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I think you're mixing up real (inflation/deflation-adjusted) and nominal (not inflation-adjusted). - nerfhammer probably meant a nominal return of 5%, which wh

by 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.

by evanpw 11y ago

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.