Quote from: dinofelis on March 27, 2015, 08:41:00 AM

Quote from: tee-rex on March 27, 2015, 07:45:15 AM

You still don't see that it is not the same for deflation. In deflation you may end up with less money than you started with

No, you don't. Well, if you do, you will ALSO loose when there is inflation. Simply because of the higher interest you have to pay on your loan of W.

Imagine that you buy this year for $1000 of stuff, that the real interest rate is 6% and that inflation is 5%. This means that the nominal interest rate is 11%. You have borrowed your $1000,- at 11% interest rate.
Imagine your product is ready after a year, and it is worth 2% more in real terms as the cost. So it would have been sold at $1020,- this year, but because of inflation, you can ask $50 more for it next year (I'm not considering second-order effects).

So you can sell your stuff for $1070 next year. However, you have to pay $110 of interest on your loan. So net, you are LOOSING money: you gained $70 (20 value creation, and 50 inflation) but you have to pay $110 in interest), even though you sold for more than you bought.

---> $40 LOSS.

Let's say we have a zero real interest rate to simplify matters, since it is the same for both inflation and deflation. Also, we started with a condition that we are profitable at 0% inflation. What will your example be in these conditions, for inflation and deflation, please.

Quote from: dinofelis on March 27, 2015, 08:41:00 AM

Let us now consider a value creation of 15%, with the same numbers.

5% inflation: you could have sold your product this year for $1150, but because of inflation, you can sell it next year for $1200,-
You have to pay $110 interest on your loan, so your net gain is $90.

5% deflation: you could have sold your product this year for $1150, but because of deflation, you can only sell it for $1100.-
You have to pay $10 interest on your loan, so... your net gain is STILL $90.

You get the same positive result since in both of your examples you effectively have inflation, 11% in the first case (6+5) and 1% in the second (6-5). Now let's talk about real deflation.