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Keeping cash balances is undesirable because of the opportunity cost not because of inflation. In other words, even if inflation was at -10% you still would wa

by lottin 6y ago

Keeping cash balances is undesirable because of the opportunity cost not because of inflation. In other words, even if inflation was at -10% you still would want to keep as little cash as possible and invest the rest at the risk-free rate. And I don't agree that central banks are failing to maintain price stability. Inflation data indicates otherwise [1] [2]. If anything, central banks are failing to create enough inflation to meet their inflation targets. [1] https://fred.stlouisfed.org/series/FPCPITOTLZGUSA https://fred.stlouisfed.org/series/FPCPITOTLZGUSA [2] https://www.ecb.europa.eu/stats/macroeconomic_and_sectoral/hicp/html/index.en.html https://www.ecb.europa.eu/stats/macroeconomic_and_sectoral/h...

bboygravity 6y ago
> Keeping cash balances is undesirable because of the opportunity cost not because of inflation. I don't get this statement. IMO it's undesirable for both reasons. From the point of view of holding USD on a savings account -10% inflation (aka: 10 deflation) is the same as 2% inflation with savings accounts that reek in 12% interest rates. You're arguing that nobody in the world should want to have such a savings account? Everybody should invest it in something at a risk-free rate? You mean a risk-free investment? I'm not sure what that means. > And I don't agree that central banks are failing to maintain price stability. I'm talking 2020 - 2021, as in: right now. The data you link goes until 2019 pre-corona, pre-helicopter-money times. Here in Europe there's without a single doubt in my mind stagflation going on right now (prices that rise faster than the average income). Holding cash in a bank account is IMO a guaranteed significant loss of purchasing power right now. If you take 1 look at past year's commodity prices, you'll see that the market agrees with me. Year over year examples: lumber spot price up 300% up, silver 74% up, gold (the gold standard for measuring inflation) 5% up, housing prices 10 - 30% up, wheat price 25% up, and so on and so forth. Does this mean all these things have all of a sudden become more desirable? No. Does it mean the USD/EUR/etc have lost buying power? IMO very big yes.
- lottin 6y ago
  The opportunity cost of cash is the return that you would have earned if you had invested in a risk-free asset instead of keeping the cash. By keeping cash you incur such a cost, whether there is inflation of not, and this means you should always keep as little cash as possible regardless of inflation. For example, if the inflation rate is -10% and the return on a (risk-free) savings account is 1%, then you are incurring an opportunity cost of 1% annually by keeping cash balances. If the inflation rate is 10%, you are incurring the same exact cost. So while cash balances can absolutely depreciate as a result of inflation, cash balances should represent a small fraction of a household's net worth anyway, since it's not optimal to hold large amounts of cash. Therefore a modest rate of inflation, such as we observe in developed nations, is never going to have a significant impact on household balance sheets, compared to other forms of depreciation such as the normal depreciation of physical capital (e.g. houses and cars).

by lottin 6y ago

bboygravity 6y ago

> Keeping cash balances is undesirable because of the opportunity cost not because of inflation. I don't get this statement. IMO it's undesirable for both reasons. From the point of view of holding USD on a savings account -10% inflation (aka: 10 deflation) is the same as 2% inflation with savings accounts that reek in 12% interest rates. You're arguing that nobody in the world should want to have such a savings account? Everybody should invest it in something at a risk-free rate? You mean a risk-free investment? I'm not sure what that means. > And I don't agree that central banks are failing to maintain price stability. I'm talking 2020 - 2021, as in: right now. The data you link goes until 2019 pre-corona, pre-helicopter-money times. Here in Europe there's without a single doubt in my mind stagflation going on right now (prices that rise faster than the average income). Holding cash in a bank account is IMO a guaranteed significant loss of purchasing power right now. If you take 1 look at past year's commodity prices, you'll see that the market agrees with me. Year over year examples: lumber spot price up 300% up, silver 74% up, gold (the gold standard for measuring inflation) 5% up, housing prices 10 - 30% up, wheat price 25% up, and so on and so forth. Does this mean all these things have all of a sudden become more desirable? No. Does it mean the USD/EUR/etc have lost buying power? IMO very big yes.

lottin 6y ago
The opportunity cost of cash is the return that you would have earned if you had invested in a risk-free asset instead of keeping the cash. By keeping cash you incur such a cost, whether there is inflation of not, and this means you should always keep as little cash as possible regardless of inflation. For example, if the inflation rate is -10% and the return on a (risk-free) savings account is 1%, then you are incurring an opportunity cost of 1% annually by keeping cash balances. If the inflation rate is 10%, you are incurring the same exact cost. So while cash balances can absolutely depreciate as a result of inflation, cash balances should represent a small fraction of a household's net worth anyway, since it's not optimal to hold large amounts of cash. Therefore a modest rate of inflation, such as we observe in developed nations, is never going to have a significant impact on household balance sheets, compared to other forms of depreciation such as the normal depreciation of physical capital (e.g. houses and cars).