
The Time Value Of Money - tortilla
http://www.avc.com/a_vc/2010/02/the-time-value-of-money.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+AVc+%28A+VC%29
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AndrewDucker
Odd nit-pick: _When prices of things rise faster than they should, we call
that inflation._

I have no idea what "faster than they should" means in this case, and it
frankly doesn't matter - it's inflation if prices rise at all (and deflation
if they fall).

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abalashov
I think what is meant by that statement is that in an ideal scenario, the
money supply would expand annually to the exact same degree as the net growth
of the value of goods and services in the economy. Inflation is the degree to
which growth in the monetary base outpaces economic growth, at least in the
short term.

That definition obviously carries many assumptions about net investment flows,
savings rates, market efficiency, etc., but I think it's what is meant by
"faster than they should."

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lionhearted
> Which leads me to my final point. Markets set rates. Banks don't and
> governments don't. Banks and governments certainly impact rates and
> governments can do a lot to impact rates and they do all the time. But at
> the end of the day it is you and me and it is the traders, both speculators
> and hedgers, who determine how much of a discount we'll accept to get our
> money now and how much interest we'll want to wait another year.

Technically that's a true statement, but in practice governments can set
interest rates as artificially low as they want.

How they do this: Government officials can lend money to banks at less than
the rate of inflation. That makes it in a everyone's interest to borrow as
much as they can and buy any hard asset remotely likely to appreciate or even
hold its value with it.

The inflation becomes a self fulfilling prophecy at that point. More money
comes into existence by being lent, it's immediately put into chasing hard
assets, which increases the price of assets. Which then makes it make sense to
borrow money and buy hard assets with it, because next year the asset will be
worth more than the loan because of the inflation.

Long story short - technically sorta true, but governments can reduce interest
rates dramatically at the expense of inflation, which then becomes cyclical.
More inflation means more demand for lower interest rate money, which means
more inflation. The author's point is correct in theory, though in practice
governments can set interest rates basically as artificially low as they want.
(Getting them artificially high doesn't seem possible in the current generally
practiced monetary/banking/legal/tax systems)

So - correct in theory point, but in practice governments who control fiat
currencies can set interest rates as low as they want (albeit it with some
nasty side effects).

