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Taking on debt is also necessary for a functioning financial system with the US gov playing an important role as global debtor of last resort. Money has no intrinsic value, and the only way to save it is for someone else to borrow and spend it!

Inflation is basically a tax on savings, which is not that bad when you consider again that money has no value. A low inflation rate then creates subtle pressure for people to invest money productively (or just spend it) as they lose out if they just hide it under their mattress. A high inflationary rate is not good, of course, as you basically can't save at all, while deflation is also bad because it rewards saving and causes value to evaporate (since money has no intrinsic value, things produced have to be bought and used...).




This is a very Keynesian way to look at things that isn't necessarily absolutely true. There are a lot of times when this ideal of "slight inflation" is detrimental given the actual output of said policies.


For example, when? There are very fundamental truths here; e.g. consumption has to match production with very few exceptions, no matter how much someone has to save (or can't spend according to what they are earning). You might be able to save for a rainy day (or retirement), but it is impossible for the world to do that (instead, they must invest for the future to prepare for that rainy day).

I'm not sure you could find a single serious economist who would claim "slight inflation is bad;" i.e. would argue that 2-3% is worse than 0%. Maybe a libertarian, but there is a good reason we never vote them into power.


You might not vote them into part, but the people you do appoint them into power, since Alan Greenspan has argued for zero inflation has the best policy in the long run.

I'm not saying that it isn't a misguided theory - I'm far too ignorant to honestly argue macroeconomics - but I disagree with your representation of it as a settled argument, disputed only by cranks.


Economist here. In my view you're exactly right. Though there has been a merging of Neo-Keynesian and Neoclassical modeling methods in recent decades, interpretation thereof is still a battle.


You have no idea what you're talking about.

Inflation is a tax on savings, but that's alright because money has no value?! But if money actually had no value, there would be no use for it.

Consumption "has to" match production?! What's that supppsed to mean? If I produce something no one wants, people "have to" consume it anyway?

You say inflation is good because it motivates people to invest (because their money loses value just sitting in a bank), but why wouldn't people want to invest even if their money was gaining in value? The purchasing power of whatever money you earn through investments is increased by deflation too, so the sooner you make a good investment, the better off you'll be.


Money has no intrinsic value, it only has value based on trust that the money We receive can be used to purchase other goods. The value of money is set by the markets (and indirectly by prices, wages, and printing new bills).

If you produce and no one buys, then you stop producing because you are providing no value; simple. If your production is non perishable, you could pay rent and upkeep to stockpile it, but value is lost regardless.

People have an incentive not to invest because investing is risky. Many would just sit on a gold hoard than to risk losing it, but that behavior doesn't solve any consumption problems (worse, it leads to temporary deflation, since that gold is taken out of circulation).

This isn't rocket sicence, most of us have college degrees, this is just Econ 101.


You've just said that everything produced must be consumed. Now you have a more realistic model, with stocks. You are still missing waste. Keep improving it, and you may come into something useful.

You seem to have misunderstood you Econ 101 classes because "supply" isn't the same thing as "production", "demand" isn't equivalent to "consumption", and "intrinsic value" is a completely artificial construct.

Also, people save mostly because they want to spend later, invest mostly because they want to have more money, and consume mostly because they want the wealth. Inflation and deflation have very complex and often non-intuitive relations with those three. You can't just extrapolate from Econ 101, not even after you understand it right.


I didn't confuse production and consumption with supply and demand, which anyways determines costs and is not the point. We simply have little capacity to save production like we can save water in a reservoir. People save because they want to spend later, sure, but again, that is irrelevant, because production can't be saved in general someone else must borrow.

Investments require taking on risk and...they actually require skills to do right (e.g. Doing your homework). So you might want to invest to get rich, but you might not want to invest because you aren't good at it or do t want to become poor. It still has to be incentivized, especially when most people just want comfortable lives.

You seem to have an agenda in introducing more relationshios above this one simple fact. So make your point rather than just claiming my ignorance, because no points were argued in your post.


> production can't be saved in general someone else must borrow

What's that supposed to mean?


You're not addressing my post, where I tried to highlight the silliness of your earlier claims.

How does consumption "have to" match production? How do you figure "money has no value"? Now you're talking about "intrinsic value" but earlier it was just plain "value".

People save money for a reason you know. If money has no value, as you originally claimed, then there's no reason to save or possess it. If money has no "intrinsic value" that doesn't make your original claim any less confused.

But to be precise, value is purely subjective. We've been using the word somewhat ambiguously. Value is utility as a means towards an end. Money, as a medium of exchange, has utility as a means towards countless ends, and that's exactly why everyone wants it.

You say people have a disincentive to invest because it's risky, but I don't see a point there. It all depends on the investment opportunity, and the investor's tolerance to risk etc, ie. the circumstances. Some people do invest, some don't. So what?

You say that not investing doesn't "solve any consumption problems", but what the hell might those be? Again, why does consumption "have to" match production? What does that mean? What's a "consumption problem" and whose problem is it, and why?

Why is (price-)deflation a problem, considering it means our purchasing power is increasing? Do you really want to claim people want less stuff for their money?

Don't pretend you're giving me an economics lesson.


How is investing NOT risky if inflation occurs? All you are doing is pressuring people into investing (aka gambling, because there is no guaranteed ROI) and causing a fluctuation of returns amongst people who "invest."

Some of us actually have advanced degrees in Economics, so let's not act like you're Krugman himself.


>If I produce something no one wants, people "have to" consume it anyway?

You go out of business and stop producing.


I know that, but the OP didn't seem to. He claimed consumption "has to" match production.


It does, in the same way that effects have to match causes. The only time production can run free with "no consumption" is when someone personally bankrolls extra production, and in that case they're actually the consumer.


So you're telling me that if I produce a bunch of shit-sandwiches and no one wants them, for whatever mysterious reason, then if I produce some more anyway, suddenly I'm the sole consumer of said sandwiches?

How does that make sense, considering no one has even eaten (=consumed) one?


If you're making them while knowing you won't sell them, you're not actually putting them on the market. You're making them for yourself. So either the production should be completely ignored when talking about producer/consumer, or you're the real consumer here. You don't have to eat them, you're a collector.

But that's just closing a minor loophole. People do not often intentionally produce market products with no intent to sell, and it'll make them run out of money. The overall rule is pretty solid even if you don't close the minor loophole.


>or something compels producers to refrain from production that would go unconsumed

Yeah, they run out of money. The rest is a rounding error.

>I could be on a sacred mission to provide everyone in the world with a shit-sandwich

You're not a producer in the market sense then. Consumption is a market term, it doesn't mean anyone has to eat the sandwich.

To put it simply: The original statement was "consumption has to match production with very few exceptions". Zealotry outside of markets is one of those few exceptions; it's very rare. Otherwise market forces compel them to match.


From what I've heard, 0% inflation would be best, but that risks getting into deflation (eg -5% 'inflation'). So 2% inflation is worse than 0%, but better than risking deflation.


0% risks stagnation, which means investment isn't envouraged or discouraged. Even 1% inflation slightly encourages investment, and really the scale only needs to be tipped a bit to keep the economy moving forward toward growth.


I don't get that argument. Perhaps you want something like Demurrage (https://en.wikipedia.org/wiki/Demurrage_(currency)), which could give you that incentive without debasing the currency.


If you're talking about the natural costs of holding money, those are miniscule. If you're talking about a tax I don't see how it avoids debasing the currency, or is meaningfully different from inflation. It just makes things more complicated because people can attempt to avoid paying.


Inflation encourages "investment" which is another way of saying inflation encourages gambling.


The problem with 0% inflation is that people with money have no incentive to risk it.

IMO you need a cycle of inflation between 2-7% to keep things healthy. Dollars stockpiled in some account are not doing anyone any good.


Dollars stockpiled in an account will be lent by the bank at a low interest rate (since they have to be invested with little risk). Dollars saved under a mattress actually lead to deflation while they aren't being used, which can mess things up even more.


>Dollars stockpiled in some account are not doing anyone any good.

Why is it that Keynesians believe that money just gets stuffed under a mattress or stockpiled somewhere? It is loaned out at X% interest rates to people who need present-day liquidity to fuel growth. What do you think the VC industry is based on, Keynesian economics?


The reality today is that most banks dump deposits into fixed income securities, the vast majority of which in 2014 are Treasury instruments.

VC investments are a completely different universe. None of the $7 trillion in deposit balance is going to a VC.

Right now, smaller businesses are starved of loan capital, and if you don't offer the high growth rates that VCs need to succeed, it is difficult to get loans.


This is one possible dynamic of a monetary system, but it is not how things must work by any stretch. Until the Bretton-Woods agreement gold was shipped from country to country to settle trade imbalances. Money was an IOU for gold and not a method of nullifying debt with currency.




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