I’m finding it hard to parse the rest of your comment. There is a zero lower bound on nominal interest rates. That’s a problem for the central bank, in extremis and under certain policy regimes, but it shouldn’t prevent businesses from attracting capital, as long as deflation is moderate and known. (If this were not the case, it would only strengthen the argument against deflation, which you seem to favour.)

Proposition 1: The nominal interest rate is the real interest rate + inflation, regardless of whether inflation is high or low, positive or negative. Therefore neither high inflation nor high deflation is a problem, as long as they are steady and predictable.

I am proposing instead:

Proposition 2: The nominal interest rate is the real interest rate + inflation, or zero, whichever is greater, because savers have the option to hold cash instead of investing it. Therefore high deflation will cause people to play qualitatively different games than the ones they will play under low deflation, or high or low inflation.

What I mean by “asymmetry” is that people “play qualitatively different games”. It was probably a poor word choice.

I think Aeroguy is suggesting that the problem of deflation is self-limiting, that deflation causes shortages, which tend to cause inflation. That sounds plausible, but I suspect there are other scenarios we haven’t thought of. Kgaard seems to disagree. I don’t understand Japan at all. I don’t understand capital vs. financial investors. I only understand mattresses.

I listened to an EconTalk podcast with Doug Irwin on the Great Depression and the Gold Standard. It didn’t make any sense to me until near the end, when they started talking about the “cover ratio”. Now I’m wondering what Ron Paul’s position is on the cover ratio, because to my way of thinking, that makes all the difference in the world to whether or not I want a gold standard.

http://www.econtalk.org/archives/2010/10/irwin_on_the_gr.html

I am treating the real interest rate as exogenous to savers’ decisions, something determined largely by technology and political interference. I am thinking of inflation/deflation also as exogenous to savers’ decisions, something likely to be caused by central bankers lying about how much their money is worth and how much gold they own.

If you have fiat currency, then printing money seems like the easiest thing in the world to do. So what’s the problem? I can kind of see why there are conflicts of interest between Greece and Germany, but Japan? I don’t get it, unless the problem is political interference that has nothing to do with currency shortages.

Personally, I’m afraid of high inflation, not deflation. I don’t understand “sterilization” or why it couldn’t be reversed at any moment. I don’t understand why China or Switzerland haven’t created currencies based on baskets of commodities.

What’s going to be interesting is how the developed world deals with a situation where productivity is climbing so fast that the real cost of producing both goods AND services is falling. In other words, annual price declines of 1-2% would be the order of the day without some form of QE. As someone noted above, these price declines might be acceptable precisely because they are happening due to sharply higher productivity. It would be like the tech-industry’s strategy writ large: You invest knowing prices will fall but your costs are falling faster and/or your volumes are rising exponentially.

Still, it’s gonna create some challenges. Gotta think about this more. One issue would be the federal debt. Does the real weight of it ($17 trillion) get heavier as the purchasing power of each dollar rises? Or do productivity gains lead to strong-enough growth that the tax revenues rise fast enough anyway, making it easy to finance the debt despite negative CPI? I think I would lean toward that more positive scenario.

This is still not understood. For instance, Vimothy’s response is suitable, possibly because it doesn’t address this supposed “asymmetry.”

If people think that deflation is going to be greater in absolute value than the real rate of return, they disinvest. Isn’t this just a rewording of “there is a non-negativity constraint on nominal interest rates” w.r.t. investors? Which is actually only a rewording of “investors expect to be compensated, not pay, for taking additional risk?”

Again, it’s the asymmetry part, specifically “you can no longer just add the signed value of it to the real interest rate and carry on as before,” that is not understood.

I think I get what you’re saying about the behavior of capital investors (which is different from financial investors so thank you for pointing that out) but my understanding is that the interest rate and inflation are linked. If we let the interest rate float we would have deflation (and a depression) but it would be floating so high it would keep the real interest rate positive. (Although I’m starting to understand that with the interest rate kept low but without QE there could be enough deflation to cause the effects you describe) The status quo right now is negative real interest rates for financial investors (as opposed to capital investors) forcing money out causing a flood toward higher interest (and risk) investments inflating them with the sound investments so overbought that we’re seeing alpha being chased in garbage because investors have no other choice which is why so many junk bonds have got inflated.

Under your deflation scenario shouldn’t there be an army of savers (financial investors) trying to loan to reluctant builders (capital investors). Also during the hyperdeflation episodes with bitcoin, miners fueled with their deflating bitcoins, kept reinvesting into capital goods (better mining equipment) in spite of the machines being a deprecating asset, when the deflation stopped going crazy and partially inflated the capital investment also dropped off.

A negative real interest rate is obviously bad, but the deflation boogie man has got the CBs in Europe so scared they’ve actually discussed setting a nominal negative interest rate to counter it (but they need a cashless society to do that).

Can you expand on this?