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> 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
by 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.