Re: A fractional Reserve
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Deflation rewards savers. If you save your money you will be able to buy more goods and services with it tommorrow. Inflation rewards debtors, so it is no wonder why the US has steadily become the largest debtor nation in history.
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Wouldnt this lead to less spending---> less production ---->less jobs?
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There are many factors working in opposite directions, and while common sense may point to this possibility there are many reasons why it doesn't happen in actuality. Take inflation for example- inflation means that money must be either invested or spent or lose its value, there is risk <font color="red">risk is a poor choice of words here, because it doesnt mean what you are applying it to in financial terminology. </font> in simply holding money (ie capital) which in turn makes risky investments appear relatively less risky (when compared to holding dollars), <font color="red">I disagree with this characterization. There is no "appearance of an investment becoming less risky". You are compensated for risk by a greater return on your investment then you can get from risk free investments. You are also compensated in the risk free rate of return for inflation. </font> the result of this is many more businesses would be expected to fail under inflationary standards. <font color="red">that doesnt follow at all. In an inflationary environment the risk free rate of return and the risky investment return both increase to compensate for inflation. the net result is that the discounting of the asset and liability offset each other and the effect on investment decisions is minimal, and is a residual of timing differences. If returns could be immunized by exact cash flow matching there would be no impact at all on invesment decisions from higher or lower inflation. </font> Anecdotal evidence in the US? generally accepted numbers for small businesses are that 70-90% of them close within 5-10 years, with the majority closing because they are unprofitable (2/3rds is often quoted, no data or links to back that up right now). <font color="red">It is my understanding that under-capitilzation, not long term prospects for profitability, is the primary reason for business failure. Even if it is profitability, that is an error in business judgement that is minimally impacted by inflation as shown above. </font> In the short term thats a lot of jobs, in the long term thats a lot of mis allocated resources. In a deflationary (due to fixed money supply) setting investors are more cautious with their money, fewer businesses will be started, but one would expect those businesses to have far higher success rates, short term growth is slower but with out the corresponding liquidations of unprofitable businesses so available resources are greater. <font color="red"> wrong, since your basis for this is by assuming the opposite of incorrect conclusions regarding the impact of inflation on investment decisions</font> A deflationary scenario can lead to lower overall productivity when measured in total units, but much greater efficiency when measured in actual utility, mush steadier growth and more security for the individual.
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