Did I get this right? About deflation

[david_z]

@slider123456

I am only saying that with deflation there would be more incentive for some people to not take the risk of losing money in an investment and put it in a mattress where by sitting there with virtually no risk it will gain more spending power. I do not know how you can say it is wrong that holding money would be more common in a deflationary system than an inflationary one. In an inflationary system you have to invest or the spending power of money is slowly eroded in a deflationary system you can hold money risk free and gain spending power this would surely cause more people to hold money instead of risking it in an investment.

In this sort of economy, holding money is not “risk free” as you put it. There is a very real opportunity cost. Furthermore, if some group of people prefer to hold cash, instead of lending, then the price (in terms of interest) that the others can command, will be that much greater, assuming the Demand for loanable funds hasn’t changed (and there is no reason to assume that it has).

You suggest that when purchasing power is increasing (because prices are trending mildly downwards) that people will be generally less inclined to bear risk for a nominal return. I say this is not the case, because in that sort of economy, a nominal return (i.e., $1 becomes $1.10 when repaid) compounds the real return (i.e., the purchasing power of $1.10 is now $1.21)

It seems that due to this effect, there would also be more incentive for some people to take the risk, since their return would be that much greater, having been augmented by a real rise in purchasing power/productivity.

[NB, I may have misread the last point you made. Oops.]