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by vkou 2182 days ago
In a deflationary world, it would have a lower rate of return, while hoarding cash would have a higher rate of return.

This would attack investing at both ends. Currently, the spread between inflation eating your money, and the SP earning you money is 7%. That compensates for a lot of risk. Drop that down a few percentage points (by making cash attractive), and a few more percentage points (it's harder for firms to earn profits in a deflationary environment) while keeping the risk the same, and the SP becomes a worse and worse investment.
1 comments
imustbeevil 2182 days ago
The S&P tracks a certain basket of companies. If other companies held more value it would track those companies. There are a lot of percentage points between 7 and 0.

Deflation means USD value goes up. It doesn't mean USD value goes up 5%. A "deflationary world" could have 0.5% deflation. Or 0.00001% deflation. Again, it is incredibly narrow to view economics in this way. You lose 50% of the possible worlds you could inhabit and the economic systems and incentives you could have.

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vkou 2182 days ago
Inflation/deflation is a proxy for population growth + productivity growth + looseness of monetary policy.

Loose monetary policy can't be maintained forever (You get stagflation, which is even worse - just ask Japan), year-over-year productivity growth can't be maintained forever, and the subject this thread is discussing is 'what happens to the economy when population growth goes negative?'

So yes, a deflation of 0.5% wouldn't be devastating. A deflation of 3% would be a stop-the-presses-the-world-is-going-to-hell-we-need-a-new-economic-system event.

The problem is that you can't loose-monetary-policy your way out of deflation, because one of the factors contributing to a loose monetary policy is how willing banks are to lend money to people. In a world where the money base is shrinking year-over-year, in aggregate, lending money to people is a terrible idea, because there won't be enough money in circulation next year to make interest payments. This leads to a reduction in lending, a reduced appetite for risk in lenders, and a reduction in the amount of money created by fractional reserve banking, which further pushes you into deflationary territory.

It's a vicious cycle that you can't escape.

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