[gahahaha]

It didn't use to matter much. Consistent inflation is a rather new phenomenon that basically only appeared after WWII. There was for example almost no inflation in Britain between 1814 and 1914.

For the record, in case there still are Ron Paul fans/goldbugs out there: moderate inflation is generally considered a good thing by economists today and inflation is probably too low at the moment.

[msandford]

Personally, as a reductionist, I like the idea that money is somehow permanent. Maybe economists like inflation, and perhaps it is "good" for the economy overall. But the idea that a dollar saved today can buy roughly the same amount of stuff in a decade or a century seems like a powerful idea to me. To me that seems like a goal that's worthy of pursuing because then money becomes a true abstraction that's not leaky. And because of the way my brain works, I see that as incredibly useful. Not having to always inflation adjust things, not having to do this or that, not having to worry about how much retirement you actually have versus how much you think you have, etc. I understand that for various reasons few other people want this, but that doesn't convince me personally otherwise.

One person described money as "sweat, distilled" and I find that definition incredibly attractive. I recognize that plenty of people making money not by sweating but thinking or whatever, but I still find it an excellent description. And I can't see how devaluing a person's effort over time is a viable strategy for building a lasting civilization. I think it leads inevitably towards the kind of throwaway society we have here in the US and virtually guarantees that we won't build infrastructure of long lasting value like exists elsewhere in the world. Well built stuff can last for hundreds or thousands of years. I wish money was the same.

[hsk]

One aspect of inflation is that it is a tax on people who choose to hoard their money. Because inflation naturally makes every dollar worth less and less over time, you are forced to either spend it now or invest it somewhere that grows with inflation. As a result, money is actually utilized instead of sitting in a bank account.

Thus, I think the idea that a dollar saved today can buy roughly the same amount of stuff in a decade is actually bad, because in a world where that's likely, that dollar was probably sitting useless in someone's purse for a decade.

Inflation, in my opinion, actually does the opposite of what you suggest -- because it encourages lending and investing in order to beat inflation, money is actually put to use for longer term projects such as infrastructure that can last years and years.

[hga]

As a result, money is actually utilized instead of sitting in a bank account.

Because we all know banks put all the currency they receive in huge vaults filled with paper $100 bills, instead of, oh, lending it out (several times over one way or another).

Unless you're converting it all to gold, or stuffing it under a mattress, your savings are in institutions like banks which are not a sink where the velocity of your money goes to zero, outside of economic messes where they aren't willing to lend, or people are afraid to borrow. And your being encouraged to spend your money doesn't seem to help those situations.

[nshepperd]

A piggy bank would have been a better example. Anyway, it's not an argument against inflation: the reason putting your money in a bank account is a good idea today is (among other things) because they do invest it to stave off inflation. So inflation doesn't preclude saving (as in savings accounts), it just makes sure you save in better ways, like storing it in a bank that does lending.

[msandford]

Right now I earn less than a percent while inflation is definitely higher than a percent. Where is my real return on my savings?

[saalweachter]

If you are earning less than a percent, you are probably paying for liquidity.

Inflation is currently bouncing between around 1.6% and 2% (but mostly towards the 1.6%). A 3 year CD at a decent bank is currently paying around 1.6%; a 5 year CD is paying around 2%. So if you're willing to commit to a 5 year deposit, you will probably beat inflation and realize a small, real return. Even an interesting-bearing checking account (with a sufficient balance...) pays close to 1.6%.

Granted, it's not the glorious 5%+ returns of yesteryear, but then, we're in a savings glut.

[nshepperd]

I make 3.5% on my (AUD) savings account while inflation is currently <2%. Maybe you're just getting screwed?

[Dylan16807]

In the bank's pocket.

[msandford]

> Because we all know banks put all the currency they receive in huge vaults filled with paper $100 bills, instead of, oh, lending it out (several times over one way or another).

Right?! Every bank vault is just huge piles of gold bars and ornery old men counting and recounting the money, hoarding it up and never loaning it out.

[msandford]

So everyone should live paycheck to paycheck and thus keep money circulating in the economy more rather than "hoarded" in checking accounts to absorb shocks like big car repair bills and stuff like that?

I think the idea that a dollar today buys just as much in a decade IN NO WAY precludes people from investing their money to earn a return. It just eliminates the stupidity tax that some people pay for not understanding how things work.

In a non-inflationary environment nearly all people would still invest their money and put it to work. It's just that they wouldn't be taxed for not doing so.

Inflation doesn't encourage lending, it encourages borrowing. It's smart to pay back with dollars that are worth not as much as the dollars you borrow. Inflation actually discourages lending because you now have to find borrowers who can pay you back higher than the interest rate.

Of course, all this is predicated on a real market in interest rates which we don't have in the US because the Fed sets the rate through various means.

[Dylan16807]

You don't need more than a year's buffer in a checking account, and target inflation is insignificant at the timescale of a year. It only discourages long-term uninvested money.

[msandford]

If a year's buffer is 20k (rent, utilities, car payments, insurance, etc can total $1500/mo pretty easily) then 2% inflation (and basically zero interest) means that this buffer costs me $400 a year, or over $30/mo. That's a non-trivial carrying cost, $30/mo can buy me substantial, actual real things.

I might not care too much if it was $0.50 or $1 per month. But quantitative differences eventually become qualitative ones, and at this point it's not just some tiny abstract amount of money, it's real consumption that a person has to forego every month (or day!) for the sake of not getting financially ruined the first time a big unexpected expense comes up.

[simonh]

It might seem like a nice idea that cash stuffed in a mattress for a few decades would keep it's value, but that's not beneficial to society. Encouraging money to be invested in order to earn a premium, and stave off inflation, is a good thing overall because it puts wealth to work creating jobs and stimulating economic activity.

[iopq]

Except it is beneficial, because that cash inside the mattress will get spent eventually. Guess when it gets spent? During a financial crisis. If everyone had a little bit of cash in their mattress, the spending wouldn't go down as much and the crisis would have a limited impact.

[WoodenChair]

You just argued that we need inflation to stave off inflation.

[Dylan16807]

No, that's not what that post says.

I'll reword it for you:

'Encouraging money to be invested, by motivating people via inflation, is a good thing overall because it puts wealth to work creating jobs and stimulating economic activity.'

[gahahaha]

No he didn't. He argued that we need inflation to stop hoarding of money and make people spend their money and create activity in the economy. This is important because in the economy as a whole TotalSpending == TotalIncome

[chucksmash]

He said that as a society we benefit from inflation because as individuals we are forced to invest our funds so that individually we can avoid the effects of the inflation.

[hga]

Expanding on that, I came of age during the '70s where I believe the major transition in inflation expectations occurred, and being numerically literate, I have a feeling for how the value of the dollar declined (which I frequently reify with this calculator http://www.bls.gov/data/inflation_calculator.htm but know the government understates it, see below for one example).

When I see, oh, normal genre 300-500 page paperbacks going for Amazon prices from 8-11 USD, mid '80s official inflation adjusted prices of ~$3.65-5, and lower actual prices from a quick check of my library, my response to the higher end is not no, but hell no, and I'm not going to buy the lower end new for all but the most exceptional titles.

Many economists think deflation causes people to hoard their money, since an item bought tomorrow will cost less (assuming your form of storage survives, $N in a bank that goes bust before the FDIC was established is worth $0), and the reverse for inflation. I think it's a lot more complicated than that.

[msandford]

I agree that it's more complicated than that! Maybe for any 0.1% of change in the interest rate or inflation rate there is a marginal effect. But eventually quantitative differences become qualitative ones.

When the interest rate you pay is 4%, the inflation rate is 2% and the interest that you earn is 0.25% quantitative changes become qualitative ones at numbers that seem very innocuous.

[jsprogrammer]

Deflation would evaporate the money supply in months. It won't be allowed to happen as it is "game over".

[msandford]

2% annual inflation isn't a big deal, but 2% annual deflation would make all the money disappear in less than a year? How can that be so?

I do understand that for double-digit losses and gains things are nonlinear, in other words a 50% loss means that you need a 100% gain to offset it, and a 90% loss needs a 1000% gain to offset. But in the single digits, this is very close to linear. If you lose 5%, then gaining back 5% leaves you very close to even.

If 2% compounded deflation is the end of society, how can 2% compounded inflation be the savior?

[jsprogrammer]

I'm not saying inflation is the savior. I'm saying that in the current system, deflation can evaporate the money supply quickly and is a huge risk factor.

The reason is that ~90% of the money that exists needs to be continuously rolled over into new loans to maintain the total supply (and it actually needs to increase a bit [ie. inflation]). At any given time, only a small fraction (~10%) of the total supply is available to make the upcoming interest & principal payments. If new loans don't roll out in time (to replace the money destroyed by the principal payments), you can enter a situation where there is no legally manifestible currency (banks are completely insolvent) without some seriously disturbing hackery and deception.

You begin to hit serious problems (many individual actors will fail due to 0 flow) before you even get to that point. This is just the ultimate fate of our economy.

Edit: What we really need are accurate and accessible simulations of our economy so that everyone has a chance to understand it.

[msandford]

> to replace the money destroyed by the principal payments

The money isn't destroyed. It's back in the hands of the lender, available to do whatever they'd like with it. Perhaps they'd invest it into a factory or a business that they own, instead of just loaning it out. That would mean it'd be spent on real things in the real world, thus meeting the criteria of not being destroyed and being spent.

[thaumasiotes]

> 2% annual inflation isn't a big deal, but 2% annual deflation would make all the money disappear in less than a year? How can that be so?

There's no symmetry between inflation and deflation. Your incredulity is unwarranted.

Money is an accounting method to enable easy trade. Ordinarily, it's worthless, which makes it available to be used in transactions. Under deflation, money gains an inherent value -- you can multiply your worth by holding on to the money you have now. This means that much less trade occurs, because the gains from that trade are less than the gains from holding on to your cash while it appreciates. But the gains from cash appreciation are in an important sense hallucinatory -- on a system level, they don't exist -- and the gains from trade are real, so the economy just ends up being crippled.

[anigbrowl]

On the other hand, when you consider what money is an abstraction for - economic resources - inflation doesn't seem so unreasonable. Consider one fairly standardized resource unit - a barrel of oil. Crude oil lasts pretty well, but refined oil products definitely have a shelf life. Food commodities are of course perishable, and real estate can often lose use value if buildings aren't properly maintained. Of course this is not to say that all resources are perishable or perishable to similar degrees, but nature does impose 'use it or lose it' conditions of its own.

The other thing to consider is that any decision to wait has an opportunity cost, and the baseline opportunity cost is captured by the interest rate. Since nobody is going to stop charging interest to borrow money - even in sharia finance you pay a rental cost for money that is very very similar to interest - it would seem as if price inflation was an unavoidable characteristic of any system involving credit or loans.

[gohrt]

Money, or more properly, _currency_, is not a store of value. Oil, timber, or woool is a store of value -- it is actually something you can use. Money is an abstract "IOU", a right to demand someone give you something of value. At the end of the day, a society with oil, timber and wool is better than a society with only money. The only utility money has is that it facilitates production, instead of leaving people unemployed and starving because they have no convenient way to trade their labor or capital for whatever they need.

[anigbrowl]

Yes...that's why I described money as 'an abstraction.' My point is that the underlying resources on which money gives you an easy means of purchasing a claim (instead of having to barter) are sometimes perishable, which means that opting to store rather than use them can have a cost (separate of the opportunity cost of foregone alternatives) and inflation could be thought of as the incorporation of the aggregate perishability of goods into the abstraction of currency. I can't give you a citation for this, it's just my personal conjecture.

[ArkyBeagle]

But permanent with respect to what? US GDP is 16.77 trillion. In 1950 it was $.3T. Ratio is 55:1. Population is only approximately 2:1. That's a compounded growth rate of 5%. So really- just to break even and make a dollar mean the same thing, we'd need an average money supply growth of 5% ( which is not the same as inflation ). But all the prices will be radically different - some more, some less.

[Spooky23]

No inflation encourages the type of behavior that we're seeing today -- hoarding of US dollars.

Gold as currency had lots of really negative effects, read up on the populist movement in the late 19th century U.S. and the background of the "Wizard of Oz" story.

[GnarfGnarf]

Money is a measure of power. With money, you can make people do things for you. People don't crave money for its own sake. They crave money for the power it gives them over others.

[mikeyouse]

There was a period of low inflation during that time frame but it temporary and isolated.. There were huge inflation swings before, during, and somewhat after that time..

http://imgur.com/HLfnO6R

[gahahaha]

I think you'll observe that there are periods of inflation offset by periods of deflation, meaning that over time the value of money was somewhat more stable than your image implies.