Thursday, December 06, 2012

Oops!

Some time during breakfast today I noticed that I was an idiot - not alas, a new discovery but unwelcome anyway. As the politicians, say, I had spoken "inartfully." That is to say, I had written the following:

So he buys Japanese stuff, like a bunch of Canon 1D X's which may be cheaper (due to inflation) and the Japanese economy is stimulated to the tune of a zillion Yen.

Claiming that inflation would make things cheaper. WB thought I might be joking, but in fact I was serious. Seriously in error, of course, since the actual effect of inflation is opposite, so that I literally had it backwards.

Nonetheless, I claim, that I had a certain point, which, of course, I failed to make. Start with the theory that people save money with the idea of someday spending it, or having it spent by someone of their choice. If you have an economy with failure of aggregate demand, that means, in effect, that savers are deferring spending to an extent that others are losing their jobs. Deflation makes future goods cheaper than present day goods, so in a deflationary economy deferring spending saves you money in the long run. In inflation, it's the opposite. For a country experiencing inflation, you can expect future goods to cost you more than present goods. Inflation tells you to buy that new Canon 1 D-X this year rather than next year. That's the point I intended to make.

It's true, by the way, whether you are an elderly Japanese retiree or a bank in Frankfurt that just sold a big euro bond for a bunch of yen.