That's true.  However, the only thing that means is that a consumer using mutual funds to store their savings is limited to domestic mutual funds, which are frankly more stable anyway specifically due to currency fluctuation issues you cite (not to mention that mutual funds generally charge an added premium for working internationally).  Regardless, though, that is not a necessary cost for our calculation, because the consumer can very easily limit themselves to domestic mutual funds and avoid that cost entirely.

"So.... how does the math work, then, that a currency depreciation hurts the investment?"

You are considering the investment is in Chinese yuan.  If so, then it would have appreciated, yes.  But if it were invested in the US, then it would have depreciated over that period.

"So... again... what's the scenario under which currency depreciation operates in a way which both negatively affects the investor/consumer and is additive with inflation?  Moreover, where is the scenario in which a consumer/investor has no way to insulate themselves from the effects of depreciation?"

The US bond fund invested in US currency.

Evasion, evasion, and nonanswers.

Okay, I get it.  Makes sense now.

That being said, that isn't a need.  That's a want.  The investor could choose to keep the funds inside the US.  He is actively making the choice to invest abroad.  This has two implications.  First, it means not all consumers investing in markets to counter inflation actually incur this cost (and therefore, it isn't representative of consumers as a whole) and second, those consumers which do enter that market enter with the recognition that they must take currency values into consideration, so they have an expectation of higher gains to accommodate the currency issue.

Additionally, as I mentioned, not all mutual funds even invest abroad.  So if I wanted currency exchanges to make absolutely no difference, I could invest in a domestic-only mutual fund.

It's no different than if I invest in any stock and the stock decreases in price.  Yes, I lost value relative to other stocks.  However, blaming the stock market as a whole is disingenuous because in the process of entering the agreement, I understand the conditions under which I would participate in the market.

> xeno syndicated wrote:

> "That being said, that isn't a need.  That's a want"

In a FREE MARKET ECONOMY, the investor should be able to invest in whatever he or she WANTS to invest. 

If the investor WANTED to invest in other markets, that investor would suffer the effects of the devaluation of the currency.  Why shouldn't he be able to write-off that loss?

This is an ethical issue, Zarf.  If you believe in the free market system, you have to agree with me that it is a potential loss, and should at least be considered.

I'm not restricting their right to make any investment they want.  However, every investment has with it the probability of gain or loss.  A free market is a system in which I have choices, but take responsibility for bad choices.  So yes, I am fully capable within a free market to throw all my money into We're Going To Screw Our Investors Over Incorporated, but the circumstances of that investment should determine my motivations (i.e., I should be discouraged from making bad investments).

> "blaming the stock market as a whole "

I'm not blaming the stock market.  I'm blaming the thye deficiency of a financial system based on fiat currencies which can be manipulated in unethical, ANTITRUST ways.

You are so taking that out of context.  X(

Tell us more about investing, xeno. I wish to increase my earnings with use of your knowledge.

I don't like inflation it eats away at my matras

I actually outlined that argument in the thread this cites a few months ago.  You know... the thread which did not receive a reply for 7 months, and only now, after the SECOND time I called xeno out on that thread as evidence that he consistently ignores arguments, is receiving a reply on a small fraction of the issues I actually raised?  Yeah, that one.  I'd invite you to check out that thread, linked in this thread, to see my line of argumentation.  However, similarly to how you have refused to regurgitate arguments to Flint which you say you have posted and were ignored with regards to drug policy, it would be disingenuous of you to expect me to regurgitate everything I've said, especially when the original post is clearly available with a cited link.  Additionally, because xeno has a very clear history of claiming that something like rehashing my old arguments which may not be directly linked to his testimony (and in fact some arguments which were very directly linked to his testimony) were off-topic, unless xeno agrees not to resort to such tactics, doing exactly that would simply result in degrading this to a copy of the SOPA thread.  Not that I agree with his interpretation, but for the sake of engaging the discussion... yeah... 

Frankly... that debate was huge, and even now, when xeno is supposedly giving a reply, only a fraction of what I said is actually being replied to... and in this situation, considering that xeno is actively choosing to participate in the debate, as opposed to the alternative (not choosing to participate), the act of choosing not to answer certain arguments within a post one is replying to anyway is distinct from declining to answer a post entirely, because xeno would have already come to the personal conclusion that he would commit the time to answering a post anyway... translation: shit got ignored.  And not just a little shit... a ton of very well-thought out arguments were outright ignored.  So no... trying to summarize that here when I empirically did not get a complete reply the first time is kind of redundant. 

EDIT: Whoops!  The original link isn't here.  Well, for the record, there you go.  http://www.imperialconflict.com/forum/viewtopic.php?id=145540&p=3

EDIT #2: I know how to copy/paste links! 

EDIT 3-... about 9: Random additions.  Yeah... I'm being stupidly OCD.

@Kemp

First thing's first: Whoops!  Sorry...

Yeah, I understand that I'm a little confusing there.  At the same time that I was writing that, I was studying for a test on the exact same subject, so a good portion of the models and examples I was discussing there were actually used in the tests (surprisingly enough, this exact same thing happened today.  These debates are starting to be the best damn study aid ever for me!).

My argument is quite simple.  Remember, we have a central bank that manages money supplies.  Now, as you well know, central planners can't do their job perfectly by any means... now, I give the Federal Reserve more credit than most central planners because we're talking about an agency much more independent from government interference than normal, with membership generally consisting of some of the most learned economists of the day (Bernanke was well respected among economic circles before heading the Federal Reserve... he's not just a random guy).  Regardless, though, central bank actions cannot perfectly pinpoint target inflation rates within margins of error of 1-2%, much less .05%.

For example, let's assume the central bank could target a desired inflation rate within a 2% margin of error.  If the Federal Reserve said that it wanted inflation to be 1%, within a 2% margin of error, the Federal Reserve risks putting the economy in a deflationary path by having too little currency around.  However, if I said the target inflation rate would be 2%, actual inflation would end up being somewhere between 0-4%, because we assume the central bank can't perfectly plan inflation.

Now, I can't tell you exactly the margin of error in the Federal Reserve's operations because it changes from year to year.  That being said, if we absolutely know that deflation is bad, the optimal Federal Reserve policy would be one where the margin of error on the Federal Reserve's target rate is at least as high as the margin of error in order to prevent a deflationary policy.  I use 2% as a relatively safe margin of error because the inflation rate during healthy economic periods (when the Federal Reserve's job is much easier) is generally between 1-5%, indicating that they practice a target rate of 3% with a 2% margin of error.

So at least part of my justification is not "I want a 3% inflation rate" as much as "I want to keep the Federal Reserve from screwing up, so their target goal will be high enough to reduce the risk of them screwing up."  If evidence could be gathered that the Federal Reserve could target inflation at more accurate levels, the margin of error could certainly be reduced, thus reducing what I define to be an ideal target inflation rate.  And yes, I do think this is probably happening with more and more data on economic statistics being collected, and the study of economics becoming more refined over time.  Until then, we have to operate with the understanding that the Federal Reserve does not perfectly control the total money supply relative to money demand.

That being said, there is at least one macroeconomic justification for inflation.  If a rational consumer has discretionary income, and is making the choice between saving/investing, spending, and storing money, inflation will play a fundamental role in that decision.  In a deflationary period, as I described, a preference is made toward storing money (removing money from the economy entirely) because the money's buying power will increase over time, which creates a self-fulfilling cycle of deflation begetting more deflation.  At hyperinflation levels, investment becomes increasingly unstable, and storing money is just stupid, consumers will only spend.

By creating a relatively stable, balanced inflation rate, a slight favoritism is given toward spending/investment by slowly devaluing money over time, which increases the marginal cost of storing money under a mattress.  At the same time, because inflation under this scenario would be consistently occurring (i.e., we don't necessarily know what the inflation rate will be, but we know inflation will happen), people have a slight incentive favoring some sort of savings/investment (both stimulants to overall economic growth), but not of the Weimar Germany scenarios.

Finally, remember that inflation does not affect all people equally.  For example, if I'm a homeowner who is paying a mortgage constructed with the assumption that inflation would run 3% per year, a 4% inflation rate actually increases the benefit to me because it decreases the total burden I will be paying.  Now, this is not in itself a justification to inflate the economy.  That being said, I just want to note that not all people are affected equally.  This is one of my primary critiques of the current debate I am having with xeno, in that he is expecting me to give an analysis which is homogenous among all individuals, when different individuals have different economic circumstances which changes their individual relationship to inflation.

EDIT: I should emphasize this since it seems to be the #1 critique against me.  I do not ignore the microeconomic negative effects of inflation.  Yes, it exists.  However, microeconomic effects are bidirectional, and thus spurious (i.e., the person saving all their money is harmed by inflation and helped by deflation, but the person with a giant pile of home or student loan debt is helped by inflation).  At the point where the microeconomic effects are spurious, one needs to either step outside the microeconomic effects and ask about macroeconomic effects, or restrict themselves to the macroeconomic affects that can either be quantified and compared (i.e., asking whether there are more debtors than savers in the country) or that affect everyone in the country (i.e., everyone in a hyperinflationary society is forced to spend frantically).  Otherwise, you're simply playing a sort of political patronage game (i.e., simply outright valuing one group of individuals over another, sometimes larger group).

So, very short answer: My target inflation rate=1%+margin of error in inflation targeting.  If it was possible to perfectly set inflation rates, I'd say 1% inflation every year, and we'd be fine.  But that's outside the realm of reality, at least right now.

END THE FED!

http://www.youtube.com/watch?v=Hqe8bs9O8iM
(John Schaffer speaks for God.)

I don't dispute that they're bright guys in banking. I dispute that they act in the best interest of the country, not themselves. A small increase in inflation rate as a result of their actions doesn't hurt them if their actions enrich themselves more than that rate.

I understand the macroeconomic justification you've offered, but I have principled objections to such meddling. As you point out that the microeconomic effects are spurious, I don't like erring on the side of benefiting debtors and harming savers so much.

Thanks for the explanation. I really don't know much [anything] of macroeconomics. *eyes the book on the fed he still hasn't gotten to* I'm gonna get back to you... eventually. I meant to reply sooner when I saw the John Schaffer video a while ago; but, alas, I was significantly intoxicated at the time. I'll remember to attack you when I get to Griffin's book.

In the meantime, end the fed! Buy gold! Support bringing gold back as legal tender!

"he consistently ignores arguments, is receiving a reply on a small fraction of the issues I actually raised? "

Sometimes, I don't notice them.  Sometimes I just don't have time.  Sometimes, there is no need to do so

"a ton of very well-thought out arguments were outright ignored." 
Sometimes, Zarf, in all due respect, some of your points depend on prior points, and if I refute the points upon which they are dependent, there is no need to address them.

"In a deflationary period, as I described, a preference is made toward storing money (removing money from the economy entirely) because the money's buying power will increase over time, which creates a self-fulfilling cycle of deflation begetting more deflation.  At hyperinflation levels, investment becomes increasingly unstable, and storing money is just stupid, consumers will only spend."

Target inflation rates have a balancing effect.  I am not disputing this.  What I am disputing is that this balancing act is beneficial. 

"different individuals have different economic circumstances which changes their individual relationship to inflation."

This is exactly why it is not beneficial.  It provides advantages to some and disadvantages to others. 

"the person saving all their money is harmed by inflation and helped by deflation, but the person with a giant pile of home or student loan debt is helped by inflation). "

Let's consider the person who chooses instead to save for their tuition, save to buy a home without a mortgage; better yet, let's consider those who have no other choice but to do so because for whatever reason they can't get student loans or mortgages. Due to the effects of your target inflation rate, their saving targets are constantly having to be recalculated, increased, and often beyond their means to reach, because their salaries or their wages do NOT keep up with inflation.  In effect, your target inflation rate results their NEVER being able to pay for their tuition; never being able to afford their own home.  And you want to do this to them on PURPOSE?  This your POLICY, Zarf?  What it is is systemic injustice. 

If there is one person out there who due to monetary policy cannot save enough to pay their tuition and buy a home without a mortgage AND can't qualify for a student loan or a mortgage; whose wages do not increase with inflation - if there is a SINGLE person out there in that situation, your monetary policy with an inflation target at ANY positive amount, is in my opinion, criminal.

What if, in fact, the majority of the human race were in the circumstance of which I speak? It would make your monetary policy a crime against humanity in my opinion.

"My target inflation rate=1%+margin of error in inflation targeting.  If it was possible to perfectly set inflation rates, I'd say 1% inflation every year, and we'd be fine.  But that's outside the realm of reality, at least right now."

I don't have anything to say in response to this.  You justify what is in effect an atrocity.  Zarf, wake up!