2K: Above ground gold supplies have vastly increased in the 20th century and continue to increase at something like 1.5% percent per year.
In fact I talk about "stable" supply, not "rigid" or "predefined" supply.
1.5% medium increase per annum is "stable" compared with the US$ with a 10-20% increase of M1 per year or even the € with its 13% year.
In fact, the increase of the supply is self regulating: if the price is not high enough to cover the mining and refining costs the supply reduce and would stop if the market price go under the costs to operate the most profitable mine.
Due to horrible misuse of the word inflation on these forums it is hard to tell what people actually mean by inflation, do you mean change in value or change in supply. Inflation has always meant a change in value but it's a popular fallacy here to call any change in supply, even one which is done to keep money constant in value an inflation event. It is unfortunate that you will need to be more precise because of this.
I use inflation for an increase in the supply of money (M1 mainly). This can easily be measured without ambiguity.
The increase on CPI or Price index is what common people call inflation. This depend on how you select the prices of good and services you measure and how you measure them. These naumbers are heavily manipulated with all shenanigans possible.
I'm glad to see that you have a good grasp of business financing, and I can certainly agree that any change in money value introduces distortions into this financing and this is undesirable.
Change in money supply is undesirable because it redistribute purchasing power from the owners of the existing money to the creator of new money.
With gold it was not so bad, as there were limits on the production of new gold (the costs and limited quantity available to be mined at any price level).
With regard to what factors keep a business afloat and which go under the one to consider is the interest rate.
If your business activity can return 3% per year nominal, but interest rates are 5% then your business can not pay back it's loans OR if the business had no debt the owner of the business should have liquidated the business assets and put the money in a bank. I will frequently get morons saying that being 'self financing' and not having debt makes interest rates irreverent, but interest rates are a universal signal for all investors, thouse making new investments and thouse continuing to RE-invest in their existing businesses. The rate of inflation or deflation doesn't need to be considered in this calculation because your always returning to money at the end and your just trying to maximize your profits (or minimize losses) irregardless of what money is doing.
I disagree on how you understand interest rates.
You understand interest rates would be right if there was no inflation or deflation and the value of the money woudl be stable.
When I, or anyone else, consider if investing in any business, I must evaluate the interest rate and the devaluation of the currency.
If I'm able to return the interest rate but I'm not able to repay the capital costs, I should not invest in it.
If I buy a truck to move stuff around, I must be able to pay pack the money invested after paying back all variable costs (my salary, the fuel, the interests on the loans, etc.) but not on nominal terms.
At least I must be able to buy back another truck before the end of the previous truck life.
If I spend 100K$ for a truck and, after 5 years I get back 100K$, the truck best to cost me 100K and not 120K$ or I'm in a loss and can nopt continue my business.
The point is,
with a inflating currency, the prices will go up long term and I will must foresee I need to get 120K$ if I invest 100K$ now to keep the same purchasing power and replace the capital consumed.
with a deflating currency, the prices go down long term and if I foresee to get 100K$ back, probably the new truck will cost me 80K$ and I will get an higher profit.
If your concerned about 'mal-investment' the notion that interest rates may be encouraging activity which is not productive in a REAL sense, then you would look at rate of return vs inflation/deflation. If returns exceed inflation then the business is actually being productive.
As I wrote, the return must exceed inflation plus the real interest rate (I must pay back more than what I loaned in real term, not in nominal terms).
This is because I would not find a loan if there are no lenders to lend me. And the lenders need to being paid back principal (with the same purchasing power) plus interests (at market rates) to have a reason to lend.
So, if I take a loan, I will be asked an interest rate covering inflation and a profit. If the lenders foresee a lower inflation than the real one, he lose purchasing power and will be unable to lend me the same purchasing power later on. And if he doesn't receive a profit he have no incentive to not spend his money on something now instead of later on.
But business motivation is based on interest not inflation so we would only expect mal-investment when interest rates are lower then inflation. This would allow a gap in which a business could be returning more then interest rates but less then inflation and would be judged to be productive against interest rates but would be unproductive against inflation. Currently interest rates are lower then inflation buy just a bit as both are nearly zero. But we must also consider that their are lots of idle resources right now (human, infrastructure, machinery etc) and idle resources decay at an appreciable rate, probably in excess of 1-2% per year. We can't put thouse resources in a vault and get them back later if they are not used now. We shouldn't seriously worry about mal-investment until were seeing a gap of several points between interest and inflation AND we have a 'hot' economy operating near full potential.
And here you are wrong again:
there are no "idle" resources. There are savings and investments.
Savings is what you need just in case things do not go as you foresaw.
If I keep no savings (because I have invested all of them), if something unforeseen happen I will be forced to liquidate my investment or take loans or sell something I use.
Saving is always keeping two gallons of "idle" gasoline in your car's tank. Are they "wasted" or are they "insurance"?
