Comment by codetrotter | Hacker News Reader

Comment by codetrotter | Hacker News Reader

> Although the idea of a more valuable dollar may sound great, many economists think it is worse than high inflation (Engeman, 2019). The problem is that the value of money would increase when people do nothing with it. This would be problematic since people would not invest or spend money to get the country out of a recession when they could just get a return from doing nothing.

Yes, how terrible that would be.

In reality people would still need to buy things that are actually important.

Housing. Food. Heating. All kinds of stuff. And on top of that we are still gonna spend on the non-essentials as well. It’s not like I’m going to completely stop watching movies or playing games or listening to music just because I know my dollar today would be worth more tomorrow.

The people that would be holding back are the ones that have hoarded all the resources in the first place. And that’s the real problem. Inflation is a bandaid to avoid things getting as bad as they would. But the reason is because of people taking too much and societies that don’t take care of their people. Incidentally the ultra rich also have a lot of clever ways of avoiding being impacted by inflation in the way that it impacts most normal people.

> Yes, how terrible that would be.

It would be pretty terrible if I became richer not by generating economic activity, but by sitting around with my money in a mattress.

You are correct that it's a band-aid fix... But it's the best one we have.

What I’m telling you is that normal people would not be doing that. Not in the way that this kind of idea makes it sound like anyway.

Monetary policy isn't intended to steer the behavior of normal people[1] who have ~net-zero cash for most of their lives, it's intended to steer the behavior of investors who don't need to spend all their money on food and shelter and medicine, and who will happily choose to sit on their cash, instead of investing it, if that provides them with better returns.

Everyone bitches when the price of milk goes up 8%, but nobody seems to realize that it went up because wages did. On average, if you're a worker, and you aren't saving (or trying to save) a pile of cash, inflation is net-zero for you.

[1] Stimulus checks did steer the behavior of normal people, but they were fiscal, not monetary policy. They had knock-on monetary policy effects, but the juice was worth the squeeze - thanks to them and the PPP, the economy didn't entirely collapse.

> if you're a worker, and you aren't saving (or trying to save) a pile of cash, inflation is net-zero for you

But people should be able to save. So that they can buy a house or apartment for themselves and their family. Without having to take up a loan to do so.

> But people should be able to save.

If everyone saves, the economy will collapse. Every dollar you save is a dollar that someone else doesn't earn.

In an inflationary environment, people can still save by buying equities.

This has tax and timing implications... But it's still possible.

> Without having to take up a loan to do so.

The existence of 25, 30, 35 year mortgages driving housing prices into the stratosphere is a separate problem, but not one you're ever going to unwind without having existing mortgage holders stringing you up from a lamp post.

That's a completely separate issue to inflation.

> If everyone saves, the economy will collapse. Every dollar you save is a dollar that someone else doesn't earn

Where is the plan to make billionaires spend all their savings? That’s the money I personally didn’t earn!

Or is it saving for them, nothing for me?

Billionaires have very little in savings relative to their wealth. Most billionaires have their wealth tied to ownership of a small number of companies, usually ones they founded.

If you want to buy a house or apartment, you're probably looking at at least several hundred thousand dollars, and average working class people would need years to save that much.

In other words, we're looking at someone with a few hundred thousand dollars, held for a few years. At which point, what's stopping them from keeping the money in an index fund, instead of under the proverbial mattress?

Also, taking a mortgage is a totally normal thing to do when buying a house, it will give you years of enjoying your home ownership, and in this case inflation actually works for you!

> what's stopping them from keeping the money in an index fund

Risk of principal loss.

Store shelves would be empty and businesses would shutter. There’d be less to buy. Banks would hold on to money instead of lending to productive businesses.

> Store shelves would be empty

Doesn't that result in scarcity and thus rising prices? A bit of a contradiction.

Scarcity because nobody is working. It's not a contradiction. Inflation encourages economic activity - work. Deflation discourages it.

I think you're being downvoted because you haven't explained why the store wouldn't raise prices before the shelves go empty.

If all the stores did that, and people would actually buy goods at those prices, you'd be in an inflationary economy, not a deflationary one.

What do you think inflation is? It's a reduction in the value of money, relative to goods. You can't say that the solution to the problems of deflation is inflation. (I mean, you can, that is my whole point... but it fully undermines the original argument.)

Deflation causes the production of goods and services to become more expensive in addition to slowing down the velocity of money. Hence, businesses actually go bankrupt (as in liquidated, restructuring becomes far more risky), productive capacity sits idle, unemployment rises, consumption slumps further, remaining businesses become even more distressed, all of which leads to a complete collapse in confidence in the marketplace. In turn, individuals and businesses are encouraged to hoard money, which only leads to further slowdowns in the velocity of circulation, making money even more scarce, etc.

In such an environment, businesses undergo brutal competition for a shrinking pool of money. Simply servicing current debts and operating expenses becomes difficult. Taking out new loans and/or investing capital into such businesses is nothing short of insanity. Even if a business could raise prices the inability of consumers to pay could easily result in a net loss.

The economy is built on the velocity of money. There's a reason why Bush called on Americans to spend money in the aftermath of 9/11, the system really can't cope with a significant slowdown in spending, even if only for a few days.

What if the deflation is caused by continuous improvement in productivity, as was the case for semiconductors? It seems like in that scenario, the continual decline in prices is more than counterbalanced by a continuous increase in production volumes, resulting in profits for manufacturers despite precipitous decline in the price of the products they sell. Moore's law didn't cause investment in semiconductor fabs to dry up; just the opposite. What if that happened to all sectors at once?

Productivity/efficiency driven deflation is almost always a good thing. The problem is when deflation is being driven by the scarcity of money or some other unsustainable mechanism

How would that be different from the people who buy the S&P500 instead of spending their money and generating economic activity?

If you buy the S&P500 then someone else sold the S&P500 for the same amount of money. The cash doesn't disappear, it just moves to a different person who presumably sold the S&P500 because they need cash to spend it.

That is quite different than sitting on cash.

How is it significantly different than what happens when banks invest money that is left in checking/savings accounts?

In a deflationary economy, banks offer negative interest rates.

You don't put your money in a savings account (which are lent out) in one, you put it into a vault.

Deflation has always been a disaster.

You don’t need inflation to solve the problems. Adjust the tax rates instead.

Property taxes. Income taxes. Taxing people by the amount of savings they have. Importantly, don’t give the rich guys tax breaks. Give the tax breaks to the poor.

Property tax is just inflation on 'land'.

It is also a useful tool for steering the economy.

> Taxing people by the amount of savings they have.

That's essentially what inflation does.

That’s what she/he is saying, tax achieves the same purpose, but better

Inflation _redistributes_ wealth from those with higher knowledge / ability to avoid it, to those with little ability/knowledge. Alternatively, it redistributes from people with fixed incomes, to workers; or from people with cash savings to debtors. There are many ways to look at it.

That is different than an explicit tax (the tax can be structured in a way to shrink everyone's purchasing power proportionally, and is harder to avoid).

The poor aren't paying that much tax that is easily tracked to get a break on. That's why UBI is appealing.

Solving NIMBY-ism and housing speculation would do much more for the poor than taxing the rich would. After all, you can't eat dollars.

And more dollars competing for the same goods would just drive inflation higher (the rich do not directly compete with the poor in buying things, other than potentially crowding them out of real estate investments - that is a legitimate societal problem. But so is NIMBY-ism - driven largely by the fact that racial covenants and crime-targeting became illegal in the 1960s-1990s). Although we haven't really come up with great alternatives (other than drive prices up because income tends to correlate inversely with propensity for crime).

Singapore-like enforcing of laws and harsh sentences could do it (the other low-crime countries are much more ethnically homogenous), but the trade-off there is much less freedom than in the U.S. - so it probably wouldn't be palatable here.

This is flat out incorrect. There have been productivity driven deflations in the 1800s that have actually been net good for the average person.

It's just that the most salient example of recent deflations (2008 and 1930) happened to coincide with massive crashes and problems; but that is a feedback of deflation + excessive leverage leading into the deflation - it's not something inherent in deflation itself.

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