4 ms·

Time value of money - meaning that its better to have a $1 today rather than a $1 tomorrow - isn't really an arbitrary thing. If its not true, then we have defl

by ojbyrne 12y ago

Time value of money - meaning that its better to have a $1 today rather than a $1 tomorrow - isn't really an arbitrary thing. If its not true, then we have deflation.

thaumasiotes 12y ago
There are two concepts here: 1. $1 today might buy you less stuff than $1 tomorrow would. For example, maybe today $1 will buy you three today-apples, but tomorrow $1 will buy you five tomorrow-apples. This is arbitrary. The example shows deflation in apples, but there's no reason, a priori, that today should be better or worse than tomorrow, whether measured in apples or any other dimension. Maybe tomorrow $1 will get you two tomorrow-apples. 2. Under the assumption that the buying power of $1 is fixed and eternal, $1 today is necessarily better than $1 tomorrow because you have more options. Among other things, you might die later today. This phenomenon can't reverse, it can only make earlier money (or anything else) more valuable than later money. But it's not the same idea as #1. Deflation is an idea related to concept #1. $1 today being better than $1 tomorrow is concept #2.
- fennecfoxen 12y ago
  The traditional point made for #2 isn't about the fact you could die but more that $1 today could be invested in some profit-making enterprise (directly or through a bank account paying interest). For a concrete non-financial-system example, $1000 today could let you re-insulate your home, saving you $250 over the course of the next winter. Every year you put off that $1000 then costs you around $250 (modulo any depreciation and the variability of heating costs). The thing that's a little different with the banking system is that you're not just getting paid for the time value of your deposited money and the returns it could get in the economy writ large, you're losing a little bit for the sake of safety (deposit insurance) and liquidity (you can withdraw money from a bank account any time, unlike if you had issued a mortgage loan directly yourself).

by ojbyrne 12y ago

Time value of money - meaning that its better to have a $1 today rather than a $1 tomorrow - isn't really an arbitrary thing. If its not true, then we have deflation.

thaumasiotes 12y ago

There are two concepts here: 1. $1 today might buy you less stuff than $1 tomorrow would. For example, maybe today $1 will buy you three today-apples, but tomorrow $1 will buy you five tomorrow-apples. This is arbitrary. The example shows deflation in apples, but there's no reason, a priori, that today should be better or worse than tomorrow, whether measured in apples or any other dimension. Maybe tomorrow $1 will get you two tomorrow-apples. 2. Under the assumption that the buying power of $1 is fixed and eternal, $1 today is necessarily better than $1 tomorrow because you have more options. Among other things, you might die later today. This phenomenon can't reverse, it can only make earlier money (or anything else) more valuable than later money. But it's not the same idea as #1. Deflation is an idea related to concept #1. $1 today being better than $1 tomorrow is concept #2.

fennecfoxen 12y ago
The traditional point made for #2 isn't about the fact you could die but more that $1 today could be invested in some profit-making enterprise (directly or through a bank account paying interest). For a concrete non-financial-system example, $1000 today could let you re-insulate your home, saving you $250 over the course of the next winter. Every year you put off that $1000 then costs you around $250 (modulo any depreciation and the variability of heating costs). The thing that's a little different with the banking system is that you're not just getting paid for the time value of your deposited money and the returns it could get in the economy writ large, you're losing a little bit for the sake of safety (deposit insurance) and liquidity (you can withdraw money from a bank account any time, unlike if you had issued a mortgage loan directly yourself).