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Economists usually say that with constant predictable inflation money is "neutral" meaning that the interest rates adjust to offset any higher cost so that busi

Economists usually say that with constant predictable inflation money is "neutral" meaning that the interest rates adjust to offset any higher cost so that businesses shouldn't be affected by inflation (except for a bit of "menu cost", that is the overhead cost of having to update price lists more often. Low inflation has huge potential downsides in that fiat money can't have negative nominal return while it is quite normal for private investment returns to go negative sometimes (thermodynamics says that things, including stores of value, tend to degrade with time unless you put work and energy into them). This is the famous zero lower bound problem. It means that when private market rates go negative, people transfer their savings to cash, the world switches from producing real stuff and building real businesses to people hoarding intrinsically worthless pieces of paper (pieces of paper that might not be able to buy that much in the future because production will have gone down. On top of this, if you keep interest rates above market rates and inflation too low for a long enough time, that is if you keep rates high at 0% when they should be at -3%, market pressure will build for an uncontrolled inflation rebound when all the cash hoarded on the sidelines start flowing in an economy with lowered production. It is much easier to keep inflation stable if you keep it high enough so that the investment market can always clear and never hits the zero lower bound.

simo7 9y ago
Low inflation is usually desirable, just think that achieving 2% inflation annually is the main mandate for the European Central Bank. That's because even at 1%-2% inflation a year is difficult to spark the so-called thesaurisation phenomenon you're implying. In general I agree with you, I'd just change "low inflation" with "deflation". On the "money" being neutral with constant inflation. Yes, sure. It's the business dynamics that are not neutral. Quick example: - Say you have 10$ costs and 10$ revenue every year. - One year you expand production and you have to pay an additional 10$: so 20$ costs and 10$ revenue for that year. - With 0% inflation you have a 10$ loss (20-10), while with 10% inflation you have (20 * 1,1 - 10) = 12$ (about 11$ on constant prices terms) in loss (revenue won't grow till next year).
- BenoitEssiambre 9y ago
  First, the ECB has nearly destroyed western civilization with their overly tight stance during the past decade. They destroyed the economy of their weaker members like Greece, eliminated the means of subsistence for their vulnerable workers which emboldened fascists and geopolitical foes like Russia. It was not difficult to spark the "thesaurisation". Excess reserves at the ECB and the Fed shot up by trillions. Natural market rates for investment were estimated by some around -4% and the central banks kept their rates very high at close to 0%. Yes deflation is worst but low inflation can be terrible in some situations. "With 0% inflation you have a 10$ loss (20-10), while with 10% inflation you have (20 * 1,1 - 10) = 12$ (about 11$ on constant prices terms) in loss (revenue won't grow till next year)." Not true, inflation means that revenues are constantly rising faster and financing costs are lower in real terms.
  - simo7 9y ago
    > Yes deflation is worst but low inflation can be terrible in some situations. Agreed. But not because of what you are implying: "...people transfer their savings to cash, the world switches from producing real stuff...". That is rather a risk resulting from deflation. I agree because higher inflation can help an economy plagued with insolvent debt to "assimilate" it gradually and create new room for healthy debt. > Not true, inflation means that revenues are constantly rising faster. That's precisely what I'm denying: there's often a significant delay between the outflows of money and the inflows they generate (typically in high fixed-costs businesses). If you're expanding production every year and you see the added revenue only the year after it's not difficult to see how inflation would have a negative impact (even if constant!).
    - BenoitEssiambre 9y ago
      >That is rather a risk resulting from deflation. There doesn't need to be deflation. As long as the real return on cash (around -2% when interest rates are zero) is higher than market safe return on investment (which can be lower than -2%) it can cause a gridlock in the investment market. >If you're expanding production every year and you see the added revenue only the year after it's not difficult to see how inflation would have a negative impact (even if constant!). I don't follow at all. Inflation means prices are rising with time. So the investment early in time is made when prices are lower and the revenues are made later when prices are higher and thus you make higher revenues relative to what you paid for your investment. Inflation helps you here! Insufficient inflation would be the problem. You make your investment when prices are high so you pay a lot, then when it comes to sell your product you get a insufficiently high price and low profit. It's all part of the cost of capital calculation: https://en.wikipedia.org/wiki/Cost_of_capital https://en.wikipedia.org/wiki/Cost_of_capital

simo7 9y ago

Low inflation is usually desirable, just think that achieving 2% inflation annually is the main mandate for the European Central Bank. That's because even at 1%-2% inflation a year is difficult to spark the so-called thesaurisation phenomenon you're implying. In general I agree with you, I'd just change "low inflation" with "deflation". On the "money" being neutral with constant inflation. Yes, sure. It's the business dynamics that are not neutral. Quick example: - Say you have 10$ costs and 10$ revenue every year. - One year you expand production and you have to pay an additional 10$: so 20$ costs and 10$ revenue for that year. - With 0% inflation you have a 10$ loss (20-10), while with 10% inflation you have (20 * 1,1 - 10) = 12$ (about 11$ on constant prices terms) in loss (revenue won't grow till next year).

BenoitEssiambre 9y ago
First, the ECB has nearly destroyed western civilization with their overly tight stance during the past decade. They destroyed the economy of their weaker members like Greece, eliminated the means of subsistence for their vulnerable workers which emboldened fascists and geopolitical foes like Russia. It was not difficult to spark the "thesaurisation". Excess reserves at the ECB and the Fed shot up by trillions. Natural market rates for investment were estimated by some around -4% and the central banks kept their rates very high at close to 0%. Yes deflation is worst but low inflation can be terrible in some situations. "With 0% inflation you have a 10$ loss (20-10), while with 10% inflation you have (20 * 1,1 - 10) = 12$ (about 11$ on constant prices terms) in loss (revenue won't grow till next year)." Not true, inflation means that revenues are constantly rising faster and financing costs are lower in real terms.
- simo7 9y ago
  > Yes deflation is worst but low inflation can be terrible in some situations. Agreed. But not because of what you are implying: "...people transfer their savings to cash, the world switches from producing real stuff...". That is rather a risk resulting from deflation. I agree because higher inflation can help an economy plagued with insolvent debt to "assimilate" it gradually and create new room for healthy debt. > Not true, inflation means that revenues are constantly rising faster. That's precisely what I'm denying: there's often a significant delay between the outflows of money and the inflows they generate (typically in high fixed-costs businesses). If you're expanding production every year and you see the added revenue only the year after it's not difficult to see how inflation would have a negative impact (even if constant!).
  - BenoitEssiambre 9y ago
    >That is rather a risk resulting from deflation. There doesn't need to be deflation. As long as the real return on cash (around -2% when interest rates are zero) is higher than market safe return on investment (which can be lower than -2%) it can cause a gridlock in the investment market. >If you're expanding production every year and you see the added revenue only the year after it's not difficult to see how inflation would have a negative impact (even if constant!). I don't follow at all. Inflation means prices are rising with time. So the investment early in time is made when prices are lower and the revenues are made later when prices are higher and thus you make higher revenues relative to what you paid for your investment. Inflation helps you here! Insufficient inflation would be the problem. You make your investment when prices are high so you pay a lot, then when it comes to sell your product you get a insufficiently high price and low profit. It's all part of the cost of capital calculation: https://en.wikipedia.org/wiki/Cost_of_capital https://en.wikipedia.org/wiki/Cost_of_capital