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Comment by aqme28 | Hacker News Reader

I remember this little joke about Argentine inflation: It's cheaper to take a taxi than a bus, because in a taxi you pay at the end of the trip.

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That is a funny joke but after I read it outloud to my friends I got confused. How is it cheaper? One would enter the taxi with pesos. These pesos do not go up in value. Instead the cost of the rides go up. Thus you would want to pay sooner rather than later. Of course there is no joke in saying the bus is cheaper.

Unless one entered the taxi with US dollars. Yet in theory the exchange rate should match inflation. To me the joke would only make sense under hyper-deflation.

The idea is that you are billed a nominal value, whose rate is fixed when you contract the service. Since the rate is always agreed to at the beginning of the trip, the time of payment has an impact on its value.

This joke is essentially the opposite of debt deflation (theory of recessions), as described by Irving Fisher;[1] the theory states that the debtor loses money during deflation, causing repayment problems. In the bus/taxi joke, the rider is a debtor, and the taxi driver is a creditor, with the length of the ride being the term of the loan. The inflation is essentially devaluing the loan.

[1] http://en.wikipedia.org/wiki/Debt_deflation

I thought you pay in advance when you take the bus too. At least that was the case in the few countries I visited.

No, you only pay in advance when you take the bus. When you take a cab/taxi, you set the rate in advance, but only pay at the end (when the currency is less valuable).

I still don't get it. Let's say the real price is 1 peso per mile for both services. You want to travel 100 miles. On the bus, you pay 100 pesos up front. In the taxi, the meter is set to one peso per mile. Then you pay 100 pesos at the end. Unless you are going to convert from some other good into pesos and then pay, the cost is still the same.

First of all it's a joke

But 100 pesos at time T (bus) is worth more than 100 pesos at time T + interval (taxi)

Inflation means that the value of 100 pesos in the future is less than the value of 100 pesos now. In countries under hyperinflation, supermarkets will raise their prices several times a day.

"During the Brazilian inflation of the earl 1990s, for instance, supermarket workers reportedly spent half of their time replacing old price stickers with new ones." -- Essentials of Economics

I don't see how it matters if your asset position is identical in either trial.

It only makes sense if you were going to (hypothetically) do something with the pesos. Let's say you bought 100 pesos worth of bananas when you hopped in the cab. Then, when you got out, before you paid, you sold the bananas. Because of inflation, you got more pesos for the bananas (say, 150 pesos), and still only had to pay 100. So at the end of the trip you have 50 pesos you wouldn't have had if you had to pay at the beginning (and couldn't buy your bananas).

I guess the joke is that while you're in the taxi, pesos goes down, but the cab driver didn't have the time to adjust his pricing according to the new (lower) value of the pesos. Therefore he'll charge you the old price which is lower than what it should be by the end of the ride.

I think you have to check what inflation means...

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