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Why is built-in deflation necessarily a problem? If the real economy continues to generate investment opportunities, wouldn't the deflation rate just supplemen
by Gormo 15y ago
Why is built-in deflation necessarily a problem?
If the real economy continues to generate investment opportunities, wouldn't the deflation rate just supplement that? Sure, you could put money in your mattress for 5%, but if you can invest for a nominal 10% and thus yield a real 15%, why would you choose the mattress?
- beefman 15y agoIf this is an average loan, all 15% of its real return must be captured by deflation since the money supply cannot increase 10%. But then the mattress rate is also 15%. Of course some loans are better than average, and some are worse. The "deflationary spiral" takes out the worse ones first. That lowers the average and takes out the next tier, until the average is zero. Actually it goes below zero, to the average rate of real depreciation (e.g. termite damage to houses). Well, that's the bottom equilibrium anyway.
- Iv 15y agoAnd also what is the difference between this scenario and a scenario where you can get a saving account that has a higher rate than inflation ?