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> Inflation does not reduce wealth. Inflation (a jargon word that basically means printing money) transfers money from savers to debtors. This is destructive.

> Inflation does not reduce wealth. Inflation (a jargon word that basically means printing money) transfers money from savers to debtors. This is destructive. It's destructive because the amount of money the government will print is not fully predictable, so it creates financial risks for people who plan ahead. It's destructive because the new money enters the economy unevenly -- and basically unpredictably and unfairly, not efficiently. It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation. So inflation does reduce wealth, overall.

chii 13y ago
> So inflation does reduce wealth, overall. i totally agree with all your points, except inflation doesn't reduce wealth (the same amount of goods and services are produced regardless of inflation), it redistributes wealth from those who cannot hedge against inflation (usually those who don't have lots of money), to those who can. While nominal interest rates _might_ somewhat match inflation, in practicality, having an account with a bank that you need for day to day means you don't get much interest (often there are rules like "withdraw once, and lose the monthly interest"). Sure, when you are rich and have an investment account paying 10% pa, then it somewhat balances inflation. I want to know what the major cause of inflation is - i suspect it is a result of fractional reserve banking.
- xenophanes 13y ago
  When you take money away from someone who was saving to build a factory, so his factory is not built, then the factory doesn't produce anything, so wealth is lost. Moving money around disruptively (via inflation or other methods) makes it harder to do economic planning and successfully do large wealth creating projects. So it does mess up wealth creation. You say you agree with my points but you are disagreeing. Hopefully this clarifies. A major cause of inflation is printing money. Fractional reserve banking is basically the same thing as loans. It increases the amount of money that exists only if you ignore the amount of debt that exists. If you subtract people's debt when considering how much money they have, like you should, then nothing actually happens to the money supply. (In practice, banking is complicated by factors like FDIC insurance. But the basic idea of borrowing money then loaning out the borrowed money, while it does come with some issues, doesn't cause inflation because loaning neither creates nor consumes money, it balances out (unless you selectively ignore half of what's happening))
  - betterunix 13y ago
    "When you take money away from someone who was saving to build a factory, so his factory is not built, then the factory doesn't produce anything, so wealth is lost." Unless he can find investors...
    - nthj 13y ago
      Investors are a subset of “people who save“
      - userulluipeste 13y ago
        He probably was also talking about investment banks, that will gladly lend you some money for the right price...
  - tedsanders 13y ago
    You make a good point, but I only agree partway. You are right that if a factory builder was saving money to build a factory, then inflation hurts his output. However, if a factory builder takes on loans to build a factory, then inflation actually helps his output! I would expect that most factories are built from loans, rather than savings. In general, banks are creditors and businesses/people are debtors. So perhaps inflation hurts the banking sector but helps other sectors. Lastly, inflation only hurts the factory builder if he's using money as a store of value. If he buys stocks/bonds/commodities, then he can store value without exposing himself to the risk of inflation. What do you think about these points?
- pjc50 13y ago
  Opinions differ, although it's worth noting that inflation happened before the invention of banking and in countries that used specie as money. Most theorists revolve around the effects of economic growth and supply/demand sudden changes.
rsynnott 13y ago
> It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation. However, it encourages investment, which in a modern capitalist economy is far more important to wealth creation.
- userulluipeste 13y ago
  You give too much credit to the financial system in regard to investment. Inflationary policy just makes the money a bad thing to hold on to, a "hot potato". This is what contributed (among other things) to housing bubble as people looked at real estate properties as safe deposits, not necessarily because they needed the houses. I presume however that you didn't counted housing bubble as "investment rush".
  - rsynnott 13y ago
    Walk into any independently owned shop (and most chains) in the developed world, and notice the large amount of non-perishable stock on the shelves. That isn't there because the owner saved up a few million prior to opening the shop, it's there because of a revolving credit facility provided by a bank. The bank can provide this at affordable rates due to cheap credit, which is a result of a mildly inflationary economy.
    - userulluipeste 13y ago
      You seem uncomfortable talking about the negative side of due-to-inflation "investment drive", the one that has negative impact on society, and keep mentioning again about the good part/cases instead. I got it first time - investment banks, through the power and leverage allowed and granted by legislative framework, contribute to investments. I am not denying that! But well, the consequence of inflation are not limited to the PR-stories, like or not. Also, I believe the down-voting in my previous comment was because some took my comment personal, not because it had something condemnable in it.
eli_gottlieb 13y ago
>Inflation (a jargon word that basically means printing money) transfers money from savers to debtors. This is destructive. Call it destructive, but historically it's the only way to prevent society from blowing up in an exponential debt meltdown. Well, that or banning usury. >It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation. Except that the actual source of wealth is just labor and materials, and capital accumulation is a vampiric disease on the honest economy.
- digitalengineer 13y ago
  "Just labor and materials"? To read such a bold statement on HN. Human intellect and bravery are important to wealth creation. Or do we still plough the fields with a horse?
  - eli_gottlieb 13y ago
    Human intellect is labor. "Bravery", well, that's essentially a claim that you need Moral Virtue in order to make goods and services, which seems pretty freaking stupid.
    - digitalengineer 13y ago
      I think you're mixing up labour with human capital. E.g. the stock of competencies, knowledge, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value. Instead of bravey we could call it risk-taking if that would make you feel better. You speak of "the actual source of wealth". Risks that can be rewaring or not. They require something for -possibly- nothing. An entrepeneur takes risks, does research and only when he is succesfull will he or she create value, thus wealth.
      - eli_gottlieb 13y ago
        A worker also takes risks, on a regular basis. Everyone with a freaking mortgage on their house is taking a risk. The mere fact of having a probability less than 1.0 of getting the desired return doesn't mean you've performed some superheroic act that sets you in a different moral class from everyone else. >I think you're mixing up labour with human capital. E.g. the stock of competencies, knowledge, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value. I'm not mixing them up; there's just very little difference between potential labor and actual labor.
jellicle 13y ago
This response smacks of a religious creed. Let's try the opposite: > Deflation (a jargon word that basically means printing money) transfers money from debtors to the rich. This is destructive. Yep, the opposite is at least as true.
akjj 13y ago
> Inflation (a jargon word that basically means printing money) transfers money from savers to debtors. No. Inflation is a decrease in the value of money relative to the goods and services in the economy. As with all things, the price of currency depends on the supply of currency, but as with all things, it also depends on the demand for currency, speculation, etc. > It's destructive because the amount of money the government will print is not fully predictable, so it creates financial risks for people who plan ahead. Nothing in this world is fully predictable, but inflation for the US dollar has been approximately 2% per year for a long time, although it is now somewhat lower. This is much more stable than the price of bitcoins which can vary significantly day-to-day. If I'm planning, what I care about is prices, i.e. inflation in my definition, not quantities, inflation in your definition. > It's destructive because the new money enters the economy unevenly -- and basically unpredictably and unfairly, not efficiently. There's a great deal of difference between fairness and economic efficiency. You undermine your point by confusing the two, and I'm not sure what you mean here. > It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation. No. Inflation discourages holding cash, by which it encourages investing in the real economy. If you put your money into some investment whose value is tied to real goods and services (e.g. a factory or rental apartments), then the value of your investment will not be impacted by moderate, predictable inflation.
- sfjailbird 13y ago
  > There's a great deal of difference between fairness and economic efficiency What? Fair == effective. Fair should be the number one concern for an economic system. Anything else means someone somewhere is sucking up the wealth.
tedsanders 13y ago
Do you make any distinction between expected and unexpected inflation? Imagine inflation was a constant 2% a year. All contracts and interest rates could take this into account, so there would be no transfer of wealth from savers to debtors. If inflation is unexpectedly high, debtors benefit, whereas if inflation is unexpectedly low, creditors benefit. From my perspective, it's not inflation that transfers wealth from creditors to debtors, it's unexpectedly high inflation. And even then, this is a transfer of wealth, not destruction of wealth.

chii 13y ago

> So inflation does reduce wealth, overall. i totally agree with all your points, except inflation doesn't reduce wealth (the same amount of goods and services are produced regardless of inflation), it redistributes wealth from those who cannot hedge against inflation (usually those who don't have lots of money), to those who can. While nominal interest rates _might_ somewhat match inflation, in practicality, having an account with a bank that you need for day to day means you don't get much interest (often there are rules like "withdraw once, and lose the monthly interest"). Sure, when you are rich and have an investment account paying 10% pa, then it somewhat balances inflation. I want to know what the major cause of inflation is - i suspect it is a result of fractional reserve banking.

xenophanes 13y ago
When you take money away from someone who was saving to build a factory, so his factory is not built, then the factory doesn't produce anything, so wealth is lost. Moving money around disruptively (via inflation or other methods) makes it harder to do economic planning and successfully do large wealth creating projects. So it does mess up wealth creation. You say you agree with my points but you are disagreeing. Hopefully this clarifies. A major cause of inflation is printing money. Fractional reserve banking is basically the same thing as loans. It increases the amount of money that exists only if you ignore the amount of debt that exists. If you subtract people's debt when considering how much money they have, like you should, then nothing actually happens to the money supply. (In practice, banking is complicated by factors like FDIC insurance. But the basic idea of borrowing money then loaning out the borrowed money, while it does come with some issues, doesn't cause inflation because loaning neither creates nor consumes money, it balances out (unless you selectively ignore half of what's happening))
- betterunix 13y ago
  "When you take money away from someone who was saving to build a factory, so his factory is not built, then the factory doesn't produce anything, so wealth is lost." Unless he can find investors...
  - nthj 13y ago
    Investors are a subset of “people who save“
    - userulluipeste 13y ago
      He probably was also talking about investment banks, that will gladly lend you some money for the right price...
- tedsanders 13y ago
  You make a good point, but I only agree partway. You are right that if a factory builder was saving money to build a factory, then inflation hurts his output. However, if a factory builder takes on loans to build a factory, then inflation actually helps his output! I would expect that most factories are built from loans, rather than savings. In general, banks are creditors and businesses/people are debtors. So perhaps inflation hurts the banking sector but helps other sectors. Lastly, inflation only hurts the factory builder if he's using money as a store of value. If he buys stocks/bonds/commodities, then he can store value without exposing himself to the risk of inflation. What do you think about these points?
pjc50 13y ago
Opinions differ, although it's worth noting that inflation happened before the invention of banking and in countries that used specie as money. Most theorists revolve around the effects of economic growth and supply/demand sudden changes.

rsynnott 13y ago

> It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation. However, it encourages investment, which in a modern capitalist economy is far more important to wealth creation.

userulluipeste 13y ago
You give too much credit to the financial system in regard to investment. Inflationary policy just makes the money a bad thing to hold on to, a "hot potato". This is what contributed (among other things) to housing bubble as people looked at real estate properties as safe deposits, not necessarily because they needed the houses. I presume however that you didn't counted housing bubble as "investment rush".
- rsynnott 13y ago
  Walk into any independently owned shop (and most chains) in the developed world, and notice the large amount of non-perishable stock on the shelves. That isn't there because the owner saved up a few million prior to opening the shop, it's there because of a revolving credit facility provided by a bank. The bank can provide this at affordable rates due to cheap credit, which is a result of a mildly inflationary economy.
  - userulluipeste 13y ago
    You seem uncomfortable talking about the negative side of due-to-inflation "investment drive", the one that has negative impact on society, and keep mentioning again about the good part/cases instead. I got it first time - investment banks, through the power and leverage allowed and granted by legislative framework, contribute to investments. I am not denying that! But well, the consequence of inflation are not limited to the PR-stories, like or not. Also, I believe the down-voting in my previous comment was because some took my comment personal, not because it had something condemnable in it.

eli_gottlieb 13y ago

>Inflation (a jargon word that basically means printing money) transfers money from savers to debtors. This is destructive. Call it destructive, but historically it's the only way to prevent society from blowing up in an exponential debt meltdown. Well, that or banning usury. >It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation. Except that the actual source of wealth is just labor and materials, and capital accumulation is a vampiric disease on the honest economy.

digitalengineer 13y ago
"Just labor and materials"? To read such a bold statement on HN. Human intellect and bravery are important to wealth creation. Or do we still plough the fields with a horse?
- eli_gottlieb 13y ago
  Human intellect is labor. "Bravery", well, that's essentially a claim that you need Moral Virtue in order to make goods and services, which seems pretty freaking stupid.
  - digitalengineer 13y ago
    I think you're mixing up labour with human capital. E.g. the stock of competencies, knowledge, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value. Instead of bravey we could call it risk-taking if that would make you feel better. You speak of "the actual source of wealth". Risks that can be rewaring or not. They require something for -possibly- nothing. An entrepeneur takes risks, does research and only when he is succesfull will he or she create value, thus wealth.
    - eli_gottlieb 13y ago
      A worker also takes risks, on a regular basis. Everyone with a freaking mortgage on their house is taking a risk. The mere fact of having a probability less than 1.0 of getting the desired return doesn't mean you've performed some superheroic act that sets you in a different moral class from everyone else. >I think you're mixing up labour with human capital. E.g. the stock of competencies, knowledge, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value. I'm not mixing them up; there's just very little difference between potential labor and actual labor.

jellicle 13y ago

This response smacks of a religious creed. Let's try the opposite: > Deflation (a jargon word that basically means printing money) transfers money from debtors to the rich. This is destructive. Yep, the opposite is at least as true.

akjj 13y ago

> Inflation (a jargon word that basically means printing money) transfers money from savers to debtors. No. Inflation is a decrease in the value of money relative to the goods and services in the economy. As with all things, the price of currency depends on the supply of currency, but as with all things, it also depends on the demand for currency, speculation, etc. > It's destructive because the amount of money the government will print is not fully predictable, so it creates financial risks for people who plan ahead. Nothing in this world is fully predictable, but inflation for the US dollar has been approximately 2% per year for a long time, although it is now somewhat lower. This is much more stable than the price of bitcoins which can vary significantly day-to-day. If I'm planning, what I care about is prices, i.e. inflation in my definition, not quantities, inflation in your definition. > It's destructive because the new money enters the economy unevenly -- and basically unpredictably and unfairly, not efficiently. There's a great deal of difference between fairness and economic efficiency. You undermine your point by confusing the two, and I'm not sure what you mean here. > It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation. No. Inflation discourages holding cash, by which it encourages investing in the real economy. If you put your money into some investment whose value is tied to real goods and services (e.g. a factory or rental apartments), then the value of your investment will not be impacted by moderate, predictable inflation.

sfjailbird 13y ago
> There's a great deal of difference between fairness and economic efficiency What? Fair == effective. Fair should be the number one concern for an economic system. Anything else means someone somewhere is sucking up the wealth.

tedsanders 13y ago

Do you make any distinction between expected and unexpected inflation? Imagine inflation was a constant 2% a year. All contracts and interest rates could take this into account, so there would be no transfer of wealth from savers to debtors. If inflation is unexpectedly high, debtors benefit, whereas if inflation is unexpectedly low, creditors benefit. From my perspective, it's not inflation that transfers wealth from creditors to debtors, it's unexpectedly high inflation. And even then, this is a transfer of wealth, not destruction of wealth.