What you’re describing is basically the need for monetary policy. When the fed raises rates to combat inflation, this makes debt more expensive and makes yield expectations higher on investments (by raising the risk-free yield of bonds).
> "Low time preference generations produce prosperity, which produces high time preference generations, who bring ruin, which produces low time preference generations."
Inflation severely disincentivizes savings and rewards consumption. This affects the behaviors of entire generations of people. If you really want an example, look at the USA post ‘71 (up to this very day) and its ever-increasing rate of consumption.
This is an horrible example given that since 71 the este of inflation in the US has gone down, not up, while at the same time during the post warn, and during the strong keynesian period it is considered to be a golden age where anyone could buy a house, while at the same time the inflation rates where the highest
What op doesn't mention is that high inflation doesn't per se desincentivize saving, rather it encourages to invest in high returns endeavors, or in assets which don't strongly devaluate, as for example housing, of which most people on the planet being able to own their own small home is their biggest investment of their lifetimes, and again, part of what made "the American dream" what it was, sadly all of that is dead now, so we have millions living in tents in Cali
You’re missing the long term. The inflation went down after having changed buying patterns, and that inflation didn’t disappear. Hence, it is (in general) always better to operate on debt than on cash as long as your interest rate is low (which has been the case for 30 years now). This drives up consumption patterns over-all.
Next, while this does drive the purchasing of investment class assets, those are not necessarily high-return. The reason the stock market keeps going up is not that everyone is suddenly making double the revenue. The stock market has turned into a ponzy-esque scheme where the higher and higher valuations are driven only by people seeing the numbers go up. The actual returns per share are not rising as quickly as the share prices.
Funny you should mention housing, as the housing market predictably crashed in 2008 (Ron Paul called it quite well, as did those who bet against the market). It will happen again as many of the same mistakes have been made. Even without derivatives on property, or even the easy lending, people have been taking massive loans due to interest rates, and this has driven a dramatic rise in housing costs. As more and more people are priced out, and rents continue to increase the potential buying/renting pool shrinks which will eventually cause another crash even if nothing else does.
>Funny you should mention housing, as the housing market predictably crashed in 2008 (Ron Paul called it quite well, as did those who bet against the market). It will happen again as many of the same mistakes have been made. Even without derivatives on property, or even the easy lending, people have been taking massive loans due to interest rates, and this has driven a dramatic rise in housing costs. As more and more people are priced out, and rents continue to increase the potential buying/renting pool shrinks which will eventually cause another crash even if nothing else does.
If you want to avoid housing bubbles and crashes, you have to legalize building more houses.
Also building up. Higher density housing should be the norm in most places. In the US it's the exception and leads to poor public transport, the need for a car, long commutes, etc...
Actually, 2008 was supposed to be the end of the economic system. It should have resulted in a great depression and a massive increase in political polarization and violence. Yet for some strange reason, we are merely limping away from it and that event is becoming a faint memory in another decade.
People didn't take on massive loans due to interest rates, banks were handing out massive loans and this forced them to lower interest rates.
People save first, then the money must be invested, either directly in stocks or indirectly through loans where the borrower invests in his company.
If there is a flood of savings, then there will be a flood of loans as well.
The problem with Keynes is that he dismissed Silvio Gesell's idea of having expiring bank notes. Yes, a modern implementation will probably look very different, no stupid stamps but the principle is much better than attempting to eliminate liquidity preference with inflation.
>Inflation severely disincentivizes savings and rewards consumption.
Good. We've been suffering from deflationary policies that led to demand shortages and low productivity growth since the 1980s. There's a healthy balance, but ultimately there's no moral virtue in economic austerity.
Just to make sure I’m understanding, is the suggestion that people who lived through that high inflation period became more inclined to spend and less inclined to save, culturally, to this day? Do you have any links discussing this further?
If you have the money to buy, e.g., an Xbox, saving it will not neccesarily return you the same amount of money to buy an Xbox in the future, because inflation raised the console's price more than the extra money you got in return of your investments.
If you buy the console right away, you can be sure that your asset is "One Xbox" in value, no matter the amount of inflation.
the assertion, as I understand it, is that if you lived through a period of inflation your generation will be spending more, and not saving as much, for _the rest of life_, meaning even in low inflation periods like the 2010s
Interesting. I’ve lived in the opposite (my entire adult life has been in the low inflation period following the 2008 recession) so I can’t personally relate
Why save money today when tomorrow it will be worth a fraction of what it's worth today? You're better off spending it on anything. Inflationary currency sucks by design, you're supposed to get rid of it as soon as possible.
I’m sure people more educated than I can debate about this all day, I’m just saying that in the system we have as it exists today, the expectation is that the federal reserve will increase interest rates to combat inflation, and in turn this makes debt more expensive and increases the risk free yield rate
Edit: and just to be clear where I’m going with this, the market adjusts along these expectations. Why has the housing market been so insanely hot for a year now? In part because money is easy, and everyone believes inflation is coming/here, so getting a 30 year loan on 3% interest is a killer deal. Consequently home values are through the roof. But this counterbalances: you end up with a higher principle and lower interest for the same monthly home payment, and take on the risk that you will be underwater on your mortgage if asset values crash when rates rise.
You are assuming a simulated environment without permanently increasing entropy. Gold doesn't really suffer from increasing entropy but humans do. That's the fundamental problem that makes it impossible to maintain a gold standard or a fixed supply currency that does not account for entropy.
If you were to account for increasing entropy with a negative interest rate then you could maintain a fixed money supply though I would recommend price level targeting to adjust the money supply to the population and economic growth because of psychological biases.
A fixed supply demurrage currency (negative interest) that is deflationary could in principle work just as well as one that does price level targeting however, the need to adjust prices would remain which is undesirable because we suffer from money illusion.
So no, monetary policy is not what is causing inflation. Inflation is a backwards way of representing an increase in entropy. By that I mean the exponential x% creeping monetary inflation. A supply shock can obviously cause an arbitrary amount of inflation within an arbitrary time span.
> "Low time preference generations produce prosperity, which produces high time preference generations, who bring ruin, which produces low time preference generations."
I don’t understand