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The loan argument is a good one, to be sure. Alas it does not play out in reality. Check out the graph here: http://en.wikipedia.org/wiki/Deflation#Major_def

The loan argument is a good one, to be sure. Alas it does not play out in reality. Check out the graph here: http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_the_US http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_t... Once you've done that, please explain to me how there were loans made over the last 400 years in light of the fact that only the last 80 years has had reliable consistent inflation.

JPKab 14y ago
What do you think were the interest rates on these loans? Historically loan interest rates were extremely high, for multiple reasons: 1) To cover the opportunity cost of holding the money during actual deflation 2) To cover the risk of a possibility of deflation 3) To allow the loaning institution to profit even when deflation occurs 4) The high demand for loans, due to a vastly diminished supply of loans If you live in a time of high barriers to borrowing money, you will live in a time of vastly decreased social mobility. You know, kind of like the time prior to the last 80 years. That wonderful age you gold-standard lovers wish you lived in.
- codex 14y ago
  Deflation also requires more collateral, because in case of default, the bank won't be able to sell the collateral for the value it had when the loan was made, which risks insolvency and the loss of depositors' funds.
- msandford 14y ago
  I'm not opposed to "high" interest rates. It encourages thrift and thrift is what built the modern world. The economy can only grow if production is greater than consumption on a macro level. How do you ensure that production is greater than consumption? You encourage savings via a "high" (some might say reasonable) interest rates.
stretchwithme 14y ago
Yeah, just because a currency is deflating doesn't mean you can't charge interest and have it be worth your while. You get back your principal plus whatever amount it take to make you take the risk. Inflation is worse for lenders than deflation. Each dollar they get back is worth less when it is returned, not more. Borrowers love inflation. If there was great deflation, it gets quite painful to pay back loans. The lender is quite happy about it though. I think I read, though, that both severe deflation and inflation push up rates. If deflation is severe, it can push many borrowers into bankruptcy, making lending more risky.

JPKab 14y ago

What do you think were the interest rates on these loans? Historically loan interest rates were extremely high, for multiple reasons: 1) To cover the opportunity cost of holding the money during actual deflation 2) To cover the risk of a possibility of deflation 3) To allow the loaning institution to profit even when deflation occurs 4) The high demand for loans, due to a vastly diminished supply of loans If you live in a time of high barriers to borrowing money, you will live in a time of vastly decreased social mobility. You know, kind of like the time prior to the last 80 years. That wonderful age you gold-standard lovers wish you lived in.

codex 14y ago
Deflation also requires more collateral, because in case of default, the bank won't be able to sell the collateral for the value it had when the loan was made, which risks insolvency and the loss of depositors' funds.
msandford 14y ago
I'm not opposed to "high" interest rates. It encourages thrift and thrift is what built the modern world. The economy can only grow if production is greater than consumption on a macro level. How do you ensure that production is greater than consumption? You encourage savings via a "high" (some might say reasonable) interest rates.

stretchwithme 14y ago

Yeah, just because a currency is deflating doesn't mean you can't charge interest and have it be worth your while. You get back your principal plus whatever amount it take to make you take the risk. Inflation is worse for lenders than deflation. Each dollar they get back is worth less when it is returned, not more. Borrowers love inflation. If there was great deflation, it gets quite painful to pay back loans. The lender is quite happy about it though. I think I read, though, that both severe deflation and inflation push up rates. If deflation is severe, it can push many borrowers into bankruptcy, making lending more risky.