{"items": [{"author": "Chris", "source_link": "https://plus.google.com/117346402173047680184", "anchor": "gp-1358183604383", "service": "gp", "text": "I can think of two possible reasons that inflation matters.\n
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\nOne is that inflation, like value, is an emergent property, not a top down property.\u00a0 The fact that your 10000 credits are now only worth the same as 10 credits were before is because of what someone is willing to give you for them.\u00a0 The price of different goods can increase at different rates.\u00a0 When inflation is small, this difference is small, but when inflation is large, different people can have vastly different ideas of what something is worth, and thus markets become inefficient.\n
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\nYou're absolutely right that you could account for high inflation by increasing credit rates, but it adds a lot of inaccuracy errors.\u00a0 Pretend you can predict inflation to within 50%.\u00a0 Not 50 percentage points, but 50%.\u00a0 So say your inflation prediction is 1%.\u00a0 Then we can expect inflation to be between .5% and 1.5%.\u00a0 And say I loan you money with a 1.5% interest rate.\u00a0 I can expect to make a little money, but there's no way I'm gonna lose my boat if the rate is slightly outside the expected range.\u00a0 And if it's .5%, you owe me a little more than I gave you, but not that much more.\n
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\nBut if the inflation prediction is 100% then we can expect inflation between 50% and 150%.\u00a0 If I offer you a loan at %150 interest and inflation is only 50%, you owe me around twice what I gave you.\n
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\nThe other reason inflation matters is, as you state in the first sentence, that debts aren't updated.\u00a0 Currency is sort of a form of debt.\u00a0 I have a certain amount of money in the bank.\u00a0 You can think of that money as being a debt that the society owes to me.\u00a0 Inflation causes that debt to be worth less.\n
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\nIf I'm someone who has a lot of money, I don't want that debt to be worth less.\u00a0 If I'm someone who has a lot of money, I can influence what sort of decisions get made in monetary spheres.\u00a0 I'm not sure if this correlation leads to the issues that you can imagine it does.\n
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\nHigh inflation also causes problems for people on fixed income and people with cash savings.\n
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\nFor this same reason though, modest inflation can actually be very helpful.\u00a0 If I'm someone who owes a lot of other people debts, inflation can make that debt be less burdensome.\u00a0 The US government owes a lot of other people debts.\u00a0 Inflation definitely has its upsides when it comes to debt management.\n
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\nThis is the problem that the Euro causes for Greece.\u00a0 Because the debt that Greece owes is in Euros instead of in Drachmas, Greece doesn't have the power to cause inflation which would help decrease its debts.\n
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\nThere's also the advantage of having a weak currency in that it brings investment to your country.\u00a0 Since inflation isn't a top down thing, the value of your currency on currency markets can run ahead of the prices of things in your country.\u00a0 This can make it cheaper to buy things in your country and export them to other countries, thus moving money into your economy.\u00a0 In other words, causing other people to owe you debts.", "timestamp": 1358183604}, {"author": "Marcus", "source_link": "https://plus.google.com/115811589251174483775", "anchor": "gp-1358185466659", "service": "gp", "text": "I wouldn't like this system.\u00a0 It protects debts against inflation without adequately protecting savings or fixed incomes.\u00a0 The average person would have much greater trouble ensuring that all of the assets were in inflation-protected instruments than large banks and other capital institution would.\n
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\nDebts which are protected against inflation, (such as requiring repayment in foreign currency or precious metals), historically have been one of the prime drivers of ruinous hyper-inflation.\u00a0 Being unable to escape your debt, in aggregate anyway, by earning more money would also be really frustrating and would lead to defaults.\n
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\nYou could, of course, have wages be in the inflation adjusted dollars, but I think that would undermine the entire system.\u00a0 If everything in the economy becomes in the inflation neutralized currency, eventually that too would have inflation, since it would simply replace the underlying currency.", "timestamp": 1358185466}, {"author": "Chris", "source_link": "https://plus.google.com/117346402173047680184", "anchor": "gp-1358185652480", "service": "gp", "text": "I forgot to mention the reason deflation is worse than inflation.\u00a0 With deflation, all of a sudden it's better to hold cash than to invest it and people stop investing and thus the economy stops growing and probably shrinks a huge amount.\n
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\nI think I'm finally starting to get my head around the fact that what matters in the economy isn't how much money exists, but how much it moves.\u00a0 Having dollars in a bank doesn't do any good, but when I buy an ice cream cone, that money then goes to the makers and sellers who then buy something else and the money moves around a whole bunch and that's what makes it useful to the world.", "timestamp": 1358185652}, {"author": "Jeff Kaufman", "source_link": "https://plus.google.com/103013777355236494008", "anchor": "gp-1358186600008", "service": "gp", "text": "@Marcus\n\u00a0\"without adequately protecting savings or fixed incomes\"\n
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\nYou do the same thing to protect savings and incomes: you inflation-index them too.\n
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\n\"Being unable to escape your debt, in aggregate anyway, by earning more money would also be really frustrating and would lead to defaults.\"\n
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\nYou could earn more money in real terms (real raises).\n
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\n\"have wages be in the inflation adjusted dollars\"\n
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\nYup, proposing that too. \u00a0Inflation-index everything.\n
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\n\"If everything in the economy becomes in the inflation neutralized currency, eventually that too would have inflation, since it would simply replace the underlying currency.\"\n
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\nExplain? \u00a0I'm very interested in how this would work, and I agree that that's a crucial issue here.", "timestamp": 1358186600}, {"author": "Marcus", "source_link": "https://plus.google.com/115811589251174483775", "anchor": "gp-1358187331537", "service": "gp", "text": "I'm not an expert by any means, but my fear is that if everything is tied to inflation, the economy becomes too self-referential. Inflation is usually defined by changes in prices, but what if vendors start requesting that long term contracts be signed in inflation-adjusted prices? At some point, the inflation neutral currency could have the potential to just replace the currency, which I fear would be the effect of trying to denominate all transactions in it. At that point, the same forces that cause inflation to begin with, would inflate (or deflate) the inflation neutral credits.", "timestamp": 1358187331}, {"author": "Jeff Kaufman", "source_link": "https://plus.google.com/103013777355236494008", "anchor": "gp-1358187601549", "service": "gp", "text": "@Chris\n\u00a0\"modest inflation can actually be very helpful. \u00a0If I'm someone who owes a lot of other people debts, inflation can make that debt be less burdensome. \u00a0The US government owes a lot of other people debts. \u00a0Inflation definitely has its upsides when it comes to debt management.\"\n
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\nExcept that inflation was already taken into account when people decided what interest rate they we're willing to lend at. \u00a0In a steady state, modest inflation doesn't make things easier for people with debt because their interest rates are correspondingly higher.\n
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\nChanges in the amount of inflation, however, are very important. \u00a0An increase in inflation is good for people with (fixed interest) debts, a decrease is good for people with (fixed interest) loans. \u00a0Unfix these rates by inflation-adjusting them and then inflation stops mattering.\n
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\n\"You're absolutely right that you could account for high inflation by increasing credit rates, but it adds a lot of inaccuracy errors\"\n
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\nOnly if you have to account for inflation in advance. \u00a0If you just continuously adjust for inflation when repaying we can just agree \"you're lending me $X at a real interest rate of Y%\". \u00a0Which is basically what inflation-indexed bonds do.\n
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\n\"The price of different goods can increase at different rates. \u00a0When inflation is small, this difference is small, but when inflation is large, different people can have vastly different ideas of what something is worth, and thus markets become inefficient.\"\n
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\nI'm not sure that's true. \u00a0People can already have vastly different ideas about what something is worth, but you end up with a market price based on what prices people are willing to buy and sell at. \u00a0I would expect that to keep working, even under high inflation.", "timestamp": 1358187601}, {"author": "Jeff Kaufman", "source_link": "https://plus.google.com/103013777355236494008", "anchor": "gp-1358187722158", "service": "gp", "text": "@Marcus\n\u00a0\"At that point, the same forces that cause inflation to begin with, would inflate (or deflate) the inflation neutral credits.\"\n
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\nThis makes some sense, and is important. \u00a0I think I'm going to try and condense and package up this question to where I could ask an economist.", "timestamp": 1358187722}, {"author": "Marcus", "source_link": "https://plus.google.com/115811589251174483775", "anchor": "gp-1358188076113", "service": "gp", "text": "Put another way, my concern is that either the system would not be universal enough, in which case it would disproportionately benefit creditors and the elite, or it would be sufficiently universal, at which point it would risk being ineffective.", "timestamp": 1358188076}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/332836440164813?comment_id=332875146827609", "anchor": "fb-332875146827609", "service": "fb", "text": "The effective inflation rate is different for every single economic agent in the economy. The more price volatility there is, the more approximating inflation for everyone at a single global rate is bad.", "timestamp": "1358189114"}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/332836440164813?comment_id=332879606827163", "anchor": "fb-332879606827163", "service": "fb", "text": "Inflation isn't inherently bad or good and it can have positive or negative effects. However, if prices for goods are unpredictable enough it erodes faith in using money instead of barter. If you don't think inflation matters Jeff, then I pose this thought experiment. How would you make a currency that never has inflation? If you want everything to be inflation indexed, how do you index cash to inflation? Holding cash is something people can do, as well as holding other assets. Currency is a thing you can buy for currency (you should be willing to sell me $20 for $20 plus your transaction costs including your own time and energy). Furthermore, consider a world where we can buy widgets made in one factory or hold cash. Suppose that the widget factory burns down along with all our widgets that happen to be stored in an adjacent factory. Before a widget was $1, but now there are no widgets for any price! Our consumer price index is just the price of widgets and now that price is infinite! Does our currency still have value? You can't buy anything with it.", "timestamp": "1358189921"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/332836440164813?comment_id=332884583493332", "anchor": "fb-332884583493332", "service": "fb", "text": "@George: \"how do you index cash to inflation?\"
I'd be inclined to say \"don't; just use electronic funds transfers for everything\" but I don't think we actually have to give cash up. Couldn't we replace this-dollar-is-a-dollar with this-dollar-is-a -TIPS-fraction?", "timestamp": "1358191086"}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/332836440164813?comment_id=332886633493127", "anchor": "fb-332886633493127", "service": "fb", "text": "That isn't what I meant. I meant the finance meaning of cash, not the meaning of cash as currency. I just meant money and not goods.", "timestamp": "1358191469"}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/332836440164813?comment_id=332887666826357", "anchor": "fb-332887666826357", "service": "fb", "text": "My question remains, if inflation is meaningless, we should be able to make a currency without it. How would we do that?", "timestamp": "1358191637"}, {"author": "Marcus", "source_link": "https://plus.google.com/111675838261170541573", "anchor": "gp-1358193085891", "service": "gp", "text": "I agree with Chris that inflation is an emergent property. Interest rates, on the other hand, are a transaction dependent property. Interest rates do not have to be equal to inflation, though there are influences of inflation on interest rates and vice versa.\n
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\nI'd argue that interest rates are determined by opportunity costs of the money: a money-owning individual or institution can choose to loan you money with some interest rate, or it could choose to loan to the next guy in line, or it could choose to buy real estate, or it could invest in a start-up, or it could buy government securities, or it could buy a hamburger and eat it. The interest rate charged is only dependent on inflation to the extent that the other investment opportunities are dependent on inflation. Moreover, the interest rate is often much higher than inflation, especially if you are a risky bet. But the interest rate can be lower than inflation in some cases - if you are a very sure bet, and there isn't any one else out there who is as good a bet as you who is willing to pay more, it can be better to lend you money at a 2% interest rate than to not do anything with the money, even if inflation is 3%. Note that a positive inflation increases the incentive to lend out money rather than holding onto it - and this effect is often considered to be positive for the economy. (see the babysitting coop economics parable).\n
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\nThere is also one important disconnect between inflation and interest: interest has a zero percent lower bound because it is better to hold onto money, than to lend it at a negative rate. So inflation can go negative (deflation) and interest can't. Hypothetically, if you make everyone hold their money in electronic form, you could charge negative interest rates on all savings accounts...\n
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\nAn other important factor for interest rates is the Fed funds rate: a low Fed rate will increase the amount banks are willing to lend, a high Fed rate will make it more difficult for banks to lend, and this will influence the interest rates which the banks will charge. This ability of the Fed to influence interest can be a good thing in terms of stimulating the economy during recessions and slowing it when it overheats.\n
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\nBut, thinking about it, the most important factor here is that inflation is that it doesn't \"just happen\": for example, if a hurricane hits the gulf coast and wipes out a bunch of our oil infrastructure, the price of oil will rise due to scarcity, and so the price of everything that depends on oil for transport will rise (and that's most things), and so that means increased inflation. But magically waving a wand and saying that everyone's money increases at the same rate as inflation won't\u00a0 work, because the problem isn't inflation, the problem is a limited oil supply, and inflation is actually part of the solution (eg, increase price and therefore reduce consumption of goods that depend on oil, thereby reducing the use of oil to match the reduced supply).", "timestamp": 1358193085}, {"author": "Lex", "source_link": "https://plus.google.com/111102660583646544610", "anchor": "gp-1358201829558", "service": "gp", "text": "It sounds like a good idea for really long contracts of 10+ years. For long contracts, you would ideally write in all manner of contingency clauses, not just for inflation.\n
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\nFor shorter contracts, it seems just as well to break your contract into sequences that are at most 1-3 years each, and to renegotiate as you \u00a0go. This gives you far more flexibility in dealing with all manner of events, not just inflation. Maybe you have a better idea about how good the other party is at what they do. Maybe you have other options on the table, or fewer. Maybe you got a super employee, or lost one.\n
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\nThere are also pragmatic concerns. Inflation measures lag by several months, whereas the whole purpose of using a \"currency\" is to make lightweight transactions. Additionally, there is not one single measure of inflation; which one do you use in which circumstance? All prices change all the time, in both directions.", "timestamp": 1358201829}, {"author": "James", "source_link": "https://plus.google.com/106345404829653994850", "anchor": "gp-1358216046454", "service": "gp", "text": "You can think of inflation-adjusted dollars and non-inflation-adjusted dollars as being like two separate currencies, with an exchange rate determined by peoples' expectations about future inflation and discount factors. If inflation is higher, demand for non-resistant dollars is lower. If demand for non-resistant dollars is lower, that causes inflation.\u00a0This is a positive feedback loop, inhibited only by the inertia of slowly-updating prices. Get it started by moving enough things off the base dollar, and the base dollar could collapse as a currency entirely, leaving people to buy their goods and services with inflation-resistant bond-fractions. Then you don't really have a usable base-dollar inflation index anymore, since prices aren't denominated that way. But you could measure inflation of the bond-fraction denominated prices, and repeat the cycle.", "timestamp": 1358216046}, {"author": "Jeff Kaufman", "source_link": "https://plus.google.com/103013777355236494008", "anchor": "gp-1358216310633", "service": "gp", "text": "@James\n\u00a0\"measure inflation of the bond-fraction denominated prices\"\n
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\nI'm still thinking through this, but I would think that if your bond-fraction denominated prices were inflating then you weren't calculating inflation properly.", "timestamp": 1358216310}, {"author": "Chris", "source_link": "https://plus.google.com/117346402173047680184", "anchor": "gp-1358225858057", "service": "gp", "text": "@Lex\n\u00a0Short contracts have a high cost in that renegotiating them costs money. \u00a0You also often will want a long term contract because there's a cost to changing partners and depending on the nature of the contract that can lead to a unbalanced negotiation. \u00a0The example I keep thinking of, though I know you're talking about money contracts, is a long term lease. \u00a0There is a huge cost to moving a company, so the landlord can be at a huge advantage.", "timestamp": 1358225858}]}