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0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of in savings accounts, CDs, bond

by slg 4y ago

0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of in savings accounts, CDs, bonds, and the like is bad for the economy. That is why economists generally prefer a small positive rate of inflation. It adds more incentive to both spend and invest.

monero-xmr 4y ago
There should not be a penalty for saving money. Furthermore you can give your money to the bank as a deposit (loan) and the bank will pay you some rate based upon what they can invest it on. Nowhere here does this require any level of inflation.
dsfyu404ed 4y ago
>0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of This is an absurd claim. Nobody seriously considering mattress vs CD (or bonds in a low rate environment like we had 2008-2020) is swayed by a return of less than a couple percent. It is a security vs liquidity vs trust calculation, not a return based one. Furthermore, as the other commenter points out, rates are correlated but not necessarily in lock step with inflation. The rate on your savings account is probably still sub 1% (although bonds have gone up).
- slg 4y ago
  Maybe not for you. Maybe not in the short term. But there are all sorts of people involved in the economy with all sorts of risk tolerances. Lots of people don't like losing their money. Putting their money some place with zero risk is attractive for people. It isn't the most up-to-date data and survey results are always a little questionable, but here is some data from 2015[1]: >A new survey of more than 1,800 people from the American Express Spending and Savings Tracker, however, found that 43% of Americans keep their savings in cash. An alarming 53% of those cash-hoarders "plan to hide bills in a secret location at home." Those numbers are big enough that even if they are way off, there is still a sizable number of people who are holding onto their savings in physical cash. That would go up if there was no inflation. [1] - https://www.businessinsider.com/americans-hide-money-under-the-mattress-2015-2 https://www.businessinsider.com/americans-hide-money-under-t...
cjbgkagh 4y ago
Inflation is not interest rates, it’s perfectly normal and proper to have higher interest rates than inflation. They’re only linked due to rehypothecation of money supply which is a problem in an of itself. But it gets a little complex to explain. Edit: my brain skipped over the ‘cash’ part and assumed ‘risk free’ interest would still be collected.
- slg 4y ago
  Can you explain why you think this disputes my point? The real interest rate is the nominal interest rate minus inflation. When there is inflation, the real interest rate for holding cash is negative. When there is no inflation, that real interest rate is 0%. The disincentive to holding cash disappears and therefore more people hold cash.
  - cjbgkagh 4y ago
    > The real interest rate is the nominal interest rate minus inflation. Yes. > When there is inflation, the real interest rate for holding cash is negative. No. This assumes nominal interest rate stays constant which it very much will not do.
    - slg 4y ago
      I'm still not following your line of thinking. The nominal interest rate on holding cash is always 0%.
      - cjbgkagh 4y ago
        You’re right, I didn't read your question accurately. By cash I assumed interest collecting back accounts. The missing out of the opportunity to make risk free money is punishment enough. If people elect to do this then they don’t think it’s risk free and thus are paying a premium to reduce risk.
        slg 4y ago

by slg 4y ago

monero-xmr 4y ago

There should not be a penalty for saving money. Furthermore you can give your money to the bank as a deposit (loan) and the bank will pay you some rate based upon what they can invest it on. Nowhere here does this require any level of inflation.

dsfyu404ed 4y ago

>0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of This is an absurd claim. Nobody seriously considering mattress vs CD (or bonds in a low rate environment like we had 2008-2020) is swayed by a return of less than a couple percent. It is a security vs liquidity vs trust calculation, not a return based one. Furthermore, as the other commenter points out, rates are correlated but not necessarily in lock step with inflation. The rate on your savings account is probably still sub 1% (although bonds have gone up).

slg 4y ago
Maybe not for you. Maybe not in the short term. But there are all sorts of people involved in the economy with all sorts of risk tolerances. Lots of people don't like losing their money. Putting their money some place with zero risk is attractive for people. It isn't the most up-to-date data and survey results are always a little questionable, but here is some data from 2015[1]: >A new survey of more than 1,800 people from the American Express Spending and Savings Tracker, however, found that 43% of Americans keep their savings in cash. An alarming 53% of those cash-hoarders "plan to hide bills in a secret location at home." Those numbers are big enough that even if they are way off, there is still a sizable number of people who are holding onto their savings in physical cash. That would go up if there was no inflation. [1] - https://www.businessinsider.com/americans-hide-money-under-the-mattress-2015-2 https://www.businessinsider.com/americans-hide-money-under-t...

cjbgkagh 4y ago

Inflation is not interest rates, it’s perfectly normal and proper to have higher interest rates than inflation. They’re only linked due to rehypothecation of money supply which is a problem in an of itself. But it gets a little complex to explain. Edit: my brain skipped over the ‘cash’ part and assumed ‘risk free’ interest would still be collected.

slg 4y ago
Can you explain why you think this disputes my point? The real interest rate is the nominal interest rate minus inflation. When there is inflation, the real interest rate for holding cash is negative. When there is no inflation, that real interest rate is 0%. The disincentive to holding cash disappears and therefore more people hold cash.
- cjbgkagh 4y ago
  > The real interest rate is the nominal interest rate minus inflation. Yes. > When there is inflation, the real interest rate for holding cash is negative. No. This assumes nominal interest rate stays constant which it very much will not do.
  - slg 4y ago
    I'm still not following your line of thinking. The nominal interest rate on holding cash is always 0%.
    - cjbgkagh 4y ago
      You’re right, I didn't read your question accurately. By cash I assumed interest collecting back accounts. The missing out of the opportunity to make risk free money is punishment enough. If people elect to do this then they don’t think it’s risk free and thus are paying a premium to reduce risk.
      - slg 4y ago