top of it. > The majority of purchases people make are not delayable... There is plenty of empirical evidence that people do delay purchases during deflation, e.g. https://ideas.repec.org/p/hst/hstdps/d05-98.html https://ideas.repec.org/p/hst/hstdps/d05-98.html Even assuming it's not a majority of purchases, if people cut spending by only 15-25% that's still enough to be quite deleterious for the economy. > Necessity of pay cuts doesn't follow from deflation but rather from depression. Yes it does. Under deflation in order to pay people the same in real terms you have to pay them less in nominal terms. The whole point of deflation is that everyone cuts prices. This means that companies will end up with less income, and have to pass that on to their employees. People absolutely hate pay cuts, and often layoffs end up being used instead. > The debt won't grow. Yes it will. The real value of $1 increases. If you debt is denominated in dollars, the value of your debt increases. The equivalent amount of work you will have to do to pay off the debt increases.