Nobody is going to give hungry because food will be cheaper next year. Nobody is going to go homeless because rents will be cheaper next year. Even if doing nothing is a good strategy, humans aren't going to do nothing because our time on earth is finite and we hate saving.
Even in an inflationary environment the rational thing is not to consume, but to invest in investments where the expected return beets inflation.
From the perspective of the wealth (who account for most consumption) we have effectively been in a deflationary environment as their investment returns consistently beat inflation
A deflationary environment is the opposite, where people sit on cash instead of investing because they believe that the investments will be worth less than the cash in the future. Inflationary environments are what make investments the smart choice, if we were deflationary no one would invest money.
Yeah, that makes sense if you don't think about it too hard. People will invest provided the expected return of investing is positive. If deflation means cash of 1.00 is worth 1.02 tomorrow. And investing means it is worth 1.04, the rational choice is to invest.
What the hell are you smoking. No one is going to face a 99% failure risk for 1% returns. High risk low reward investments don't get investors except those bad at math or addicted to gambling.
Imagine if a lotto scratch cost 5€ and you had a 1/1 million to make 6€. Do you really think you would get many takers?
Low risk low rewards? Sure all the time, bonds, steady stocks etc. High risk high rewards? Sure too, more daring investors, with a higher tolerance for risk will take these. Low risk High reward are unicorns that get swamped quickly or are scams, but to knowingly put money in high risk low reward is just stupid.
Bro, you don't know what expected return means. Please Google that and then come back. When expected return on lottery is greater than 1, hedge funds spend millions buying lottery tickets.
Please, please, please Google what "Expected Returns" mean
If expected returns are too close to 1, it stops being worth it. No company is going to spend a billion dollars to make back a billion dollars + 50 cents. You can't compare the investment against a vacuum, you have to factor in the opportunity cost. If your investment doesn't have a better return than basic government bonds, people aren't going to take it
Expected returns are also just that: an expectation. Inferred from statistical data, prior patterns, and can be wrong, so any respectable company takes into account that it's a figure that could swing either way. It's one thing for an investment to go from an expected ROI of 3x to 2x, but to go from 1.01x to 0.8x is ruinous.
Different companies, depending on risk aversion and accessible capital are going to have a different minimum acceptable RoI. But >1 does not guarantee takers like you implied.
If expected returns are too close to 1, it stops being worth it
Yeah, so I worked in Asset Management for some of the biggest global investment banks.
Have you heard of this thing called leverage? And in a deflation/low inflation environment interest rates are zero or negative which means you get paid to leverage (see Yen carry trade)
So your point is objectively false. As long as expected return is positive money will flow to it. And in a high savings environment (that deflation causes in theory). Leveraging is even easier.
If your investment doesn't have a better return than basic government bonds, people aren't going to take it
And why do you assume government bonds aren't an investment? Government uses that money to invest in infrastructure which further reduces operating costs for the entire economy by reducing energy, water and transportation costs. (See China for a modern example)
So government bonds are very much a form of investment
Inferred from statistical data, prior patterns, and can be wrong, so any respectable company takes into account that it's a figure that could swing either way
Yeah, now we are talking abiut Sharpe ratios and drawdown. But that's getting way to technical and is outside the expertise of most economists. This is more finance, but it's a solved problem. You can use options to reduce volatility (not recommended for lay people)
Expected return accounts for risk neutrally, but (for a lot of rational reasons) people are risk averse. As risk increases, expected return also must increase to be a “good investment”.
This is why, for example, stocks have a higher expected and historical return than bonds, which have a higher return than T-bills
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u/OpenRole 7h ago
Nobody is going to give hungry because food will be cheaper next year. Nobody is going to go homeless because rents will be cheaper next year. Even if doing nothing is a good strategy, humans aren't going to do nothing because our time on earth is finite and we hate saving.
Even in an inflationary environment the rational thing is not to consume, but to invest in investments where the expected return beets inflation.
From the perspective of the wealth (who account for most consumption) we have effectively been in a deflationary environment as their investment returns consistently beat inflation